|
Canada grappling with ‘dramatic plunge’ Government forecasts loss of C$40B in annualized oil exports, holds out hold for gradual turnaround in prices over next two years Gary Park Petroleum News
The Canadian government’s newly released 2015-16 budget paints a stark picture of the economic fallout from the slide in oil prices, with the value of exports - almost exclusively to the United States - dropping by an annualized C$40 billion, or 2 percent of gross domestic product.
In the second quarter of 2014, those exports were valued at C$100 billion, or 5.1 percent of GDP, pointing to a decline of 3 percent in annual government revenues compared with the normal gain of 2 percent.
Finance Minister Joe Oliver, delivering his first budget, said the “dramatic plunge in oil prices has taken its toll on our economy” and will continue to act as a drag on growth.
The lower commodity price will also eat into corporate profits, which will result in reduced investment and employment in the industry, he said.
In what many observers rated as an overly optimistic forecast, the government expects the benchmark West Texas Intermediate price will average US$54 a barrel this year, rising to US$67 in 2016 and US$75 in 2017.
No lifeline But the administration of Prime Minister Stephen Harper, who once counted on Canada joining the ranks of global energy superpowers, made no effort to throw a lifeline to the floundering sector.
It extended C$80 million over five years in special funding for the National Energy Board to strengthen its safety and environmental protection measures, although that allocation will be fully recovered from the industry.
The government also extended a hand to the hoped-for LNG industry in British Columbia by confirming it will accelerate capital write-offs for the sector.
In addition, it announced the maximum length of gas export licenses for LNG will be extended to 40 years from 25 years to improve regulatory certainty.
No raise in taxes Despite these small offerings, the Canadian Association of Petroleum Producers saluted the unveiling of Canada’s first balanced budget in eight years and no plan to raise taxes “in these tough economic times when low oil prices are hurting some companies, costing jobs and reducing government revenues.”
CAPP President Tim McMillan said the fiscal regime in the budget “supports capital investment and enables future growth” in an industry that expects capital spending this year of C$49 billion - higher than the next two industrial sectors combined.
He said the LNG provisions recognize the need for a globally competitive business environment and create a more level playing field for companies weighing potential investments.
“Along with fiscal considerations, we need to continue our country-wide focus on diversifying markets for oil and gas products and moving these products to market,” McMillan said, pointing to the importance of improved transportation infrastructure.
Third largest decline in three decades
The budget documents noted that the drop in WTI prices from mid-2014 to February this year is the third largest decline in three decades.
“There is considerable uncertainty over the path of crude oil prices going forward in the current episode,” with most economists forecasting only a gradual recovery in the second half of 2015.
The budget said the primary driver of the drop in prices has been increased oil supply, with the rapid rise in United States volumes since 2011 representing more than 85 percent of the incremental growth in global production.
It said market analysts doubt there will be a rebound in prices until U.S. shale production begins to slow down, noting that the current decline in the number of rigs dedicated to oil production in the U.S. only affects the least productive rigs, allowing operators to refocus on fields with lower costs and higher yields.
“However, as the technology in this industry is relatively new, and underlying production costs continue to decline, there is considerable uncertainty over the actual timing and magnitude of the expected decline in production,” the government said.
| 