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Alberta facing an ‘ugly’ quarter Capital spending and cash flow continue downward spiral; provincial government bracing for its lowest royalty revenues in 42 years By GARY PARK For Petroleum News
If Canada’s petroleum industry and its producing provinces had any questions about the challenge they face in trying to win over the hearts and minds of the public that was taken care of on the day they swallowed a dose of bad-tasting reality.
The Canadian Association of Petroleum Producers forecast that capital spending will continue its headlong plunge this year to C$31 billion from C$81 billion in 2014.
“We have never had a two-year pullback of this magnitude,” said CAPP President Tim McMillan. “It’s affecting oil and natural gas. It’s conventional and oil sands. We’re seeing the pullback in all sectors.”
Also at stake is an industry that has fueled the growth of Canada’s economy since the turn of the century.
The Alberta government is expected to forecast its lowest return on royalties in 42 years, pegging C$1.4 billion for 2016-17.
Investment dealer Peters & Co. said upcoming financial reports are likely to show a 50 percent decline in cash flow for the first quarter from the last three months of 2015.
In addition, oil and natural gas producers are now entering a period when prices are no longer protected by hedging agreements.
“It is going to be ugly,” analyst Nick Lupick of AltaCorp Capital told the Calgary Herald. “The only companies that are going to have a decent quarter are those with meaningful hedges in place.”
He said heavy crude prices were too low in January and February to yield positive operating netbacks for most producers.
Piling on But the response from the rest of Canada was, at best, a collective shrug and, at worst, a thumbing of the nose.
The Quebec government, which has vigorously campaigned against TransCanada’s Energy East pipeline despite the chance to eliminate 700,000 barrels per day of offshore crude imports as feedstock for its refineries, demonstrated its level of empathy.
The province declared that it wants to reduce the province’s use of fossil fuels by 40 percent over the next 14 years.
Piling on, University of Alberta energy and environmental economist Andrew Leach argued that an overbuilt pipeline network could be just as bad as an underbuilt one.
He called for more analysis by the industry to prove conclusively that more pipelines would result in significantly higher prices on export markets for Canadian products. Greatest drop in investment McMillan said data compiled by CAPP and Barclays Bank showed that capital investment has dropped further in Canada since 2014 than in any other oil-producing region.
CAPP also said a lack of pipeline access impairs Canada’s ability to compete with other crude-producing regions, above all the United States, for both the best market prices for crude and natural gas and investment dollars.
That will hamper growth in Canada’s energy sector even when oil prices start to recover, McMillan said, adding: “Today, everywhere in the world has pulled back on their capital expansion, but nowhere as fast or as deep as Canada.”
But the United States, “our only customer and No. 1 competitor, is certainly not standing still. We as a country need a common effort to have a level playing field in North America.”
In addition, CAPP increased its estimate of direct and indirect job losses from the downturn, raising the total to 110,000 from 100,000 in October.
Jackie Forrest, vice president of energy research at ARC Financial, said the decline in upstream activity will also extend into 2016 from 10,400 wells drilled in Western Canada in 2014, to 5,400 last year and 3,500 this year.
She said that trend will be accompanied by a sharp decline in oil sands activity as mega-projects come closer to completion, even though the reduction in capital spending reflects downward pressure on costs from labor to materials.
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