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However, it is becoming increasingly clear there’s a whack of challenges within this country combining to make a bad situation worse. It begs the question: do Canadians want to be in the oil business at all? No is fine. Free country. But those who want Canada to become something other than it is should understand and acknowledge the enormity of the economic hole abandoning the oil industry will leave and how hard it will be to replace this wealth and opportunity.
Canada is the fifth largest hydrocarbon liquids producing jurisdiction in the world, a fact not widely known outside of the 'patch. Whatever many think Canada should be, this is what we are. The following chart shows the top 10 global producers of crude oil, condensate and natural gas liquids.
While the United States, Saudi Arabia and Russia are clearly the “big dogs,” with production exceeding 10 million barrels per day (b/d), Canada ranked number five at 4.31 million b/d in June, just behind China (4.5 million b/d) but ahead of Iraq (3.61), United Arab Emirates (3.46), Iran (3.45) and two other countries known to be totally dependent upon oil, Venezuela and Kuwait. These numbers vary as internal conditions change. Iraq’s production is up, at least for now, while Iran’s is likely to rise with export sanctions removed. Output from all producers outside the Middle East is likely to decline at current prices.
Fortunately, when oil prices collapse Canada has a diversified economy which helps cushion the shock. But it cannot afford to have this business disappear entirely. The following chart shows what mineral resource extraction (including oil and gas) meant to Canada in 2014 on a GDP basis, the last year of pre-collapse prices. The source of the chart is the website InvestorsFriend.com and it uses data from Statistics Canada.
Mining and oil and gas extraction of raw resources ranked number 3 at just over eight percent. But as the Petroleum Services Association of Canada has demonstrated on multiple occasions, the other four of five top sectors (real estate, manufacturing, construction, finance and insurance) do a lot of business supporting resource extraction. Sectors not in the top five already recognized to be hurting because of the oil patch slowdown include transportation and warehousing, professional scientific and technical services, and accommodation and food services.
Canada is learning the hard way, through diminished royalties, shrinking corporate taxes, slashed capital spending, declining payroll remittances and rising government deficits, the collapse in commodity (resource) prices – particularly oil – has a serious, negative impact on the economy. As the new Liberal government hints its $10 billion deficit estimate might be low, it is clear the savings to consumers and industry from lower fuel prices and the stimulus to manufacturing exports from the falling Canadian dollar have not yet replaced the impact of losing nearly $60 billion a year in revenue from oil and gas production. On January 7, Bank of Canada Governor Stephen Poloz said the economy would eventually adjust to low oil prices and the low Canadian dollar, but it could take three years.
Regardless, the reaction of multiple Canadian governments to the current economic situation leads to the conclusion that when it comes to oil, certain politicians are naïve, uniformed or care more about their own popularity than the economic future of the country.
What Alberta’s New Democratic Party government thinks about Alberta’s number one industry is well known. Since Rachel Notley became premier last May 5 there has been a spate of changes including corporate tax increases, large emitter carbon tax increases, a new carbon policy and a royalty review with an unknown outcome. Notley has called Alberta the “embarrassing cousin” of confederation because of carbon emissions. She and her ministers have spoken enthusiastically about the economic opportunities non-carbon energy will create.
But as job losses mount and royalty revenue to the Alberta treasury declines, the message from Edmonton has evolved from “we have a mandate from voters to make these changes” to “be assured the new royalty regime won’t make things worse.” Edmonton has increased public support for pipelines to the Pacific and Atlantic.
Outside Alberta, things have gone from bad to worse. Early this year the B.C. government reinforced its reticent position on oil pipelines through its province by publicly objecting to Kinder Morgan’s Trans Mountain expansion, despite that pipe having carried oil safely to tidewater for nearly 60 years. B.C.’s five perhaps impossible conditions for Northern Gateway, which helped win the last provincial election, remain unchanged.
But it is the position of new Prime Minister Justin Trudeau during the election campaign and the World Economic Forum in Davos which should and will cause the domestic and international investors serious concern.
Mocking former Prime Minister Stephen Harper’s assertion Canada was an “energy superpower” (the statistical evidence above supports Harper’s position), Trudeau said, “My predecessor wanted you to know Canada for its resources. I want you to know Canada for its resourcefulness.” This caused a National Post columnist to comment on January 22, that while this might be a clever message in urban areas like Montreal and the lower mainland, where they can oppose pipelines and not lose their jobs, it was insulting to millions of Canadians who have depended upon raw resource extraction to pay the bills and survive for generations.
Those were only words and the country will survive. But during the election, the Trudeau Liberals promised revisions to the National Energy Board which are now being used by oilsands opponents across the country to delay or influence current or future NEB pipeline hearings (see
https://www.liberal.ca/realchange/environmental-assessments/). The NEB is being directed to consider the environmental impact of the contents of the pipe and the social impact of its existence and construction. The
National Post reported January 27 Trudeau announced all future pipeline environmental reviews would include GHG emissions of the contents and “…give the various levels of government, scientists and indigenous people the opportunity to speak and take party in the decision making.” Trudeau said, “It’s not just governments which give permits. Communities must also give their approval, give permission.”
