Updated June 22 2020
Figure 1.8 shows both the historical and projected capital expenditures for Alberta's oil and gas and oil sands sectors. There is an option to toggle the forecast for crude oil and natural gas spending based on base and low prices, with an explanation of these cases in the oil price forecast section.
Drilling activity represents a significant portion of crude oil and natural gas expenditures, which is responsive to market conditions. Although oil sands projects tend to be longer term in nature and can be less-sensitive to shorter-term price volatility, changes in capital expenditures over the forecast reflect near-term decisions to defer projects and scale-down production based on company announcements as of April 2020.
Total capital expenditures decreased by an estimated 12 per cent in 2019 to Cdn$24.2 billion. Low energy prices, policy uncertainty, and market access constraints continued to weigh on drilling programs for new wells and large-scale bitumen projects. Instead of developing many new projects, producers have recently focused capital spending programs on sustaining existing assets by increasing capacities at lower costs, lowering debt, and repurchasing stocks.
In 2019, the Government of Alberta announced several initiatives in attempts to spur investment and reduce market uncertainty:
- In June 2019 the Alberta Government introduced the Royalty Guarantee Act, which ensures that royalty structures when a well is drilled will remain in place for at least 10 years. This means that when applicable oil, oil sands, or natural gas wells begin production, it will continue to have the same royalty structure during that time and that no major changes will occur.
- In July 2019, Alberta's corporate tax rate was lowered from 12 per cent to 11 per cent and will decrease by 1 per cent annually on January 1 until it reaches 8 per cent in 2022. This has already resulted in Alberta having the lowest provincial corporate tax rate in Canada.
- In July 2019, the Shallow Gas Tax Relief Initiative was introduced, with the goal of reducing property taxes for qualifying properties by 35 per cent for the 2019 tax year. Qualifying properties are defined as shallow gas wells and pipeline gathering systems; gas wells on the list include those less than 1500 metres in depth, producing only gas (gas containing 0 per cent condensate), and drawing from formations younger than 98.5 million years. The province estimates that about 70 000 wells and pipelines will qualify for the approximate $20 million in support from the program. Starting in the fall of 2019, the initiative will have municipalities reduce property taxes for shallow gas properties; the province will reduce the amount of education property taxes collected by municipalities to ensure they are not affected by lost revenues.
- Announced in the "Fiscal Plan" section of the October 2019 budget, enhanced capital cost allowances (CCA) will enable corporations to claim the costs of new capital assets, which improve a company's cash flow and allow them to invest in new assets. According to the Alberta Government, companies in the resource sector will be able to claim a first-year deduction of one-and-a-half times the amount of qualifying development expenses they would normally be able to claim. The province will provide up to Cdn$900 million in provincial CCAs throughout the economy and will begin to phase them out in 2023, completely being phased out by 2027.
- In November 2019, in an effort to increase drilling and employment, the Alberta Government announced that effective immediately, all producers can drill new crude oil wells without being restricted by curtailment measures. However, existing wells will remain subject to current curtailment limits.
These new initiatives will provide some support to producers, but prices and market access will continue to affect capital spending programs. Capital expenditures will remain below peak levels seen in 2014 over the 10-year forecast period. Although oil sands production is projected to increase over the forecast period, expenditures will not follow historical trends due to lower costs and pace of projects advancing.
Oil and Gas Expenditures
In 2019, expenditures on oil and gas activity are estimated to have decreased by 14 per cent to Cdn$13.6 billion because of the decline in oil and natural gas drilling activity due to low energy prices, policy uncertainty, and market access constraints. Oil wells placed on production declined 11 per cent in 2019, while natural gas drilling activity declined 18 per cent.
Producers continued to be more cautious with their capital spending by either investing in sustaining current assets or wells that targeted higher value commodities. Gas producers continued to target formations containing liquids-rich gas, which has resulted in higher levels of investment in natural gas processing facilities in recent years. Oil producers have targeted formations with light-density crude oil or drilled wells with lower capital costs to produce heavier-density crude oil.
Exploration and production companies have adapted to operating in a lower-price and market constrained environment by implementing cost-saving measures, significantly reducing drilling and field equipment costs. Companies have continued to put in place measures to cut costs like walking rigs, batch drilling techniques, and pad drilling.
Spending has also reduced due to improved digital technology for managing equipment maintenance, allowing producers to track and forecast equipment use. Additionally, some producers are using electrically powered integrated fracturing spread units that combine the equipment used for fracturing operations, using less equipment, labour, power, and fuel consumption, resulting in reduced rig times and costs.
Number of Wells Placed on Production
Crude oil wells: The number of crude oil wells placed on production in Alberta totalled 1745 wells in 2019, down from 1967 wells in 2018.
Natural gas wells: The number of natural gas wells totalled 745 wells in 2019, down from 906 wells in 2018.
