KENNEY URGES OILSANDS COMPANIES TO SPEND
One conundrum facing UCP government is coaxing the industry to create more jobs
How does the Alberta government get the oilpatch to spend more money?
As the Canadian oil and gas sector accelerates into the second half of the year with revenues taking off, one of the biggest conundrums facing the UCP government is how to coax the industry to open its collective pocketbook and create more jobs.
Premier Jason Kenney and Energy Minister Sonya Savage will be sitting down with oil and gas company leaders later this week to talk about it. The premier anticipates spending levels will soon rise.
“We do expect them to (spend more). Look, I understand they've had to repair damaged balance sheets from last year's price collapse and the last five tough years,” Kenney said.
“But we believe many of the strongest companies have paid down debt, bought back shares, improved dividends and are now massively undervalued in the equity markets. But they now have cash on hand, many of them very large reserves of cash on hand, and we urge them to translate a lot of that cash into new capital investment.”
The meetings take place later this week at Mcdougall Centre and include chief executives from both oilsands and conventional petroleum producers.
After a disastrous 2020, the sector is on the mend as Western Canadian Select heavy oil prices and Alberta natural gas prices have taken off this summer. On Monday, benchmark West Texas Intermediate crude closed at US$74.10 a barrel. Analysis from ARC Energy Research Institute projects Canadian oil and gas industry revenues will rise by more than 85 per cent this year.
While cash flow levels are forecast to hit a record $74.6 billion, the industry is only expected to reinvest about 40 per cent of the money, by far the lowest level seen in the past decade.
Companies are still under pressure from investors to remain financially disciplined and keep costs down.
Producers are paying down debt and returning cash to shareholders through dividends and share buybacks, although some modest spending increases are planned.
The Canadian Association of Petroleum Producers projects total capital expenditures (capex) will increase by 13 per cent to $27 billion this year from 2020 levels. However, it's well off the $35 billion spent in 2019 before the pandemic struck.
“By and large, the companies haven't announced any really substantive increases to cap-ex and they might not do so until their 2022 budgets,” said CAPP vice-president Ben Brunnen.
Higher capital spending by producers drives employment in the sector, including throughout the oilfield services industry, which is beginning to see more demand from customers and is starting to hire.
“Urging companies to invest, it's helpful to encourage investment, but we need more than that,” added Brunnen. “We need to look at the conditions for creating a good investment climate … but also the right commitment on addressing ESG.”
At the premier's annual Stampede breakfast on Monday, Savage said the government has done what it can on the regulatory and fiscal front to improve the industry's competitiveness by lowering taxes, cutting red tape and reforming the Alberta Energy Regulator.
She expects that as companies review their fall budgets, “we are going to see a big uptick in capital spending, which then leads to jobs.”
Yet, after the intense cost-cutting of last year as oil prices cratered, it's going to take time for companies to shift gears.
“We are having numerous roundtables with the industry this week to talk about what the state of spending is, where they're going, because our hope and our expectations is this is Alberta's resource. The oil belongs to Albertans. We need the jobs here,” Savage said. “We are going to see a lot of cash flow. And I think we just have to have that conversation: What are you going to do with it?”
The province continues to face political pressure on the employment front. Last week's jobs report was largely flat, showing a loss of full-time jobs and a gain in part-time work in June.
The unemployment rate jumped to 9.3 per cent from 8.7 per cent as more people started to look for work. The province is still down almost 48,000 jobs since the pandemic began.
A report last week from CIBC Capital Markets forecast Alberta's economy will expand by 7.9 per cent this year and 5.9 per cent in 2022, tops in the country, after suffering the largest contraction in Canada last year.
It also projects the jobless rate will average 8.5 per cent this year, almost a full point above the national average.
NDP MLA Shannon Phillips said the UCP'S decision to cut corporate income taxes in Alberta has failed.
“What Albertans are looking for in their economic recovery is jobs above all else,” Phillips said.
“That corporate tax cut has simply gone to share buybacks and other initiatives and has not remained here in Alberta to create jobs.”
Kenney told reporters Monday he was a bit surprised to see the lacklustre employment report as the provincial economy started to reopen in June, but predicted “huge job growth” later in the year.
In the energy sector, there is a “reticence to deploy growth capital,” although strong commodity prices could strengthen calls for increased exploration and development spending in the second half of the year as second-quarter results roll in, said a recent note by Stifel Firstenergy.
Petroleum producers note there are still many uncertainties ahead, including volatile commodity markets, concerns about future energy demand, the need for Esg-related investments and ongoing pipeline challenges.
“I just don't see the Western Canadian basin growing when you have all the constraints there,” said Tamarack Valley Energy chief executive Brian Schmidt.
“We are meeting with the premier … so I'm really interested to see where he is coming from. I think we need to talk about the systematic problems we have in Canada.”
That corporate tax cut has simply gone to share buybacks and other initiatives and has not remained here in Alberta to create jobs.
SHANNON PHILLIPS, NDP MLA