Montreal Mayor and former federal Liberal cabinet minister Denis Coderre entered the fray January 21 when, on behalf of 82 municipal leaders, he declared TransCanada’s Energy East a great risk and of little benefit to this part of Quebec and therefore they would oppose it. This started a war or words among Coderre and western political leaders grappling firsthand with the severity of the oil price collapse. This found its way into the House of Commons January 25.
Coderre wrote in the
Montreal Gazette January 25, “We will…ask the federal government to amend the law (NEB legislation) to include, in its assessment of this project (Energy East), an environmental impact study that will take into account the production of GHGs at the source.” Trudeau met with Coderre January 26 and agreed with the Montreal mayor when he announced the NEB policy changes.
On the west coast, B.C. Aboriginal groups pressed the NEB to suspend the current review of Trans Mountain pending NEB policy changes affecting Aboriginal impact and consultation. Lower mainland communities like Burnaby are using the Liberal policy change as another tool to stop Trans Mountain. That Prime Minister Trudeau has publicly said he would ban increased tanker traffic off the west coast has effectively killed Northern Gateway (despite NEB approval) and strengthened the determination of opponents.
The pipeline mess caused
Globe and Mail columnist Konrad Yakabuski on January 25 to call pipelines “the kryptonite of Canadian politics,” choosing that description because kryptonite was the only thing that could kill comic book hero Superman. Yakabuski quoted Calgary Mayor Naheed Neshi, who in response to Coderre and Trudeau said Canada “…is a resource economy. Our biggest export is still energy and I do not see a path where that does not continue to be the case, so clearly we need to do what we can on market access.” Yakabuski wrote, “There is not an honest politician in this country who does not know that to be true. Yet, plenty peddle the illusion to a receptive population that they are accelerating our transition to a fossil-free economy while doing little of substance to encourage the shift. They can’t change the fact that there are no technologies cheap or dependable enough to supplant the internal combustion engine on a mass scale.”
International investors read Canadian news. On January 19, the
Financial Post carried a column explaining how China was weary of investing billions in Canada oil with no progress on pipelines. The opening line read, “Canada has lost credibility as an investment destination because of its inability to build export infrastructure…” The article quoted a former CNOOC executive who said, “The federal government (in Canada) is a weak government, not like China, in comparison. Most resources are located only in Alberta…and Alberta is an island state…I don’t see any progress.”
Canada’s struggling oil and gas industry is fighting battles on too many fronts when business is this challenging. Opposing Canada’s number one resource industry is so socially acceptable, so-called “activists” are now physically interfering with the operation of Enbridge Line 9 and, although arrested, don’t expect jail time. Municipal and provincial politicians can impair economic development in other parts of the country by withholding transportation access and be rewarded with more votes. The prime minister can tell the world in Davos core Canadian resource industries don’t matter like they once did and not lose popularity.
Meanwhile, none of those opposed to continued oil and gas production and development see any need to explain what the economic alternatives are to the millions of Canadians impacted by their actions and decisions. There is always talk about the great future in renewables but there is no evidence this creates energy, taxes and wealth like hydrocarbons do.
In times like this everyone in the oilpatch is forced to demonstrate exceptional resourcefulness, particularly those who have lost their jobs and will have to find a new source of income unless business conditions improve significantly and soon.
It was a big piece of bad news that got buried in the rest of the bad news last fall. On October 30, it was announced Husky Energy Inc. had chopped 1,400 jobs a month earlier and would be streamlining its asset base through property sales to maintain its focus on heavy oil and offshore assets. At the time, Husky CEO Asim Ghosh told a conference call to investors his view on increased and proposed carbon taxes: “It would be politically suicidal for us to do a mea culpa and hang our neck out in a way that disadvantages the industry here. It has to be across the board, and Canada as a jurisdiction or Alberta as a jurisdiction cannot be disadvantaged.” Ghosh was of the view that unless carbon taxes were adopted by all oil producers – and at least the rest of North America – carbon taxes would be economically damaging.
Well, Alberta did what it said it would do – cranked up carbon taxes prior to the Paris climate change conference – and Husky did what it said it would do, sell a major portion of its Canadian assets. The Husky divestiture package hit the streets in January and it is massive. Husky has posted for sale a variety of conventional producing assets right across the WCSB from southwest Manitoba to northeast B.C. that current produce nearly 60,000 barrels of oil equivalent per day (boe/day), about the same production as many larger independent Canadian producers. It is 54% oil and liquids and is advertised as “long life, low decline oil and natural gas assets with material growth potential.” Someone knowledgeable who has been briefed on the properties said it contains some 18,000 wellbores, while the sales package advertises over 3,000 potential drilling locations.
Husky produced about 333,000 boe/day at September 30, so this sale would account for more than one-sixth of its total production. The funds will be redirected to other opportunities including the South China Sea. The main areas (from west to east) where properties are for sale are Northwest (Alberta and northeast B.C.), North Central, Pembina, Redwater, Hussar, Taber, Provost, Dodsland, Southwest Saskatchewan and Southeast Saskatchewan (which includes southwest Manitoba).
