The Motley Fool

Project Casualties Continue to Mount in Canada as the Oil Market Downturn Rages on

While oil prices have bounced off their lows from earlier this year, that has not stopped oil companies from cutting investment spending. Just last week, global oil giant Royal Dutch Shell plc (NYSE:RDS.A)(NYSE:RDS.B) and its partners once again delayed a final investment decision on their LNG Canada project.

Meanwhile, Chinese oil giant CNOOC Ltd. (NYSE:CEO) idled its troubled Long Lake facility. These assets became the latest in a litany of projects in Canada that have been delayed or shut down due to poor economics.

The latest casualties

Shell’s decision to continue delaying its US$40 billion LNG export project comes as no surprise. It initially put the project on hold in 2014 due to the slumping commodity market as well as an uncertain regulatory environment. However, Shell and its partners now plan to look at a revised path forward for the project because it is too expensive to pursue in the current environment. Given this shift, it is uncertain when this project will ever get the green light.

What is a surprise is CNOOC’s decision to idle its Long Lake oil sands facility, which it acquired as part of its US$15.1 billion purchase of Nexen Energy in 2013. This decision stems from two accidents that have cut its production capacity from 50,000 barrels per day all the way down to 15,000 barrels per day in recent weeks.

Under normal market conditions, the company likely would move forward with the repairs needed to bring it back to full capacity. However, due to poor pricing the company is just going to shut the facility down as it reviews the long-term viability of its oil sands operations.

The list continues to grow

Canada’s energy sector was under pressure long before commodity prices plunged due to the high development costs of major projects. For example, in mid-2014, French oil giant Total SA (NYSE:TOT) and its partners, including oil sands giant Suncor Energy Inc. (TSX:SU)(NYSE:SU), suspended their US$11 billion Joslyn oil sands mine due to weak project economics even at triple-digit oil prices.

Meanwhile, Shell’s LNG project is one of several proposed west coast LNG facilities that haven’t gotten off the ground due to high costs.

Project delays have continued to mount as prices plunged. Suncor Energy, for example, deferred its MacKay River 2 oil sands project and its White Rose expansion project off Canada’s east coast in 2015 in response to weak prices. And Canadian Natural Resources Limited (TSX:CNQ)(NYSE:CNQ) delayed its Kirby North oil sands project in 2015.

In addition to the project delays, Canadian producers were forced to shut in a number of legacy wells earlier this year due to low prices. Baytex Energy Corp. (TSX:BTE)(NYSE:BTE), for example, shut in 7,500 barrels of oil equivalent per day due to low margins, which represented about 9% of its production, while Canadian Natural Resources shut in 5,700 barrels per day for the same reason.

Investor takeaway

Despite vast natural resources, Canada is having a tough time getting its oil and gas out of the ground due to high costs. The downturn in prices compounded this issue, forcing companies to not only delay additional projects but even shut down producing assets. It is a situation that won’t improve until costs come down and prices go up, which suggests Canadian energy investors could be facing disappointing returns until that happens.

Just Released! 5 Stocks Under $49 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Matt DiLallo has no position in any stocks mentioned.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.