Crude oil drilling was most intensely focused in targeting the Mannville Group, Cardium Formation, and Viking Formation as producers benefited from lower capital costs. Natural gas producers overwhelmingly drilled in the eastern portion of the Foothills because of the high liquids yield that delivered higher economic value.
The well activity forecasts for crude oil and natural gas can be found in Table S4.2 and Table S5.3, respectively. Operators are expected to continue to focus on producing liquids, which delivers a higher return on their investment.
Forecast for 2020 to 2029
Depending on which price case is selected, oil and gas capital spending is forecast to decrease between 57 and 64 per cent in 2020. Compared to 2019, oil and gas expenditures are projected to range Cdn$4.9 billion and Cdn$5.9 billion due to the precipitous decline in prices. Continued infrastructure constraints along with oil production restrictions as a result of the Government of Alberta's curtailment rules have also caused some producers to delay their capital spending programs, or even shift expenditures outside of Alberta.
Producers are expected to manage capital spending programs in 2020 using funds sparingly to maintain base production of existing assets to generate cash flow. Operators will increase spending as prices improve and infrastructure projects are completed. Similar to 2019, the majority of oil and gas capital spending in 2020 is expected to be directed toward crude oil because of its higher returns, along with the introduced elimination of curtailment limits to crude oil wells.
Capital expenditures in 2021 are expected to moderately increase to between Cdn$5.8 billion and Cdn$6.6 billion before increasing up to Cdn$7.7 billion in 2022 as market constraints are relieved by an increase in oil takeaway capacity through completion of pipeline projects and several optimization and rebalancing projects. Natural gas takeaway capacity additions are also expected in late 2021.
Over the rest of the forecast period, oil and gas capital expenditures are expected to continue to increase in line with economic recovery and corresponding price forecasts that will support crude oil and natural gas wells placed on production. These forecasts are supported by the recently announced initiatives such as royalty guarantees, reduced corporate tax rates, and curtailment exemptions. By the end of the forecast period, oil and gas capital spending is projected to total between Cdn$10.7 billion and Cdn$11.5 billion.
Oil Sands Capital Expenditures
Oil sands spending continued to decrease in 2019, with capital expenditures decreasing from Cdn$11.7 billion in 2018 to an estimated Cdn$10.6 billion, which is the lowest level of oil sands investment since 2005. Producers have focused less on new projects and more on expansions and efficiency enhancements, with capital expenditures steadily decreasing annually since peaking in 2014.
Several oil sands producers have also increasingly used revenue generated to pay dividends, repay debt, and repurchase stock. In addition, oil sands producers are expected to be more focused on expansions and optimizing existing facilities in the near term to either sustain or increase production. Several new projects have been delayed or cancelled as a result of infrastructure constraints, curtailment orders, and low prices.
Sustaining capital expenditures for in situ and mining projects, which is capital spent by an oil sands producer to maintain or replace fixed assets (but does not include operating costs), decreased in 2019. For in situ producers, the majority of sustaining capital costs include drilling and completion of wells, well pads, and gathering pipelines. Similar to oil and gas producers, costs for drilling and equipment have significantly declined, resulting in decreased sustaining capital costs. Mining producers spend the majority of sustaining capital to support and maintain mining and extraction equipment and tailing ponds.
Oil sands projects are long-term development projects that require significant upfront investment before production even begins. With the price of oil having sustained below 2014 levels, oil sands operators have been motivated to continue implementing cost-saving measures to maintain operations. Efficiency enhancements and cost reduction measures put in place by oil sands operators include modular construction (modularizing), standardizing facilities, emissions reductions, use of data science and digitization, and the implementation of automated trucking and mining.
Implementing innovations has allowed in situ operators to reduce well pad sizes and increase well lengths. Modularizing shortens development time and improves access to skilled labour as equipment and systems can be prefabricated offsite. Once constructed, the modules are delivered to the production site where they can be installed and commissioned. Using a standardized approach when designing well pads and drilling programs reduces the materials needed (e.g., structure steel, piping). These cost saving measures decrease in drilling and equipment costs have decreased steam-assisted gravity drainage (SAGD) capital costs by up to 30 per cent since 2014.
Forecast for 2020 to 2029
Oil sands capital expenditures in 2020 are forecast to range between Cdn$9.2 billion and Cdn$10.5 billion. The change in year-over-year expenditures reflects the uncertainty with several large projects advancing and deferrals of turnaround programs. With improved prices and restored production anticipated after 2020, oil sands capital expenditures are projected to increase to about Cdn$13.3 billion in 2021; however, investment will reman relatively low when compared with the last decade.
Spending in the mining sector is projected to increase beyond 2021, mainly because of extension and debottlenecking projects. However, most spending over the forecast horizon is expected to be related to smaller-scale in situ operations instead of capitally-intensive mining projects.