Hard to see upside amid ongoing oil uncertainty

The Calgary Petroleum Club is a much quieter place these days.

Tighter control of expense accounts — not to mention the measure of weariness over how much the current situation can be dissected — means the lobby is not filled with oilpatch executives waiting for their breakfast or lunch mates to arrive.

The conversations in meetings that do take place range from corporate survival plans for the coming months, possible outcomes of the royalty review and climate change panels, to increasing concern about the provincial government’s understanding of the linkages between the energy sector and the economy.

There is a sense the government continues to apologize for the oilsands.

Premier Rachel Notley’s comments this week that the energy industry “is long past due to clean up its environmental act” would not have sat well with industry players given the current challenges.

With that kind of messaging, how will the premier promote a “healthy business climate” when she travels to New York, Toronto and Montreal next week?

Investors in New York will want to hear certainty and stability; reasons why this province has attracted massive investment over the years.

Notley cannot offer assurances given the royalty review and climate change panels are ongoing. The fact the existing royalty structure will remain in place until 2016 has not contributed to anything resembling certainty, despite the intent behind that timeline.

What it has meant is that transactions of size — in addition to significant capital expenditures — will be on hold.

It’s difficult enough to get the economics to work on big transactions. The overriding uncertainty means the consolidations many are expecting will not happen with too many moving parts.

The net effect is that companies will do only what is needed and nothing more.

When one looks at the calendar for future investment, the cupboard is bear (sic).

Just ask the engineering firms and investment bankers.

The irony is that the timing of companies finishing up these projects will coincide with the provincial election cycle and it will be interesting to see how the voter base feels then.

Notley will not be able to offer New York investors clarity on the fate of the Alberta Energy Regulator either. Increasingly, the AER — having come through its period of integration — is seen as the one area of stability and certainty for the oilpatch in its ability to strike a balance between regulation, oversight and development.

But the AER now falls into the category of undefined variable.

Given the grim outlook for commodity prices and the likelihood more production will be shut-in, some are suggesting a royalty holiday or royalty tax credit program — to a certain maximum so larger companies aren’t unfairly advantaged — is something the government should think about.

A healthy business community — in this case a strong energy sector — means the private sector can pick up the slack in terms of what the government cannot do in terms of funding.

In Calgary, the annual United Way Campaign is the envy of the country because it raises more dollars per capita than any other campaign. The efforts of corporations and individuals support projects of importance to the city, like the National Music Centre or the Alberta Children’s Hospital, to say nothing of how individuals have stepped up to fund the University of Calgary, SAIT and Mount Royal University and social services agencies such as Inn From the Cold, The Mustard Seed, the Calgary Counselling Centre or the Calgary Women’s Emergency Shelter.

The absence of a clear path — whether in terms of when the inflection point for oil prices will finally happen or what the various reviews will bring — has given new meaning to the phrase ‘ lonely at the top.’

Executive teams are struggling with how to keep their workforces intact as cash flows decline. They realize laying off too many employees is counter-productive in the long term.

That’s why Canadian Natural Resources Ltd. recently announced wage cuts of 10 per cent.

The motivation there was likely threefold — decrease uncertainty in the workplace, so employees aren’t wondering when the next round of layoffs will take place; preserve a corporate culture that wasn’t created overnight and ensure CNRL has the right talent to put to work when things start to improve.

Whether the 10 per cent rollback is the end or there is more on the horizon will depend on commodity prices and how quickly costs in the industry as a whole come down.

None of these decisions are easy.

When ATB Financial chief economist Todd Hirsch said last week that wages in Alberta had risen 56 per cent over a 10-year period relative to the national average of 29 per cent, there was an audible gasp from the crowd of 1,600 business types.

How many in the public sector have seen pink slips versus those in the private sector — where the tax revenue comes from to pay those salaries? That number — already at 35,000 across the province — is expected to rise through the third quarter.

Adding insult to injury this week was presidential hopeful Hillary Clinton who threw cold water on the Keystone XL pipeline, a stance entirely inconsistent with her announced objective to “modernize American energy infrastructure and forge a new partnership with Canada and Mexico to combat climate change.” The KXL pipeline is part of that modernization objective.

By appearing to favour the oil by rail option, Clinton is disregarding rail’s carbon emissions compared to oil by pipe.

As evidenced by the recent Wood Mackenzie report stating US$1.5 trillion in capital expenditures is at risk from low oil prices, there is no easy road through this.

In the absence of certainty on the fiscal and regulatory fronts or an uplift in commodity prices, the only option is to focus on what can be controlled, and even that may not be good enough.

It’s possible the Pete Club — and other popular spots for talking shop — will grow quieter still in the coming months.