Oilpatch observers add up losses as crude price crash reaches 2nd anniversary

Calgary oil and gas producer Long Run Explorationwas riding high two years ago.

Fuelled by US$100 per barrel crude prices, the company was committed to reaching "critical mass" by assembling lands in northwestern Alberta that would allow it to become a large, profitable intermediate that could boost production while paying a healthy dividend to investors.

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On June 12, 2014, it announced the latest in a string of acquisitions, a $357-million deal to buy fellow Calgary producer Crocotta Energy Inc. It agreed to pay with shares and take on $115 million in debt.

A week later, on Friday, June 20, benchmark West Texas Intermediate closed at a near-nine-month high of US$107.26 per barrel as traders reacted to reports of a violent uprising in Iraq.

Unfortunately for Long Run, that peak marked the end of a five-year price rally. World crude prices then began a collapse that would take them as low as US$27 per barrel in January of this year, resulting in a battered Canadian economy, thousands of laid-off workers in Western Canada and the pending forced sale of debt-laden Long Run Exploration.

"Everybody paid too much. Anybody who transacted in that six months (leading to June 2014) on a relatively large asset paid too much, including Long Run," said John Brussa, a Calgary lawyer who has served on the company's board for several years.

"If you bought something thinking oil was going to be $100 and the last two years it's probably averaged $40, can you just imagine? It's no different than buying real estate at the peak and then watching it crash."

In December, with pressure mounting from creditors, Long Run announced it would sell itself to a Chinese company for $100 million in cash plus the assumption of $679 million in debt. This week, it announced that the buyer, Calgary Sinoenergy Investment Corp., had won Investment Canada Act approval for the deal.

Dinara Millington, vice-president of research for the Calgary-based Canadian Energy Research Institute, says the cause of the oil price collapse was supply and demand.

Demand growth wasn't there

"If you look at the numbers, it's pretty simple," she said. "We were just in a non-sustaining price environment where the prices supported the growth in supply; however, the demand growth was not there to absorb all of that incremental supply."

North American producers assumed that Saudi Arabia would reduce output to support prices. Instead, the world's largest producer and exporter of oil elected to accept lower prices to protect market share and put pressure on fast-growing U.S. shale oil and gas producers.

Despite the recent modest recovery in oil prices to around US$50 per barrel, CERI says a full recovery will take years. It predicts that the 2016 average WTI price will be just $45 per barrel, rising to $52 in 2017.

The weak oil price has weakened the Canadian dollar compared to the U.S. greenback and that's positive for trading of B.C. lumber and Ontario manufactured goods, Millington said.

"But the oil and gas industry is such a large contributor to the Canadian economy that, overall, if the prices sustain themselves at a low level, we will see a net negative impact despite some of the positive attributes of non-energy sectors," she said.

Tim McMillan, CEO of the Canadian Association of Petroleum Producers, said prices may eventually recover but the Canadian oilpatch won't go back to the way it was in 2014. He expects the industry to emerge as a much leaner version of itself thanks to cost controls and more efficient oilfield technologies it has had to employ to survive.

"If we look at the economics of the Canadian industry even in 2014, returns on capital investment were about two per cent," he said.

"That, I think, should have been a warning sign at the time that even though oil prices were close to $100 per barrel, the returns on investment that were being achieved in the oil and gas sector were poor. And probably weren't going to maintain a good amount of investment even at those prices."

Investment dipped 62%

CAPP says Canadian oil and gas investment over the past two years fell from $81 billion in 2014 to an estimated $31 billion this year a drop of 62 per cent that is deeper than seen in the biggest previous oil price crash of 1986.

In a report released Thursday, it predicted Canadian oil production will grow from 3.8 million barrels per day in 2015 to 4.9 million bpd by 2030. That's 400,000 bpd less than last year's forecast for 2030.

The association estimates that 110,000 direct and indirect jobs in Canada have been lost because of the current price crunch.

Brussa said the oil crash of 1986 caused a lot of pain in Calgary as investors lost money and employees lost their jobs. But it also sparked the creation of junior oil and gas companies and energy trusts as major producers sold Canadian assets.

Some of those tiny startups like Canadian Natural Resourcesgrew up to be the majors of today.

"I think this is like 1986, but there's very little institutional memory of what 1986 was like," he said, adding he often tells younger people to keep their hopes up, based on his 35 years of experience as a board member for dozens of oil and gas companies.

"You can't look at this like you're at the bottom of a well," said Brussa.

"You have to say, 'Yeah, this too will pass.' It's part of a cyclical business. You're going to get through this and then there will be something on the other side."

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