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If business is good at anything, it is pragmatism. Take a hostile takeover for example. After weeks or months of trading insults and accusations in and out of the media, a deal is struck and the warring CEOs shake hands and call the final deal a stroke of genius. Whatever they may really feel, they put the past behind them and move forward, ostensibly in the best interests of shareholders. After all, it’s just business.
Now that you understand that scenario, one can be forgiven for the peculiar television images of Alberta NDP Premier Rachel Notley and CNRL boss and founder Murray Edwards praising Alberta’s new carbon tax regime. Promised for months, on November 22 the NDP announced the findings of its special climate change panel and a go-forward strategy for reducing carbon emissions and hopefully keeping the oil industry in business.
Although the policy was announced on Sunday (the NDP had deadlines to meet because of pending federal / provincial climate change meetings regarding the big international conference in Paris), the big oilsands players were able to find their way to Edmonton to comment on the announcement. This included Suncor CEO Steve Williams, outgoing Shell Canada boss Lorraine Mitchelmore, Cenovus CEO Brian Ferguson and CNRL Chairman Murray Edwards. Adding his blessing to the announcement in the media was TransCanada CEO Russ Girling.
As Canada’s most established oilsands producer, Suncor CEO Williams made the following comments in the media. He called the announcement “historic,” a “game changer” and expressed “a great deal of pride” in cooperating with environmental groups and historic oilsands opponents in formulating a new environmental regime under which the oilsands would operate.
The attractiveness of the NDP’s carbon tax regime to the oilpatch is, this time, the new levies will primarily be borne by those who consume electricity, gasoline and natural gas, not produce them. This in itself is a major departure from the way carbon taxes have been packaged and sold to the public in the past. Historically, those opposed to carbon emissions have attacked producers of the energy such as oil companies and coal-fired power generators as the problem, leaving consumers all but blameless.
The Alberta government will introduce a $20 per tonne carbon tax on all sources of carbon energy in 2017 and will raise the levy to $30 per tonne in 2018. According to figures released by the government, this will result in an increase of five cents per litre on gasoline in 2017 rising to seven cents per litre in 2018. When including higher costs for electricity and natural gas, the government estimates the taxes will cost the average household $320 per year in 2017 and $470 per year in 2018. The total tax take is estimated at $3 billion annually. Oilsands producers will continue to pay the large emitter levies already in place.
The reason oilsands producers are endorsing the program in its current form is that if a duly elected government wants to increased carbon taxes, they argued (apparently successfully) the levies should include those who consume the fuel, not just those who produce it. The program calls for a 100,000 megatonne per year cap on oilsands emissions, a figure earlier studies estimated would not be reached until 2030. With current oilsands carbon emissions in the range of 70,000 megatonnes per year, this means oilsands production can continue to grow. The degree to which oilsands producers are able to reduce carbon emissions on a per barrel or unit basis means they will be permitted to continue to produce and possibly significantly expand oilsands production.
In the past, oilsands producers have argued they were reducing carbon emissions on a per barrel basis. Opponents claimed this was immaterial because total emissions were rising with production. The total emissions from oilsands are now capped. Using current technology this would put a de-facto growth limit on the oilsands, something that immediately caused Greenpeace to claim over 6 billion barrels of bitumen would stay in the ground. However, if producers can greatly reduce the per-unit carbon emissions, this is not necessarily the case.
In light of all the awful things that have been said and written about the oilsands in the past five years in particular – including by representatives of the current Alberta government – one could understand how the senior oilsands producers represented at Premier Notley’s press conference on November 22 could speak favorably of the proposed policy.
Since being elected in May, Premier Notley and her cabinet ministers have created a direct linkage between Alberta’s historic policies on carbon emissions and opposition to crude oil export pipelines in Canada and the United States. The thesis is if Alberta were tougher on carbon emissions then opposition to export pipelines would be diminished.
But it is not intuitive that making Albertans pay significantly more for gasoline, electricity and heating (natural gas) will cause oilsands and carbon energy opponents to tolerate continued and possibly increased bitumen production.
However, after years of trying to achieve improved market access for Alberta crude with no success, it would appear the captains of industry are willing to give the new strategy a try. With the NDP holding a majority government until at least 2019 and with their stated determination to reduce carbon emissions, industry support is clearly more biased towards pragmatism than policy. Although it is not fashionable to publicly question attempts to reduce carbon emissions and their impact upon climate change, how taxing 4 million Albertans much more will change the behavior of 6 billion energy consumers around the world has not yet been fully explained.
