The Canadian oil patch is about to find out how perceptive Franklin D. Roosevelt was in his inaugural speech in 1933 when he famously declared that the “only thing we have to fear itself.”
It’s now without question that fear is taking hold in the industry, reflected by upstream drilling activity that showed only 455 rigs were operating in Western Canada entering 2015, down 20 percent from a year ago.
How long it will remain and how much tighter its chokehold will get is a deep source of worry, especially as Jim Prentice, premier of Alberta’s petro-driven economy, says it’s time for a public discussion about his province’s public finances, including the introduction of a provincial sales tax and a review of Alberta’s flat 10 percent income tax.
Even such a fuzzy reference to a provincial sales tax verges on sacrilege in the last of Canada’s 10 provinces to hold out against such a tax.
Revenue shortfall C$7 billion
But the heat on Prentice is obvious. In a Jan. 13 speech he told a business luncheon in Edmonton that the oil price rout could lead to a revenue shortfall of C$7 billion this year (based on the government’s assumption that oil will average US$65 a barrel).
The province, which relies on oil and natural gas for 25 percent-30 percent of its revenue, loses C$230 million over a year from every US$1 a barrel drop in oil.
While Prentice said he is not personally in favor of a provincial sales tax his plan to “put everything on the table” is a drastic shift from a speech in December when he asserted there will be “no sales tax” in Alberta.
“I don’t think Albertans generally advocate a sales tax but I’m prepared to be educated and to hear from people,” he said.
Economist: Recession possible
What Prentice would not contemplate and flat out rejected was a warning from the Conference Board of Canada’s chief economist Glen Hodgson who said “it’s going to be very hard for Alberta to avoid a recession this year.”
In issuing such a grim prognosis, Hodgson took a far more bearish stance than only two months ago when oil prices were US$80 a barrel and he told a Calgary audience that “you’re frankly the superstar of the national economy. I wouldn’t be worried at all about Calgary’s economic situation.”
Less alarmist, Todd Hirsch, chief economist for ATB Financial, told a Calgary Chamber of Commerce luncheon Jan. 13 that there is “no way to sugar coat it; it is going to be a soft year for Alberta’s economy.”
He forecast Alberta’s gross domestic product in 2015 will reach half of last year`s 3.9 percent growth.
Timothy Lane, deputy governor of the Bank of Canada (the Canadian equivalent of the U.S. central bank) added to the bad medicine by suggesting “oil prices could go lower, or remain low, for a significant period.”
Cuts at Suncor
That belief is driving many of Canada’s biggest exploration and production companies to act.
Suncor Energy, Canadian Natural Resources and Shell Canada have all decided to slash their payrolls and capital budgets.
Suncor, as the barometer of the oil sands sector, said it would eliminate 1,000 jobs from its workforce of 14,000, the largest downsizing yet in the current round, and shrink its capital budget by C$1 billion from the planned spending range of C$7.2 billion-C$7.8 billion it set in November.
In addition C$600 million to C$800 million of operating expense reductions will be phased in over two years.
Chief Executive Officer Steve Williams said it was “essential” that his company accelerate its cost management work aimed at lowering its capital and operating budgets.
“We will monitor the pricing environment and take further action as required,” he said.
But major projects, such as construction of the Fort Hills oil sands joint venture with France’s Total (targeting net output of 73,000 bpd) and the ExxonMobil led Hebron project (with a net 34,000 bpd for Suncor) in offshore Newfoundland, will press ahead.
Greg Pardy, an analyst with RBC Dominion Securities, said Suncor’s decision “to live within its means is logical and potentially savvy should acquisition opportunities arise, possibly in U.S. refining, as we move through 2015 and into next year.”
Cuts at CNR, Shell
Canadian Natural Resources wielded an even heavier axe, halting expansion plans at an oil sands project and slashing C$2.4 billion from its C$8.6 billion capital budget, while lowering its production guidance to 840,000-887,000 barrels of oil equivalent per day from 869,000-916,000 boe per day. The company made no mention of the impact on payroll numbers.
To demonstrate how even the biggest and healthiest companies are bending, CNR will cut spending on its in-situ Kirby North oil sands project by 59 percent to C$460 million only two years from the scheduled start of production.
Chief Financial Officer Corey Bieber said any decision to resume work on the project will be based not on the price of oil but on CNR’s ability to meet its target of a 15 percent return on investment.
He said CNR hopes that, after years of absorbing higher costs of materials, equipment and labor, supply-chain economics will swing back in favor of producers.
“It is going to take a little while for us to get our costs back in line with the new realities,” Bieber said.
CNR estimates that every US$1 decline in oil prices reduces its annual cash flow by C$130 million.
Shell, another of the oil sands majors, plans to lay off up to 300 of the 3,000 workers on its Albian oil sands project, whose other partners are Chevron and Marathon Oil, without giving exact numbers.
Lorraine Mitchelmore, the president of Shell’s Canadian operations, said last August that the company hoped to bring its costs in line with the oil price outlook at that time, which was in the US$70-US$110 range.
Analyst sees worse coming
Dana Benner, the head of oilfield services research at AltaCorp Capital, said the prospects are only “going to get worse.”
“It is driven by a number of factors, which are not only economic but probably political as well ... economic in the sense of the momentary supply-demand balance of oil. There is also a political aspect to it, with the Saudis wanting to send a very strong message to the North American shale business that moves to seize market share are not going to be tolerated.
“It may take a while to prove that point,” he said, suggesting oil could drop into the US$30s “in which case we are not even close to feeling all the pain.”
The most recent slump in oil prices during the 2008-2009 recession cost about 15,000 jobs in the Canadian petroleum sector, but the industry quickly recovered from that stumble amid a surge to conventional and oil sands output of 3.9 million bpd.
With bullish talk of a steady climb to 6.4 million bpd by 2030 dominating Alberta’s economic forecasts, human resource forecasters were projecting a shortfall of 125,000 to 150,000 skilled workers over the next decade, with 76 percent of 31 companies employing 63,000 people indicating last fall that they would be “actively hiring” compared with 6 percent who expected to “maintain” their current workforces.
It is now an open question about how long that thinking will persist if producers do end up slashing their capital spending this year by an overall 25 percent.
