Providing coverage of Alaska and northern Canada's oil and gas industry
March 2020

Vol. 25, No.12 Week of March 22, 2020

All hands on deck

Canadian industry, Alberta, scramble to develop strategy for unparalleled crisis

Gary Park

for Petroleum News

Having been shoved by Russia and Saudi Arabia, combined with COVID-19, into a bottomless pit, Alberta-based energy companies apparently have plenty of time to mull over when the descent will stop and how long it will take to see daylight again.

Things are so bad that not even government and industry leaders show signs of panic. They are just trying to figure out a strategy to handle events that have no parallel.

In the Alberta capital of Edmonton and the industry headquarters of Calgary, the brain trust is looking for answers ... any answers.

Premier Jason Kenney and Energy Minister Sonya Savage, along with Economic Advisory Council chair Jack Mintz, after meeting with the energy sector, are trying to craft a stimulus/rescue package to ease the sense of pandemonium, with hopes of announcing an initial program of assistance before the end of March.

Even the normal steady hand of Kenney has been seen to shake as he told reporters he expects “a lot of very important economic decisions to be made for the Alberta economy by business leaders” over the balance of the month.

“We want them to know the government of Alberta will be there as much as we reasonably can,” he said, adding that Alberta has been examining a “TARP-like instrument,” similar to the Troubled Asset Relief Program implemented in 2008 by the United States during that financial crisis.

Tumble in resource revenue

The most alarming trend has been to watch helplessly as Alberta’s reliance on nonrenewable resources has tumbled to 13% of provincial revenue in the 2019-20 fiscal year from 25% just a few years ago.

For now, time is running out faster than solutions, while everyone braces for the worst of COVID-19, with a raft of small- to mid-size producers facing a liquidity decline that worries Kenney.

“We are hearing about prospective bankruptcies and certain job losses,” he said.

Since the first wave of the current downturn hit in 2015, the energy industry in Alberta has lost an estimated 50,000 full-time jobs that experts say are gone forever.

Peter Tertzakian, executive director of ARC Research Institute, told the Calgary Herald: “This is as serious as it gets.”

In an attempt to offer hope, he said: “The low prices aren’t going to last forever and the pandemic isn’t going to last forever. We just have the hunker down for the next six months to a year and take it from there.”

OPEC, Russia

Otherwise, the slimmest chance of stabilizing oil prices rests with OPEC and Russia reaching an accord to lower production by an additional 1.5 million barrels per day - unlikely as these rogue players raise output to inflict maximum damage on oil markets.

In its latest economic modeling, Tertzakian’s ARC has estimated cash flows for the Canadian industry will fall by 63% this year to C$18 billion, a drop of C$32 billion from 2019, resulting in a well-completion count for the year of 2,500, the lowest count in the past 50 years or more.

Hit hardest by the tanking of Canada’s crude oil markets has been Western Canadian Select, the benchmark for heavy crude, that has been driven as low as US$10 a barrel, which makes production unprofitable for most companies.

The Canadian government has made C$10 billion available to any companies with a credit facility program and is mulling a broader fiscal stimulus package of its own.

Key players

A snapshot of how the key players in Canada’s upstream sector are responding, though some have not updated their guidance since December:

Canadian Natural Resources - The largest combined oil and gas producer has dug in against the odds by raising its capital budget to C$4.05 billion from C$3.8 billion in 2019 and forecast peak output of 970,000 bpd of crude from 850,393 bpd last year and 1.42 billion cubic feet per day of natural gas, a minor pullback from last year’s 1.49 bcf per day. Company President Tim McKay said the program demonstrates that CNR is “truly a unique, sustainable and robust company” with an “unparalleled asset base.”

Suncor Energy - In its December guidance, the largest pure oil sands producer targeted peak output of 840,000 bpd, up 5% from mid-2019 guidance, and capital spending as high as C$6 billion. President Mark Little tied those goals to the “value of our asset integration and flexibility, with a “focus on value over volume.”

However, since the start of March a string of lesser oil sands operators have announced major cuts to their capital budgets, with Husky lopping C$1 billion or one-third off its program, halting all investment in resource and conventional heavy oil plays; Cenovus Energy slashed its spending by C$450 million; Seven Generations Energy trimmed spending by C$200 million; Pipestone Energy scaled back its budget by 60% to C$90 million; and MEG Energy shed C$50 million from its cap-ex plan.

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