The policy announcement also includes a faster phase-out for coal-fired electricity generation. This is a known and significant carbon emitter and across North America attempts are being made to use coal less and alternative sources more. Once the NDP made public its plans to accelerate the phase-out of coal, the producers of this power began talking publicly about compensation. How this issue will be dealt with in a fair and transparent manner that does not impair Alberta’s reputation as a good place to invest has not been disclosed.
The promised major reduction in methane emissions is an element of the policy with an unknown cost. The Canadian Association of Petroleum Producers told the
Financial Post on November 23, “We know for certain to meet the 45% reduction in methane there will be a real costs in the tens or hundreds of millions of dollars over the next five years”.
As for Joe Albertan, at some point the collective burden of a shrinking economy caused by the oil price collapse and yet another tax increase will be felt in the greater economy. A multitude of consumer and corporate taxes – including fuel – have already been introduced. Minimum wage increases are underway, which small business claims will increase costs and impair profits. Whether royalties will or will not rise is unknown until this policy review is completed.
The anticipated $3 billion in carbon tax revenue will join several billion in other income and consumption tax increases. It is not unreasonable to estimate some 10% of the province’s revenue will soon be from levies that did not exist prior to the May election. In the October budget, the NDP indicated it would not be reducing government spending because to do so in the current economic climate would damage Alberta’s economy.
The downturn is already having a negative effect on residential and commercial real estate values across the province. The
Financial Post reported November 23 house prices in Fort McMurray were down an average of 20% in the past 12 months. The average sale price of homes across Alberta was 3.9% lower in October 2015 than the same month last year. According to Statistic Canada, in 2006 there were 1.256 million “occupied private dwellings” in Alberta (the latest figures available). It is much higher now. This includes houses, apartments, condominiums, mobile homes and whatever else Albertans choose to live in. At an average value of $300,000, the total worth would be $377 billion, which is why so many economists note that for most folks, their most valuable asset is the roof over their heads. A 5% reduction in the value of all the residences in Alberta would cost the owners $18.8 billion using this methodology.
The combination of the oil price collapse, the rise in the unemployment rate and the myriad of new taxes and levies introduced by the NDP (which will impact mortgage qualification and affordability) simply must result in further erosion of the net worth and financial flexibility of Albertans.
Everyone who works in the oil industry and listens to the news is aware of the growing public pressure to “do something” about hydrocarbon fuel emissions and their increasingly-accepted impact upon the world’s climate. The pending end of the world as we know it is a powerful driver of human emotion. At some point this will manifest itself in public policy.
So, for those in the trenches of the oil and gas industry two things are assured: carbon taxes and changes in how the oil industry does business are inevitable, and taxing oil and natural gas consumers is preferable to only taxing hydrocarbon fuel producers.
That said, the NDP’s new climate change policy is more bad news for Alberta’s black and blue oilpatch. Many have taken pay cuts to keep their jobs and now there is more pressure on after-tax income. You may get to keep working but your disposable income and possibly your net worth will continue to decline.
The Canadian Association of Oilwell Drilling Contractors (CAODC) released its 2016 drilling forecast November 18 and the bad news for the oilfield services industry (OFS) continues. The association forecasts its member companies will drill only 4, 728 wells in 2016, down 58% from the 11,226 wells drilled in 2014 and also down significantly from the approximately 5,700 wells which might be drilled this year. Besides low oil prices, the CAODC also blamed regulatory policy uncertainty at the federal and provincial level for the projected low level of drilling next year.
Association President Mark Scholz told the
Daily Oil Bulletin, “I can tell you that producers in many cases today are delaying their announcement of capital spending until next year. Today, I’ve a got a rig count that is one of the lowest since 1983 and the reason for that is we’re probably not going to see a winter drilling season because capital budgets are being held back until there is some sort of certainty as to where the Alberta government is going to be going when it comes to the structure of its fiscal regime. “
The size of the rig fleet is also forecast to shrink. CAODC members plan to market only 696 drilling rigs next year, down about 70 from current levels. They will either be de-listed (CAODC members pay fees based upon the number of rigs they have ready for service on a given day) or decommissioned, which means they will be taken out of service. Some rigs will move out of the country for better opportunities and others will be cannibalized for parts to keep other rigs running without significant capital investment.
Brian Krausert, CEO of Beaver Drilling Ltd. and a longtime participant in the CAODC forecasting process, expanded upon the changing nature of Canada’s drilling rig fleet. “The biggest change we are going to see is technology – how you drill these horizontal wells and how you utilize technology to drill horizontally. There are tools out there that can provide the ability to do that and that is what’s going to happen. The rigs that cannot provide that technology are not going to work and they will never go back to work again. Our industry will be smaller, but we will have more efficient and technically more savvy rigs. We need rigs that can drill faster in longer horizontal intervals and can stay in the zone.“
The total loss in direct employment from 2014 levels will be 28,485 jobs. The CAODC reported 762 available member rigs on November 23.
