Deloitte Sees “Relatively Robust” Oil And Gas Prices In 2023
Geopolitical tensions, the spectre of inflation, and uncertainty around the speed of the energy transition are a few of the storms roiling markets for Canadian oil and gas producers sailing into 2023.
In its recently released Energy, Oil and Gas Forecast, Deloitte Canada expects oil and natural gas producers to experience solid revenues in 2023 on the heels of strong prices, despite the choppy economic waters. The Deloitte team has deep expertise in oil and gas through their work with companies both on technical and commercial aspects of the business and has been bringing market insights through their quarterly price forecast release for many years. Andrew Botterill leads the Resource Evaluation and Advisory team that uniquely integrates technical project modelling and commercial forecasting including reserve evaluations and decarbonization investment analysis. Deloitte is forecasting an average West Texas Intermediate (WTI) price of US$80/bbl this year, which, while lower than the US$94.41/bbl average experienced in 2022, still represents a premium compared to recent years.
The Edmonton City Gate price is expected to average C$101.35/bbl in 2023, down from a 2022 average of over C$119/bbl, while the Western Canadian Select (WCS) price will average C$74.30 for 2023 compared to C$96.80 last year.
Some factors conspiring against Canadian oil prices in the waning months of 2022 included the United States releasing 180 million barrels of oil from its strategic petroleum reserve and increasing imports of heavier Mexican Maya oil. In addition, higher refining costs prompted some American refiners to switch from Canadian heavy crude for lighter oil when possible.
“We will see Canadian prices soften during the year as the United States gets different sources, but it’s still relatively robust pricing,” says Andrew Botterill, National Leader of Oil and Gas for Deloitte Canada.
Deloitte expects the United States will continue to diversify its crude oil supply in 2023, which will contribute to softer Canadian prices and a wider differential with the WTI price. Last year the differential averaged US$13/bbl in the first five months of the year but widened to around US$25/bbl as Canadian oil prices declined.
“We believe the differential will continue to be relatively wide in 2023, somewhere in the US$20/bbl range through a combination of increased Canadian oil production and decreased demand for Canadian heavy. Canadian producers will still get a softer rate because weakness of the Canadian dollar,” Botterill says.
Deloitte sees overall strength in North American natural gas markets with an average Henry Hub price of US$5.50/mmbtu an Alberta AECO price of C$5.05/mmbtu for 2023; last year they averaged US$6.40/mmbtu and C$5.31, respectively, over the entire year. There has been some softness in the past few weeks, but there is a lot more winter to get through and that is expected to prop up prices, coupling that with increased energy needs expected in the US through the summer.
Volatility whip-sawed North American natural gas prices in 2022. South of the border between US$4/mmbtu and peaked at just under US$10/mmbtu within a few months. In Canada, the highs almost reached C$9/mmbtu in the spring before falling below C$3/mmbtu.
Natural gas production in Canada has grown steadily in the past few years. However, price spikes haven’t led to sharper production growth, nor have American producers increased output south of the border.
Both oil and natural gas prices rallied in North America and globally during 2022. Despite this, exploders and producers kept capital spending and drilling activity in check. Botterill says this demonstrates that their focus is on returning money to shareholders, guarding cash, and managing debt.
“I don't think we're going to see companies significantly increase their capital budgets in 2023 like we may have expected in this type of environment in the past, even though prices are quite firm, and things are expected to be quite good,” Botterill says.
He also notes that companies want to ensure they’re deploying capital in ways that make them more sustainable and give them more options as they look ahead five or 10 years.
“We might see consumers react more cautiously to a recession by managing their pocketbooks a little more aggressively. So that will drive some of that softening that we see from 2022 into 2023.”
Like consumers, businesses are also trying to contend with persistent inflation and high energy prices. Businesses are stretching price elasticity to withstand economic challenges. The rate and pace of the energy transition could expand inflationary pressures.
It’s key for them to take demand fluctuations into account in their planning and be nimble enough to pivot as needed. As Deloitte’s report stresses, “how demand will unfold and how the economy will evolve over the next six to 24 months will impact the profitability of companies and industries.”
Meanwhile, Deloitte expects geopolitical events such as China’s zero-COVID-19 policy and the fallout from the war in Ukraine promise to keep oil markets unsettled in 2023, with markets continuing to experience volatile cycles through the winter as the sector tries to balance supply and demand.
That said, Botterill notes that Europe has been resilient in the face of energy uncertainty.
“Europe has been able to shore up storage, increase liquefied natural gas (LNG) imports and from the United States and others, and bring those energy mixes in and manage energy consumption.”
The energy transition and the government policies underpinning it will also be factors that influence oil and natural gas prices in 2023 and beyond.
Like in other jurisdictions, Canadian oil and gas markets are subject to government policies and commitments, both at the federal and provincial levels. The proposed emissions cap announced at COP27, a commitment to define and phase out Inefficient Fossil Fuel Subsidies by 2025, and the share buyback tax that takes effect in 2024 place pressure on the energy sector and other industries by adding to the economic cost that some businesses are already feeling.
Botterill says oil and gas companies are already joining the energy transition by investing in alternatives such as hydrogen, biofuels, and renewables. The big question — how quickly will the economy make the shift, and what does this mean for the natural gas market?
“There is a potential for a bigger shift into renewables sooner rather than later, due to policies from both federal and provincial governments. In that event, maybe natural gas prices may not look as robust.”
Globally, rising energy costs and uncertainty around inflation compound complex issues like decarbonization. Higher energy costs will likely trickle down to consumers, and Deloitte notes that governments must act to stabilize markets with certainty and guarantees, while industry must balance demand pressures, uncertain energy costs, and consumer spending constraints.
“The longer it takes to move on these issues, the higher the risk the energy transition could inflame inflation further, leading to an economic chill that will last well beyond the winter.”
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