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Canadian oil and gas producers to spend $67.3B in 2012: First Energy

Canadian oil and gas producers spent an estimated $62.5-billion on exploration and development in 2011, according to First Energy Capital, a 24% increase over 2011

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Canadian oil and gas producers spent an estimated $62.5-billion on exploration and development in 2011, a 24% increase over 2011, according to First Energy Capital.

Despite all the hype surrounding oil sands, E&P developers spent $16-billion in that sub-sector, $1.2 billion less than 2010, according to the Calgary-based investment bank.

But it looks like the industry is just getting started: First Energy Capital forecasts show the Canadian energy industry is set to inject $67.3-billion in 2012 and $73.2-billion.
Spend on oil sands development will spiral upwards to reach $18.5-billion in 2012, its highest level ever only to be bettered by 2013 when it will reach $19.8-billion, but Kevin Lo, analyst at First Energy, does not believe there is a bubble forming.

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Still, the percentage of spending on oil sands development has not reached the heady days of 2007 when it was 37.8% of total expenditure. Even by 2013, oil sands expenditure will be only 27% of overall spend in oil and gas industry — suggesting that there is much more to Canadian hydrocarbons industry than the headline-grabbing oil sands.

“Funding for these projects will come from the increased cash flow from oil and liquids related production,” co-wrote Mr. Lo and Ian B. Gillies of First Energy Capital in a note to clients. “In addition, we expect to see further investments from Asian oil companies in Western Canada. It is our view these companies will continue to prove out the reserves to learn about shale production and to prepare for the potential export of natural gas.”

The investment bank expect a larger portion of the E&D capex pie to go to drilling and completions, as opposed to facilities. The two key reasons impacting this is that oil development tends to be less facilities intensive compared to gas development, and as such, spending in this area will be materially less. Secondly, many gas producers will have to drill in order to maintain their production. Moreover, if there are fewer facilities costs to maintain, production tends to be less.

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First Energy believes that the ‘drama’ surrounding Keystone XL will not restrain oil sands development, although pipeline installation companies may lose out to railway companies as a more preferred form of transport.

In 2012, Imperial Oil’s Kearl Phase I is the only project expected to start up. However, construction and preparation work on a number of other projects is expected to begin. During 2012, construction will begin on MEG’s Christina Lake Phase 2B, ConocoPhillips Surmont, Husky Sunrise and additional Suncor work.

“We are also expecting an announcement regarding Northwest Upgrader sometime during H1’12. As such, just between Suncor, Syncrude, Shell, Canadian Natural, Imperial, Husky, Cenovus, MEG and Athabasca, we see capex increasing from $15-billion in 2011 to $22-billion in 2012 and $26-billion in 2013,” said the analysts.

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