70% of Canadian energy companies expect oil prices to increase over the next year: PwC survey

Crude oil and natural gas prices will have the most significant impact on the energy business in the next three years

July 15, 2009 — While 2008 was a year of two extremes, with oil and gas producers experiencing boom and bust all within 12 months and many responding by cutting their capital spending plans for 2009 anywhere from 25% to 35%, they still continue to plan for the future according to the Canadian Energy Survey released today by PricewaterhouseCoopers (PwC) and JuneWarren-Nickle's Energy Group.

• 70% of respondents expect prices to increase somewhat over the next year and 11% believe prices will increase substantially. Approximately 16% said crude oil prices will stay about the same in the year ahead.
• The majority of respondents said oil prices will have to increase to at least US$70 to $80 before they would consider increasing conventional drilling programs, although an almost equal number said prices will have to head north of US$80 before spending more on conventional drilling.
• Close to 57% of respondents said the ability to adapt to change is a critical requirement for their long-term sustainability; while 68% of respondents said attracting and retaining top talent was viewed as critical for their long-term growth. Technological innovation was seen by 40% of respondents as critical for ensuring sustainable growth.
• Respondents also said they expect to increase their investment into research and development (R&D) over the next two years, with 23% indicating they plan to boost R&D spending in 2011 versus only 4% this year and 22% in 2010.
• 72% of gas producers believe prices should recover within the next two years to a level that will lead them to increase their drilling programs, whereas 28% believed it might take three years or longer for natural gas prices to recover to levels that will result in more wells being spudded.

"The turbulent swing in energy prices from all-time highs in the summer of 2008 to four-year lows in December is a powerful reminder that the booms in commodities can quickly evaporate," says John Williamson, partner and Canadian Energy leader at PwC. "At the mid-way mark of 2009, while gas prices continue to languish, many believe natural gas fundamentals point to a recovery in 2010, which will lead to improved drilling activity levels. Crude oil prices have already rebounded from year-end 2008 levels."

Companies across the oilpatch are adopting a number of measures to remain profitable, including capital budget cutbacks, moving operations to other jurisdictions with lower royalties, as well as salary freezes or rollbacks, and layoffs.

While industry has cut staff, many energy companies prefer not to lay off employees because so much time has been spent training them. In the survey, attracting and retaining top talent was viewed by 68% of respondents as critical for their long-term growth. This driver was seen by respondents as the most critical factor that will influence future growth.

Financing

The financial crisis has reduced access to both debt and equity. As a result, 39% of survey respondents expect to rely on cash flow to support their business over the next year, while 26% identified debt and 14% equity as their primary sources of financing.

Two-thirds of respondents said access to capital and credit is critical to sustain their growth over the long-term. But respondents also feel that debt will likely be the most difficult source of financing to obtain in the short-term (over the next three years), with 63% saying it will be somewhat challenging and 26% believing it will be very challenging. Close to 54% of respondents also believe it will be somewhat challenging to secure equity financing in the next three years, with 33% saying it will be very challenging.

Operating Costs

Fully 57% of survey respondents said they anticipate their overall operating costs to decrease over the next year, with declining labour and material costs helping the bottom line. Some oil producers now say that labour and material costs have lowered so much that projects may be economical at lower prices. In addition, 76% of respondents said their land acquisition costs would stay the same or decrease over the coming year. In the first half of 2009, producers paid the Alberta government an average of $137 per hectare for petroleum and natural gas rights versus $307 per hectare in the first six months of last year.

Climate Change

Canada's climate change plan aims to reduce the country's total greenhouse gas (GHG) emissions by 20% from 2006 levels by 2020 — and by 60% to 70% by 2050. Survey respondents indicated they are taking a number of steps to respond to the issue of climate change, and, within the next 12 months, 40% will make strategic investments to lower GHG emissions, 35% will adopt more rigorous risk management processes, 34% plan to optimize their supply chain management and 32% anticipate deploying new technologies.

"All Canadian oil and gas producers — from small juniors to trusts to large integrated companies -- are affected by a list of growing concerns related to the economic downturn: volatile and weakened commodity prices, input costs misaligned with current prices, changing royalty situations and the disruption of capital markets," says Stephen Marsters, editorial director at JuneWarren-Nickle's Energy Group. "Respondents to the Canadian Energy Survey provided detail on the state of the industry, their own set of challenges as well as key drivers affecting growth, and we felt it was important to provide this forward-looking view of the industry."

Methodology and Demographics

The 2009 Canadian Energy Survey contains results from an online survey, conducted by PricewaterhouseCoopers and JuneWarren-Nickle's Energy Group during the 22-day period from May 25 to June 15, 2009, to better understand issues currently impacting the industry. Close to 85% of the 140 respondents fill senior roles within the energy sector (49% in a leadership role; 35% in a managerial role), with the balance comprising employees and consultants.

The majority of respondents work for exploration and production (E&P) companies that produce a mix of natural gas and crude oil. Just over 50% of respondents reported their company's annual revenues at more than $500 million, with about 17% listing revenues at $100 million to $500 million per year, and close to 16% said annual revenues were $10 million to $100 million. About 15% of respondents said revenues were $5 million or less per year.

For more information, please visit www.pwc.com/ca/energy.

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