The Business Development Bank of Canada (BDC) announced on November 17 it has earmarked $500 million in additional financing for Canadian small and medium enterprises impacted by the decline in oil prices. In addition, BDC will also provide advisory solutions to help companies adjust their business operations to weather the impact of the current economic downturn.
BDC’s strategy is intended to help promising companies with projects aimed at diversifying their business, increasing their operational and environmental efficiency, improving financial management, as well as purchasing new technology and equipment. As an arm of the federal government, BDC is a somewhat different lender than most banks in that it is prepared to consider loaning under terms more favorable to borrowers than many traditional bank lenders. However, there are also restrictions on the type of company it will lend to. The fact it is increasing its loan exposure to the Canadian oil and gas industry at a time when most lenders are trying to figure out how to get their money out is a clear differentiator.
Michael Denham, president and CEO of BDC said in an announcement; “The best way for Canada’s economy to thrive is to build resilient businesses that can take advantage of opportunities, survive economic slowdowns and prosper. We want to ensure that the many well-run companies that enjoyed success before the downturn continue to receive the financing and advice they require. Uncertainty can create opportunity and our support is intended to help these companies diversify and bounce back more strongly than ever. As Canada’s only bank devoted exclusively to entrepreneurs, we are committed to helping affected companies ride out these turbulent times and take advantage of new business opportunities.”
BDC has offices in most of the major oil towns of western Canada including Calgary, Edmonton, Fort McMurray, Grande Prairie, Lloydminster, Medicine Hat, Red Deer, Ft. St. John, Regina and Brandon.
Tough times call for tough measures for oil workers and depending upon the severity of the downturn, they may not all be legal. The severity of the impact on U.S. oil communities was highlighted in a report by Bloomberg News on November 16 which wrote about the theft of produced oil and idle oilfield equipment.
Oil theft works like this: tank trucks drive up to unsupervised production operations, load up somebody else’s oil and sell it on the black market for as little as $10 a barrel, less than 25% of the market price. According to security experts the theft has two phases: first you steal a tank truck, then you go steal the oil. The news report indicated this was more likely the activity of a criminal organization than angry, unemployed tank truck owners.
The Energy Security Council, a Houston-based organization studying this issue, estimated that in 2013 the losses from theft of all kinds was approaching $1 billion a year. The issue has been made worse by the loss of jobs and employment opportunities. In the state of Texas alone, unemployment insurance claims in the past year have doubled to as high as 110,000. Meanwhile, in North Dakota, wages for oil workers had fallen by 10% in the first quarter of 2015 compared to the prior quarter in 2014.
Stolen property ranges from crude oil to rock bits. The allegation has been made that oil theft in Texas has actually been linked to Mexican drug traffickers. The Bloomberg article wrote, “Many of the crimes are inside jobs, with thieves doubling as gate guards, tank drivers or well servicers. Last year, a federal grand jury indicted three Texas men in connection with the theft of one and a half million dollars with of oil from their employers, including Houston’s Anadarko Petroleum Corporation.”
Oilfield equipment theft has always been a problem in Canada but not something the industry talks about too much. But oilfield services managers are familiar with the theft of fuel and hand tools by operations personnel on a daily basis. Theft of larger and more specialized pieces of equipment such as light plants, light towers and other equipment with multiple market application is a bit more complicated because it requires a buyer who is likely to close the purchase even though they know the asset is stolen.
Drilling activity in Canada and the U.S., as measured by the number of active rigs, remains anemic compared to historic levels. Canadian active rigs are 61% lower than on the same day a year ago, a similar level to oil rigs in the U.S. which are down 64% since October of last year and the active rig count in North Dakota, which is down 65% on a year-over-year basis. WTI closed at US$41.05 on November 16 on crude for December 2015 delivery. A year out to December 2016, WTI futures closed at US$48.09 a barrel, a nice contango spread for somebody with empty, low-cost storage tanks, but hardly values high enough to move the needle in terms of picking up drilling rigs and going back to work.
Source: Baker-Hughes Rotary Rig Count November 13, 2015
Source: North Dakota Department of Mines & Resources
David YagerNational Leader, Oilfield ServicesDirect 403.648.4188Cellular 403.461.8566
Client Groups:Oil ＆ Gas
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