Falling oil prices will lead to lower capital spending in Western Canada next year, observers say, as both oil sands and light oil producers look to cope with less cash coming in the door.

North American benchmark oil prices touched $75.84 a barrel on Tuesday, the lowest since October 2011, after Saudi Arabia cut export prices to the United States.

Although Canadian producers say they are in a strong position to withstand a slump in crude prices, falling profits from oil production look likely to prompt lower capital spending as the hardest-hit look to for ways ride out the storm.

"It's probably going to force a lot of people's hands into doing transactions," said Sonny Mottahed, chief executive of Black Spruce Merchant Capital.

"The (smaller) companies are going to immediately feel the impact on cash flow, so they may start curtailing spending darn fast. The bigger companies ... may continue to forge ahead. They can probably endure as long as a year of depressed oil prices."

Canadian producers are in the midst of firming up spending plans for 2015, with most expected to announce their budgets in coming weeks.

Talisman Energy Inc has cut its current year budget by 6 percent to $3 billion and said it would take the price outlook into account when finalizing its 2015 capital spending program.

"These are difficult times in the energy sector, no doubt about that," Hal Kvisle, Talisman's chief executive said on a Tuesday conference call.

Oil sands producer MEG Energy Inc has also lowered its 2014 spending to C$1.6 billion ($1.4 billion) from C$1.8 billion.

Western Canada's oil and gas producers are forecast to spend about C$76.7 billion in 2014, according to figures compiled by FirstEnergy Capital. With cash flows declining because of lower prices, the investment bank expects that to drop to C$71.1 billion in 2015.

However, most spending on oil sands projects in northern Alberta is already locked in and cuts are more likely to hit early-stage projects.

"If we were to get consistent lower commodity prices that's probably only really going to show in oil sands production maybe four or five years from now," said FirstEnergy analyst Michael Dunn.

Indeed, Suncor Energy Inc, said it expects to spend between C$7 billion and C$8 billion next year, about the same as 2014, as it builds its new Fort Hills oil sands mine.

"We have to cut our cloth within our means, but you will not see capital budget coming up and down and these projects being stopped and started," Suncor chief executive Steve Williams said on an Oct. 30 conference call.

Despite the gloomy outlook, producers and industry observers said it was unlikely any oil sands producers would take the costly step of shutting in production.

"Any cash flow is better than none," FirstEnergy's Dunn said
Source: Reuters

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