‘Ottawa’ Why Canada Will Likely Be the Last to Benefit From Oil’s Recent Pricing Rebound
Unless you get a government paycheque in Alberta, the mood here is foul. Ongoing government announcements about diversification initiatives and environmental policy leadership are shrugged off with resignation, while frustration abounds that little is being done to encourage oil and gas capital to come back.
Oil’s recent rise to US$50 a barrel has sparked some optimism that the worst of the downturn is over. But industry executives and analysts say if there is a recovery on the way the Canadian oil and gas sector is expected be the last to benefit.
“Capital will return to the sector (globally), but Canada will be last,” said John Brussa, vice-chairman of Calgary-based law firm Burnet, Duckworth & Palmer LLP, and a board member of eight Canadian producers.
Brussa and others say continuing delays to approve oil export pipelines and liquefied natural gas (LNG) projects, climate change policies, damaged balance sheets, extensive layoffs, mean capital will flow elsewhere to take advantage of the oil price recovery.
Indeed, many fear damage from the combination of oil shock and climate policy uncertainty is permanent and that the Canadian sector will never again match past levels of activity.
“It probably will return in the U.S. first,” Brussa said. “We are perceived as not being terribly friendly toward the industry. The United States approved a number of LNG projects. We can’t even approve one. We can’t get a pipeline to tidewater. Everything seems to take so long here. Unless we send out some signals that we are a good place to do business, it’s going to be harder.”
Scott Sharabura, oil and gas strategy consultant at McKinsey & Co., said the oil downturn was so severe it left many oilsands investors “with a serious concern about the viability of investing in such a long-term, expensive asset.”
At best, new large oilsands projects are years away, and any new spending will be focused on debottlenecking — making facilities work harder — or small-scale expansions, he said.
“Downturns like this tend to stick with people for quite some time,” Sharabura said. “They get very nervous and very gun shy. There are a lot of places where they saw they got a bit ahead of themselves during the good times, and they don’t want that to happen again.”
Sharabura said there is relief that oil prices have recovered, but concern they could drop again just as quickly.
“There is nothing magical that will keep prices at US$50,” he said. “It’s certainly a better mood now than when prices were down at US$28, but it takes more than a short-term drift upward to get a level of confidence back to the point where you will make significant investments.”
Harry Knutson, executive chairman of private oil junior Canamax Energy Inc., said a recovery will take a long time because surviving companies have to repair balance sheets before investing in the business, and foreign capital will be on the sidelines until infrastructure is in place to export Canada’s oil and gas.
“We are only going to have Canadian domestic capital to re-invest in the industry, and that is not enough,” said Knutson. “I think the serious money is going to go elsewhere. The political environment here is too uncertain.”
Re-hiring will also be slow and start with contract positions because it’s easier to let contract workers go if oil prices weaken, said a senior industry source.
Laying off people is traumatic for those losing their jobs, but it’s also hard on those doing the firing, and “no one wants to move too early and risk a repeat if the recovery turns out to be a ‘dead cat bounce’ so risk aversion will be the order of the day,” said the executive, who asked not be be named because he’s not authorized to speak to the media.
The priority will be to bring back wells and facilities that were allowed to decline or shut down and catch up with maintenance that was deferred, the source said. But given the experience so far with regulatory delays, the outlook for multi-billion capital projects in the oilsands, oil and gas export pipelines and export LNG facilities, is dire.
This past year has certainly presented the most difficult set of business conditions encountered by the Canadian oil and gas sector, perhaps ever
“I expect Canada will not participate in any new major energy projects when the recovery comes,” the executive said. “Approval timelines are several years long and the cost of the approval process is measured in hundreds of millions of dollars if not billions. And approval does not mean a great deal as Northern Gateway has demonstrated. Other hurdles such as ‘social licence’ (whatever that is), endless litigation and probably civil and uncivil disobedience await any project that gets a government nod.”
Reynold Tetzlaff, national energy leader at PricewaterhouseCoopers LLP, said Canada was hit so hard it will take time for any recovery to take hold. In a recent report to clients, the firm said: “This past year has certainly presented the most difficult set of business conditions encountered by the Canadian oil and gas sector, perhaps ever.”
Capital is flowing out of Alberta, toward competitors such as the United States, due to a combination of higher political risk and high oil price volatility, the firm said.
Canadian companies “will be very careful how they build companies back up and how much hiring they do,” Tetzlaff said.
Even assuming oil prices recover to US$60 by early 2017, spending programs will be set and spending increases will lag by a year, rather than months, he said. Meanwhile, there is more discussion about diversification into renewable energy, but that will also take time, he said.
David Yager, a former oilfield services analyst and now a consultant, predicted annual oilfield services revenue will rebound at best by two-thirds compared to 2014 because of reduced investment levels even if oil recovers to US$60.
But Yager said Canada will take a back seat to other jurisdictions that haven’t penalized their industries with new taxes and longer regulatory processes.
“Of the top 10 producers of oil and natural gas, Canada is going it alone on the carbon tax/climate change file,” he said. “When you add it all up, the conclusion is that Canada is not going to get its historical share of investment.”
When they embraced aggressive environmental targets, the Alberta and Canadian governments made bets that Canada’s energy sector would be rewarded for its leadership. The outcome so far is that it’s no longer the place to be, at any oil price.