Insight: Fear Of Global Recession Weighs On North American Oil Outlook

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Global oil demand returned to pre-pandemic levels in 2022, pushing prices higher as oil importers scrambled to secure supply.

The Ukraine conflict added a geopolitical risk premium in the second quarter of the year, sending prices skyward to almost C$140/bbl WTI. Prices for the year averaged C$123.50/bbl, up from C$88.85 in 2021.

“It was a great year for North American oil producers,” said Mark Young, senior analyst for Evaluate Energy. “Our analysis of 55 North American oil-weighted producers shows a combined 75 per cent increase in operating cash flows and an 85 per cent increase in free cash flow compared to 2021.”

“The operators used the windfall to repair balance sheets, paying down $30.7 billion in net debt,” added Young. “Share buybacks and dividends skyrocketed 190 per cent to reach $67.7 billion.”

In early 2023 market sentiment has shifted as fear of a global recession and its negative effects on oil demand have overtaken long-standing concerns over tight supply due to lack of capital investment, said Young. Despite OPEC+ cutting production quotas in the first quarter providing a short-term pricing boost, overall, the trend is headed lower. Forecasts are calling for a 25 per cent reduction in WTI for 2023.

“With only 18 per cent of oil under hedges as of the first quarter we expect this price decline to translate into similar declines in operating and free cash flow in 2023,” said Young. Most operators have developed capital allocation plans in response to shareholder demands targeting certain percentages of cash flow for debt reduction, dividends and share buybacks. “We expect they will stick to these plans, but the dollar numbers will be much lower in 2023.”

Capital spending up on short-cycle oil projects

Capital spending on short-cycle projects increased by 67 per cent in 2022 as operators turned to the drill bit to take advantage of higher prices.

Canadian conventional operators increased spending by 78 per cent. The five major oilsands operators with longer cycle projects increased spending by only 21 per cent. 

The 50 North American oil-weighted producers (excluding oilsands operators) increased production by nine per cent to average 9.7 million boe/d for the year.

U.S. operators accounted for 800,000 boe/d of the production increase, with Canadian operators adding 100,000 boe/d of production. Oilsands production was flat during the year.

There has been a lot of discussion about when U.S. shale production will peak, noted Bemal Mehta, managing director of energy intelligence for geoLOGIC systems ltd.

“Base decline rates are estimated at 35 per cent, so as production rises more and more capital is needed to sustain production levels and then even more to increase it. There is plenty of resource remaining in the ground and huge drilling inventories of Tier 2, 3, 4 and 5 locations. Future growth is largely dependent on higher oil prices or a return of investment capital to industry.”

U.S. oil producers increased proved reserves by 11 per cent in 2022, with proved undeveloped reserves increasing by almost 19 per cent. Reserve life index stayed almost flat at 11.1 years.

Canada’s five major oilsands operators saw operating cash flow surge 63 per cent in 2022, with free cash flow up 87 per cent.

Capital expenditures were up 21 per cent, to $15.9 billion. Production was flat at 3.3 million boe/d.

Total proved undeveloped reserves among these operators climbed by 800 million bbls in 2022.

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