The Canadian petroleum industry is in a state of transition from a period of near total government regulation of its activities to a new era of greatly reduced government involvement and free market competitive forces. Crude oil producers are now free to compete with each other and with foreign supplies for both domestic and export markets for the first time since 1973. Similarly, the natural gas industry was partially deregulated as of November 1, 1985 with full deregulation scheduled for November 1. 1996. This move towards market responsive pricing has occurred during a period of extreme volatility for crude oil prices and a corresponding high level of uncertainty for future natural gas prices.
The following paper presents a discussion of the current market uncertainties and their impact on canadian oil and natural gas prices. Domestic and export natural gas sales forecasts and gas purchaser nomination forecasts are also presented. Given the prevailing market environment, the need for a revised approach to business planning is also identified.
During the period December 1985 through mid-March 1996, World spot market prices for crude oil have declined in the order of 60 percent with no clear indication as to when and at what level the price will ultimately stabilize, crude oil future prices for West Texas Intermediate at the time of writing are in the order of $12.00 to $13.00 U.S./BBL. While World and U.S. posted prices have not fallen to these levels. Canadian wellhead oil prices are based solely on the spot/futures market which has resulted in substantial price volatility during the first quarter of 1986.
The world crude oil market has been in an oversupply situation for the past few years with production restraint by OPEC serving to maintain prices in the $26.00 to $28.00 U.S./BBL range. In early December 1995, OPEC in general, and Saudi Arabia in particular, announced that they would abandon their role as swing suppliers in order to claim lost market share. The result has been a "flood" of surplus oil on the market in an attempt to re-establish market discipline within OPEC and to have non-OPEC producers reduce production in order to help maintain prices at higher levels. As the major non-OPEC producers (e.g. North Sea, Mexico, etc.) have not shown a willingness to reduce their output, the spot market price has declined precipitously since mid-January.
Coles Nikiforuk Pennell Associates Ltd. (CNP) are of the opinion that the current oversupply situation will exist for the remainder of this decade and possibly into the next. In the context, price stabilization is not expected to occur until there is either a major structural change to low oil prices, thereby eliminating high cost supplies from the market, or agreement by all major producers to restrain production in order to maintain higher prices. It should be understood that specific political motivations may be the determinant of the level at which prices ultimately stabilize.
