“7 Things For Attys To Watch As Oil Prices Plunge”
The historic slide in global oil prices — currently below $50 a barrel compared to over $100 barrel last summer — has roiled the energy sector, with fallout ranging from stalled oil and gas development to bankruptcy filings. With no imminent signs of a price increase, here are seven ripple effects from the price plunge that energy attorneys are watching closely.
Murky Future for Canadian Tar Sands
If the drop in oil prices cools down development in the U.S., it could put a downright chill on development north of the border. Last week, Canadian oil giant Suncor Energy Inc. announced plans to lay off 1,000 employees and cut its capital spending by CA$1 billion. Meanwhile, officials with the Bank of Canada have said that low oil prices will discourage investment in the sector, threatening the nation’s economy.
It’s more expensive to produce crude oil found in western Canada’s tar sands and bring it to market, making development projects big-ticket items with lengthy timelines. For that reason, the impact of lower prices might not be visible right away, according to Andy Derman, who heads Thompson & Knight LLP’s international energy practice group.
“Projects that are currently producing are continuing to produce, but projects that are far from being fully realized in terms of capital expenditure are either going to get delayed or get canceled,” Derman said. “Big, new capital programs, you can’t justify at $50 a barrel. There’s also a significant discount for the oil in the tar sands, because it’s in the middle of nowhere.”
Backlogged infrastructure projects such as the controversial Keystone XL pipeline that would ship tar sands oil to U.S. Gulf Coast refineries aren’t helping Canadian producers, either. If development projects start drying up, there won’t be much of a market for new infrastructure either, Derman said.