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30 Mar, 2020 12:32

Canadian drillers face nightmare scenario as oil crashes to $5

Canadian drillers face nightmare scenario as oil crashes to $5

The US shale patch laments oil prices in the low $20s crippling companies with already weakened debt and liquidity profiles. But further north, the outlook for Canada’s oil patch is even gloomier. 

Hit by the pandemic-driven demand shock and the price war-induced supply shock, Canadian oil prices have already crashed to below $10 a barrel.

This year’s oil price crash will hit Canada’s oil patch harder than the 2014 price collapse, analysts say.  

Following the double supply-demand shock of the past weeks, the industry had to quickly switch back to survival mode, just as it was expecting an uptick in upstream investments this year, for the first time in five years.

Canada’s oil and gas sector now faces an existential threat – losing even the little competitiveness it held onto in the wake of the previous oil crash.  

The pain in the coming months could become worse before the companies that manage to survive this oil price rout start making any money.

Calls for a federal government bailout are growing. However, so are calls from environmentalists for the government to help the workers who will be (or already are) out of a job instead of pouring billions into saving corporations that destroy the environment with oil sands operations.  

The government of Alberta—the heart of Canada’s energy industry—has adopted some emergency relief measures to help the sector.

And a federal government action in support of the sector could be imminent, Kelly Cryderman writes for The Globe and Mail.  

Environmental organizations wrote a letter to Canada’s Prime Minister Justin Trudeau this week, calling on the government to focus on helping workers, not bailing out corporations.

“Giving billions of dollars to failing oil and gas companies will not help workers and only prolongs our reliance on fossil fuels,” organizations including Citizens for Public Justice (CPJ), Climate Action Network Canada, Greenpeace Canada, and Extinction Rebellion wrote.

“Oil and gas companies are already heavily subsidized in Canada and the public cannot keep propping them up with tax breaks and direct support forever. Such measures benefit corporate bottom lines far more than they aid workers and communities facing public health and economic crises,” the environmentalists said.

Support for Canada’s energy sector is coming within “hours, possibly days,” Canada’s Finance Minister Bill Morneau said at Senate committee meeting on Wednesday, as carried by CBC News.

Without provincial and federal government support, many in the industry who survived the 2014 price crash may not survive this time, as oil prices are plunging, storage is approaching full capacity, and demand in Canada’s key oil export market, the United States, is plummeting.

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As a result, the price of Western Canadian Select (WCS), the benchmark price of oil from Canada’s oil sands delivered at Hardisty, Alberta, nosedived to a record low this week, and this may not be the bottom yet. 

As of Thursday, WCS was selling for US$6.45 a barrel, or C$9.08. This price compares to an average WCS price of US$36.82 for January and US$27.28 for February, according to Alberta government figures.

Bitumen prices are probably negative already.

“Looking at bitumen pricing, it is zero to negative. So, it’s as worse as it gets,” Martin Pelletier, a portfolio manager at Calgary-based TriVest Wealth Council, told CBC News this week.

Faced with plummeting oil prices, Canadian companies rushed to cut spending, curtail operations, defer investments and start-ups, cut executive salaries, and lay off workers.  

Husky Energy cut its budget and production, Cenovus Energy slashed its 2020 capital spending by around 32 percent, Suncor cut capital guidance, and so did Canadian Natural Resources. Athabasca Oil Corporation also cut its CAPEX and proactively curtailed heavy oil production at Hangingstone. 

“I expect to see cuts everywhere … It’s a survival game right now,” Athabasca Oil’s CEO Rob Broen told Calgary Herald columnist Chris Varcoe two weeks ago. 

“Being price takers has made us uniquely vulnerable to dramatic shifts in the oil price and what we’re seeing today will have immediate negative impacts on Canada’s economy,” Tim McMillan, President and CEO at the Canadian Association of Petroleum Producers (CAPP), said on the day on which international oil prices crashed 25 percent.  

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The COVID-19 pandemic and the resulting recession will hit every province in Canada in 2020, with Alberta the worst hit, RBC said in a note this week.

“The collapse in oil prices will be another massive blow to oil-producing regions of the country—most of which had not fully recovered from the previous collapse in 2014-2016. It will drastically reduce cash flows in the energy sector and slice government royalty revenues,” RBC Senior Economist Robert Hogue and Economist Ramya Muthukumaran wrote.

The entire Canadian economy faces massive job losses, with the energy sector particularly hit, RBC economists warned.  

“In Alberta and Saskatchewan, even the oil-price crash in 2014-16 will prove milder in terms of its effect on the labour market – we are expecting employment losses 2-4 times larger. The combined losses in these two provinces are likely to be in the order of 200,000 – 20% of the overall hit to employment in the country,” RBC said.

Canada’s oil and gas firms that survived the previous price crash will find this oil price collapse, combined with a recession, even harder to overcome.

This article was originally published on Oilprice.com