26 July 2016 - 12:02
  • News Code: 265752
Oil Price Slump in North America; Challenges & Consequences

TEHRAN, July 26 (Shana) -- North America, which covers Canada, the United States and Mexico, is one of the important oil-rich regions in the world. These three countries are all produces of crude oil. In this article, we review oil production conditions in these three countries and then review the consequences of oil price fall for them.

Crude oil production in the US went on upward trend in 2012 and continued into 2015. But oil production in the US slowed down and even halted in 2015 as oil prices fell sharply. According to the US Energy Information Administration (EIA), shale oil production in this country continued to fall for the seventh consecutive month in June 2016. On account of exorbitant debts and sharp fall in oil prices, the US shale oil and gas industry has flagged behind its once historic growth.

US Crude Oil Output (million barrels), 2010-2016

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US Crude Oil Output (million barrels), 2015-2016


According to BP official data, Canada sits atop the world’s largest oil reserves, behind Saudi Arabia and Venezuela. It is now the fifth largest producer of oil in the world. 
Canada’s National Energy Board (NEB) put the country’s crude oil production at 3.87 mb/d in 2015, which is estimated to soar to 6 or 7 mb/d by 2040.The bulk of Canada’s oil reserves is found in Alberta. 

Canada Crude Oil Output (million barrels), 2010-2016 


Canada Crude Oil Output (million barrels), 2015-2016


Canada exports 1.6 mb/d of oil to other markets, including neighboring US. Canada has long replaced Venezuela and Mexico as oil supplier to the US. However, enhanced shale oil production in the US has reduced its appetite for taking in crude oil from Canada.
As oil prices rebound Canada hopes it will increase its production and find new markets. 
The primary market for Canada’s heavy crude oil production growth is located in US Midwest and along the Gulf of Mexico coastlines.
There are opportunities for this type of oil to make its way into new markets in Asia. By extracting more oil from tar sands, Canada will be able to meet growing demand in Asia mainly from China and India.
Furthermore, Canada crude oil production can replace the oil imported to power refineries in Quebec and western coasts of the US.

Mexico is among the top 10 oil producers in the world. Along with Canada and Saudi Arabia, Mexico is one of major suppliers of oil to the US. Over the past one decade, Mexico has seen oil production fall due to pressure decline in its mature oil fields. Oil production in this country has declined from 3.4 mb/d in 2004 to 2.5 mb/d in 2016.
Mexico’s giant state oil company PEMEX has lost nearly 30% of its production since 2004. The main reason is insufficient investment in oil exploration and production sectors.

Mexico Crude Oil Output (million barrels), 2010-2016


Mexico Crude Oil Output (million barrels), 2015-2016


Mexico amended its energy law in 2014. These reforms end PEMEX’s 75-year monopoly on oil production, and facilitate joint venture investments in the country. The objective sought by the reforms was to enhance production and export through new investments by private and foreign companies in Mexico’s oil reservoirs.
But as oil prices have fallen in recent years and many oil companies have subsequently pulled out of oil field development projects Mexico cannot be much hopeful of attracting fresh investments with a view to raising its production level.

Oil Slump Impact on North America
The US, Mexico and Canada have all suffered losses due to sharp decline in crude oil price in international markets. This loss production is seen in the financial losses of oil companies, the growing number of unemployed people, low investment in the oil and gas industries, slow economic growth and banks’ losses from granting loans to oil companies.

Lower Investment
Under circumstances of oil price decline and concomitant fall in the profits of oil companies, most big companies are trying to reduce their investment in a bid to maintain their level of liquidity. According to estimates, investment in the oil sector through 2016 to 2018 would be almost cut by half from the 2013-2014 period. North America is no exception to this rule and it has faced the issue of reduced investment in its oil sector. This issue is mainly seen in the shale oil sectors in the US, Canada and Mexico.
Further crude oil extraction from oil sands in Canada requires transport facilities including construction of oil pipelines and railroads. For instance, crude oil supply in western Canada is not in favorable conditions due to the shortage of transport facilities. More transit facilities are needed for the supply of these oil cargoes to oil markets. 
Anyway, the global oil price slump and the decline in exports from Canada have reduced investment in this country. 
Since shale oil extraction and production costs stand high, investment in these projects is not economical for major oil companies. Therefore, a large number of companies and groups involved in the oil sector have suspended most of their shale oil projects.
For instance, Suncor Energy has forecast to cut its investment in shale oil production by $1 billion. These restrictions come in the wake of global oil price fall. 
Suncor Energy is a Canadian integrated energy company based in Calgary, Alberta. It specializes in production of synthetic crude from oil sands. 

