It’s pundit time in the oil patch, when observers and analysts start issuing their predictions and prognoses for the new year, as if moving ahead 24 hours from Dec. 31 to Jan. 1 changes everything, or, for that matter, anything.
But there is no doubt that entering 2016 is unlike any transition in the history of Canada’s petroleum industry. Few years in the last generation have started off in a more unsettled state, with some experts quite happy to talk about oil slipping under US$20 a barrel.
With natural gas remaining stuck under US$3 per million British thermal units and now crude oil apparently range-bound below US$40 - notice how few, if any are talking about US$50 - corporate executives are returning to their high-rise offices from their holiday season, recovered from the shock of going without their traditional Christmas parties and bonuses.
Things are so grim in the industry’s Calgary headquarters that even some high-end lunch hangouts are fading from the scene, with at least five dining establishments either closing their doors or preparing to take that drastic step.
Outflow from Fort McMurrayOn the industry’s frontier in Fort McMurray (no longer jokingly referred to as Fort McMoney), the oil sands “capital” city and its region of 125,000 people is witnessing movement in only one direction - an outflow of skilled workers who have lost highly paid jobs, with little hope of being reinstated.
The Canadian Real Estate Association data for November showed home prices fell by more than 19 percent in 2015 to about C$519,000 and realtors were leaving town in droves.
Because they have nowhere else to go, many are simply hanging on in hopes that oil will regain levels of US$40-$45, which, in the oil sands, is barely enough to cover some operating costs, putting an end for now to a multibillion-dollar raft of new and expanded operations.
Fort McMurray Mayor Melissa Blake, long a voice of optimism, said in a state of the region address that those who remain will fight on and “forge a new path towards prosperity,” while the industry as a whole will live in hopes that a major “pipeline or two” will connect the region to North American and offshore markets.
Harsher assessmentOthers are inclined to offer a harsher assessment.
An index released by the Alberta Council of Technologies that monitors the resilience of the Alberta economy to crude oil price shocks has found the province is paying the price for its dependence on the energy industry.
Perry Kinkaide, chief executive officer of ABCtech, said his organization’s subscriber base of 13,000 contacts who are involved in commercializing emerging technologies and diversifying the province’s economy offered their view on that level of resilience.
Based on those responses, ABCtech determined that Alberta is “too dependent on the oil and gas industry. Diversification is warranted to increase the economy’s resilience to the shock of oil price volatility. Resilience requires innovation in technology, small business growth and value-added manufacturing and exporting.”
Kinkaide said one of the primary objectives of his council is to develop a provincial plan and a number of strategic options by bringing together diverse groups who “care about reshaping Alberta.”
Push for new marketsWhile Premier Rachel Notley endorses that line of thinking she has also aligned herself with the petroleum industry’s push to open new markets for oil by convincing other provinces that Alberta is no longer an “outlier” on issues such as climate change, energy efficiency and renewable energy and promoting the development of a Canadian Energy Strategy.
She is pinning most of her hopes on TransCanada’s proposed 1.1 million barrels per day Energy East pipeline to displace most of the 800,000 bpd of crude imported from offshore and opening markets in Europe and Asia.
“We simply can’t rely on the U.S. market. We need to diversify,” Notley said, in explaining her efforts to win over Ontario and Quebec.
Cheapest crudeThe dependence on the U.S. for 99 percent of its exports comes at a high price for Canada, whose crude can be knocked down by US$10 a barrel, making it the world’s cheapest, said Tim Pickering, president of Auspice Capital Advisors.
He said that correcting that imbalance will be helped by Alberta’s tough new climate change policy, which should change Canada’s reputation peddled by the U.S. environmental movement as a sponsor of “dirty” oil.
As a result, the U.S. is saving money from the 2 million bpd it buys from Canada.
“They are getting cheap safe oil and bitching about it while they do,” Pickering said.
If a pipeline was built from the oil sands to the Pacific Coast and a tanker port was established, China would gladly buy Canada’s “secure barrels simply to diversify their supplies away from the Middle East,” he said.
“At the end of the day, the oil sands are the third largest oil reserve in the world,” Pickering said. “It’s a really important part of what is going to spin the world forward and it should be available to people.”
While the Alberta government wrestles with seemingly conflicting forces and revisits its own extravagant promises during last spring’s election, a clear, disturbing message is being delivered to Notley as she prepares to do what every leader of her province has dreaded most - deciding whether to raise royalties.
Reduced ranks, salariesFrom the time oil prices started their decline in late 2014, many companies wasted no time taking action.
Secure Energy Services slashed its employee ranks by 300, trimming salaries by 10 percent and abandoning its U.S. drilling fluids and equipment rental business, but even those measures have failed to arrest a decline from net profits of C$44.3 million in the first nine months of 2014 to a loss of C$73 million in the same period of 2014.
Mark Scholz, president of the Canadian Association of Oilwell Drilling Contractors, has forecast that a further 58 percent decline in drilling activity this year will cost another 28,500 direct industry jobs on top of about 40,000 in 2015.
“It’s one thing to get through one winter drilling season (the industry’s peak time in Canada) with lower activity; it is certainly another to go through two,” he said.
Revenues face further declineInvestment dealer Peters & Co. estimated revenues in the service sector fell by 35 percent in 2015 and faces an additional 10 percent decline this year.
Scholz said the new Alberta government’s “bad public policy” of hiking taxes and imposing new penalties for carbon emissions, while pressing ahead with its royalty review, is forcing small private and large public companies to divest out of Canada.
However, Peters & Co. said services companies have managed to cut their costs by 39 percent in the past year, laying the groundwork for a quick recovery when oil prices turn around.
Rene Amirault, Secure’s chief executive officer, is shifting his focus from exploring for oil and gas to exploiting the commodities by targeting the “lowest cost structure.”
But he also acknowledges that there is no sense in putting rigs to work when companies can’t even cover their depreciation costs.