Morning Memo: Deborah Yedlin

Canadian Natural Resources became the eighth energy player to announce a pullback on the pace of an oilsands development in northern Alberta.

As the company's chief operating officer Steve Laut said on Thursday, Canadian Natural is no longer in the mega-project business. And that about sums the current sentiment in the oilpatch.

It wasn't long ago that everyone looking at the pace and scale of activity in the oilsands would have been quick to conclude that the mantra was one of 'go big, or go home'. Today, as Canadian Natural indicated, a more prudent strategy is to take a step back and re-configure the mega projects so that they can come together in a manner that is not unlike a Lego structure.

Even though companies active in the oilsands never made their multi-billion bets on oil prices staying at levels at or near $100 U.S. per barrel, it is becoming apparent that the cost of the oilsands barrel is out of step with the current pricing environment. The combination of an explosion in global economic growth that saw the price of all the inputs - materials, labour and capital - jump exponentially is the big culprit in the decisions that have been announced in the last few months.

But Canadian Natural's news was not just about the oilsands. The company's decision to drop its entire capital expenditure budget for 2009 by 47 per cent compared with 2008 and concentrate on paying down debt sent a strong, if not unsettling, message about what the coming year holds for the oilpatch.

While many companies have already announced their third quarter earnings, Canadian Natural was the first to come forward with its capital expenditure plans for the year in addition to its results; the news suggests that the coming weeks will be filled with similar announcements as companies finalize their plans for 2009 and opt to conserve cash and strengthen balance sheets in the current environment.

It also has to be said that part of what will be driving decisions, in addition to where commodities are trading, is the coming changes to the royalty structure, which come into effect in January. The Alberta government officially passed the changes into law on Thursday.

In the broad scheme of things, much of this doesn't make sense.  The price of oil is arguably not reflecting the true supply situation.
 
Moreover, the energy business has a long cycle because spigots can't be turned on and off at will.  The decisions being made today that result in projects delayed or axed means that when demand does return, the supply response won't be sufficient.  And this will only lead to one thing: higher prices.