Shale Oil in America


Moreover, US oil giant Chevron is cutting its investments by $5 billion. This company has announced that it will stop financing projects which are no longer profitable due to crude oil price decline.
Mexico’s PEMEX has also been unsuccessful in attracting new investments. This company’s revenues are vital for Medico’s public treasury; however, it has announced delaying its planned $3.6 billion investment indefinitely due to losses it has produced following crude oil price decline in world markets, which means continued oil production decline in Mexico.

Oil Companies’ Financial Loss
PEMEX’s oil production fell 6.7% to 2.2 mb/d in 2015 year-on-year. Therefore, the decline in production and oil prices doubled PEMEX’s financial losses in 2015 from the year before to stand at $30.3 billion. That is the case, while this company’s production is on a downward trend and it is forecast to experience financial loss as oil prices stand at a very low level. In the US, bankruptcy has struck more than 60 oil and gas companies. Small-sized companies that have lost their capitals are facing more serious problems.

More Unemployment
The decline in oil prices has axed many jobs in most oil companies in North America. Alberta, which is known as Canada’s oil industry heart, cut nearly 20,000 jobs in 2015 because many companies involved in energy projects have had to axe jobs. 
Suncor Energy cut 1,000 jobs in a bid to cut its production costs by $600 million to $800 million and make up for the fallout from oil price fall. 
Alberta-based Husky Energy Inc. logged $4.1 billion in losses in the third quarter of 2015 due to low oil prices. It moved to cut jobs and sell out assets.
US’s Chevron has also accounted that it plans 10% job cuts in order to reduce costs.

Low Economic Growth
The fall in oil prices has negatively impacted growth in North American countries like Canada and Mexico. For example, the fall in oil prices has harmed Mexico's economy to the extent that the Mexican government has had to curb its budget under pressure from low oil prices.
Canada has in recent years banked in on oil extraction in order to shore up its economic growth, but the 50% decline in global oil prices has made energy production costly in Canada. It has also left negative impacts on investors in other sectors like financial services, immovable market and industries. As a result, economic growth has slowed down.
Since energy industry accounts for 10% of Canada's gross domestic product (GDP), the fall in oil revenues constitutes a big coup for Canada whose economic growth has been affected. Furthermore, the oil price fall and subsequent oil exports have resulted in a 1.7% decline in domestic demand and also given rise to lower investment. 

Banks Lose Interests
Some big banks in North America have not been safe from low oil prices either. The failure of oil companies to reimburse their debts has inflicted harm on the banks in these countries.
Five big banks in Canada, including Royal Bank, Toronto-Dominion Bank, Nova Scotia Bank, have had to cut their investments in a bid to be able to cover loss-producing loans paid to oil and gas companies.
Canadian banks seem to have no option but to limit their loan reimbursement to the oil sector in this country. This issue is likely to drive oil companies towards bankruptcy. Of course, threats to Canadian banks are not necessarily related to granting loans to oil companies. Rather on a larger scale, as employment falls in the petroleum industry, many families will suffer shock from negative income and wealth. That would finally leave impacts on banking balance sheets in Canada. 

Regional Rivalry
The sharp fall in oil prices has forced North American countries to sell more oil. That has brought about some sort of competition between oil exporters in this region as they seek to preserve and develop their markets. For instance, an oil price war has erupted between Canada and Latin American countries on which country should deliver heavy crude to refineries in US Gulf costs. At present, Canada is the most important supplier of crude oil to the US by providing 45% of its crude oil needs. It also plans to enhance its share by building new pipelines. 

By Shuaib Bahman

Courtesy of Iran Petroluem

News Code 265752

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