In one form or another, Husky has been a fixture in the Canadian oil patch since the 1940s when it started developing conventional heavy oil around Lloydminster. Its Lloydminster, oilsands and East Coast assets are not for sale, but the map on the sales brochure indicates everything else is. Husky has always been a major driller. According to data from JuneWarren-Nickles Data Central, in 2015 Husky was the 11th busiest driller in western Canada, accounting for 213 wells and 297,164 metres of pulverized rock.
That bigger companies would sell their assets in the WCSB is not new. Back in the 1980s, when royalties went up and oil prices fell, many major and multinational operators sold their properties in the WCSB. Sometimes a new and more focused owner of old assets is good for the oilfield services (OFS) sector because they tend to invest more money instead of maintaining and harvesting current output.
The question is who wants to buy this stuff. When the majors backed off in the 1980s it caused the emergence of a new generation of junior producers. However, with the increased emphasis on regulatory compliance, carbon taxes, higher provisions for future well abandonments and the as-yet unknown new royalty regime in Alberta, OFS can only hope somebody with capital and great plans for the future steps up and becomes the new owner(s).
Three different stories about the oilsands have made the news in the past week, sending mixed messages about the future of the resource.
The really good news for OFS is 2016 is looking like a big year for maintenance expenditures, particularly after some were postponed in 2015 because of low oil prices. In a Reuters story January 22 it was reported Suncor Energy Inc., Cenovus Energy Inc. and Canadian Natural Resources Limited (CNRL) all had major turnarounds planned for this year. Supporting ongoing oilsands operations is a major source of revenue for numerous OFS providers.
Suncor is doing a turnaround on its U2 upgrader which is once-in-five-year event. Cenovus has three turnarounds planned because it did none last year. CNRL has plans for 30 to 35 days of shutdown and maintenance scheduled which was deferred from 2015. Oilsands operators have learned the hard that while some facility maintenance can be postponed, not keeping equipment in top notch working order is a risk responsible operators do not want to risk.
On another front, the
Financial Post carried a story January 25 which indicated Exxon-Mobil Corp. forecast bitumen production from Canada and Venezuela would grow significantly to nine million b/d in the next quarter century. Venezuela current produces 1.4 million b/d from oilsands, while Canada is at 2.8 million b/d.
The company believes fossil fuels cannot be replaced as the major transportation fuel anytime soon, hence demand will continue to grow. Venezuela and Canada figures significantly into Exxon-Mobil’s long term outlook because that is where massive reserves of undeveloped oil reside.
On the negative side, bitumen prices are so low there is growing speculation at least some will be shut-in because it costs more to produce than the market will pay. The
National Post reported January 25 that at US$12 per barrel for Western Canada Select (WCS, a blend of bitumen, synthetic crude and condensate), some producers will have to consider withdrawing production because the sale price is lower than the cost of the condensate. On February 25, WCS closed at US$16.24 a barrel whereas condensate fetched US$27.93. Condensate is only part of the WCS blend but depresses the economics of continued production nonetheless. One thermal bitumen producer, Connacher Oil and Gas Ltd., is on the record as dropping bitumen output from 14,000 b/d to 3,000 to 4,000 b/d in February and March.
Current low oil prices might be a good reason to accelerate scheduled maintenance. Shutting down production for required shutdowns and turnarounds when the economics of continued production are squeezed are negative only makes good economic sense.
When oil prices and other commodities collapse, not everyone loses. A Bloomberg report January 25 indicated the drop in the price of crude oil, metals, coal and agricultural imports will save China US$460 billion on an annualized basis. US$320 billion will come from petroleum alone. At current prices, crude oil is about US$70 a barrel lower than its value in June of 2014. Based on world consumption of 95 million b/d, this is saving oil consumers nearly US$2.4 trillion per year on an annualized basis. No tax reduction or government stimulus program in the world is likely to be able to transfer this much after-tax wealth to world consumers.
Meanwhile, commodity traders are speculating the slowdown in the world economy - particularly China – will result in lower growth in oil demand in 2016. There was even an article titled, “Could Low Prices Cause a Global Recession?” posted on oilprice.com on January 26. The premise is not that reduced oil prices themselves cause the economy to slow down, but that vastly reduced capital expenditures by oil and gas developers may have a more negative impact on the economy than the stimulating effect cheaper fuel has upon the rest of the economy (see first article in this edition). The writer was focusing on the U.S. where the vast reduction in spending in the oil and gas supply chain is hitting many regions and other parts of the economy.
That said, if the world economy is indeed slowing down – potentially resulting in reduced oil demand - imagine how the global economy might have performed in 2015 had oil prices had not collapsed.
Hopefully Canada’s rig count hasn’t already peaked for the year, as the number of active drilling rigs on January 26 was about 10 percent lower than only a week ago. The active rig count in North Dakota and the rigs drilling for oil in the U.S. declined again this week.
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