Market Snapshot: Oil and natural gas production resilient despite price declines

Release date: 2016-04-07

Oil and natural gas prices declined sharply in 2008 and 2015 but production has not followed the price trends. New Canadian drilling activity has decreased markedly, but production has remained resilient.

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Description: The graph shows four lines representing oil and natural gas production and prices between 2006 and 2016. Oil production has increased steadily during this period. Natural gas production trended down between 2006 and 2010, leveled off, and started increasing after 2014. While volatile in 2015, it hasn’t dropped below 14 Bcf/d. Oil and natural gas prices have been more volatile, with peaks in early 2008 and sharp drops in mid-2008 and throughout 2014 and 2015.

In June 2014, West Texas Intermediate (WTI), the benchmark price for North American crude oil, was trading at over US$105 per barrel. By December 2015, WTI had fallen to just over US$37 – a decline of nearly 65 per cent. It has traded below the US$40 mark for most of 2016 so far. Similarly, the price of oil dropped sharply starting in mid-2008, losing 70 per cent of its value over the course of 12 months.

Despite those price declines, oil production has not dropped. Declines in conventional and tight oilFootnote 1 production have been more than offset by increasing oil sands production, which is based on large, long-term projects that are less affected by short-term price fluctuations. Oil sand operators are unlikely to shut in production from mines or in situ projectsFootnote 2 because of the high costs and technical difficulties related to doing so. In addition, companies have continued construction on projects that are already progressing and, in one case, a new project has been announced. The new project was applied for by Imperial Oil Ltd. and would produce 50 000 b/d using a modified SAGD process.

Natural gas also has a history of maintaining production levels in the face of significant price declines. In 2008, production fell just three per cent despite a corresponding 70 per cent price decline over the same 12 month period. Technological improvements allowed operators to achieve greater production from each well, meaning less new wells were required to maintain production. More recently, production reached 15.2 Bcf/d in December 2015 despite continued price declines and an average price that month of just US$1.93 per Mcf.

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