ENERGY’S FUTURE

Careful what you wish for in a bailout.

Alberta Premier Jason Kenney earlier this week tweeted a two-minute video clip of him telling reporters why the oil and gas industry rated a federal rescue.

The vignette, Canada’s energy industry deserves the same treatment as the auto sector, was an allusion to the bailout of General Motors Co. and Chrysler LLC by the governments of the United States, Canada and Ontario in 2009.

For the record, Kenney didn’t actually say that he thought the oil companies warranted the same treatment as GM and Chrysler. What he said was, “Albertans are absolutely right to expect and to demand at least similar treatment for by far the largest industry in Western Canada, the largest subsector in the Canadian economy.”

The distinction between “same” and “similar” is important, because there is little evidence that Canada’s version of Big Oil is ready for the medicine that was force-fed to GM and Chrysler a decade ago.

Early in the COVID-19 crisis, “sources” were saying in various places that Alberta wanted a TARPstyle rescue for the energy industry.

TARP stands for Troubled Asset Relief Program, the U.S. rescue fund that dispersed some US$430 billion in saving Wall Street and two of the Detroit Three automakers during the financial crisis. The governments of Canada and Ontario joined the auto bailout as junior partners, mostly to retain some leverage over the future of the Canadian operations of GM and Chrysler.

As government salvage missions go, TARP is generally viewed as a qualified success. No one liked seeing that much public money being handed over to failing corporate behemoths, but politicians accomplished their main goal of avoiding mass layoffs in vital industries. The fund’s managers even earned U.S. taxpayers a profit of more than US$12 billion.

The numbers were big. GM received assistance worth about $65 billion, 17 per cent of which came from Canadian treasuries: $7.2 billion from Ottawa and $3.6 billion from the Ontario government, according to the Auditor General. Chrysler’s bailout came to $15 billion, including $1.9 billion from Stephen Harper’s government and $900 million from Ontario Premier Dalton McGuinty.

“In ’08, ’09, it was the energy industry that actually led the recovery in Canada,” Alex Pourbaix, chief executive of Cenovus Energy Inc., said on a conference call with analysts on April 29. “With adequate liquidity support from government, I think the industry can do that again. I think back to ’08, ’09, and the significant liquidity support that was provided to the Canadian auto industry, an important industry to the country, but a much smaller industry than the energy industry … there are obviously precedents to this.”

No doubt, the oil and gas industry could use a cash injection equivalent to the $13 billion GM and Chrysler received from Canadian taxpayers. And that might not even be enough to avoid a catastrophe, given that commodity prices have collapsed some 30 per cent since the end of February, according to the Bank of Canada’s commodity-price index.

Canadian energy companies have so far announced plans to cut some $11 billion in capital spending this year, more than was spent in the oilsands in all of 2019, according to Bloomberg News. There were 260,000 men and women working in the natural resources and agriculture industries in April, about 45,000 fewer than a year earlier, Statistics Canada reported on Friday.

“Every company has reduced its capital spending, so I view it as bad for Canada in the sense that it has jobs attached to it,” Tim McKay, chief executive of Canadian Natural Resources Ltd., told Bloomberg this week.

But are the owners of Alberta’s biggest oil and gas companies ready for the “same” treatment as the auto sector? Paul Boothe, an academic at the University of Western Ontario’s Ivey School of Business and the federal public servant who oversaw Canada’s role in the auto rescue, has his doubts. He recently published a series of tweets to remind everyone what being rescued meant for GM and Chrysler. The treatment was harsh.

First, GM and Chrysler were given loans at market rates to keep them alive while officials reviewed their restructuring plans. Those plans were rejected “a couple of times” because policy-makers were unsatisfied with the ambition of the companies’ cost-saving plans, according to Boothe. Then, GM and Chrysler were rushed through bankruptcy, a process that wiped out shareholders, left creditors with pennies on the dollar and many senior managers without jobs. The governments took equity stakes in each company and seats on the boards of directors. Managers’ pay was severely restricted and executives could do little without the approval of Washington and Ottawa. Chrysler was forced to merge with Italy’s Fiat SpA, creating Fiat Chrysler Automobiles NV.

“Provincial politicians and CEOs should think long and hard before they turn over control of their companies to Ottawa — and to protect taxpayers, that change of control is what must happen,” said Boothe, a recipient of the Order of Canada who also served as deputy minister of finance in Saskatchewan. “Federal governments have quite different objectives than private companies or provinces. Your firms may survive the experience of federal assistance and they may not. But for sure, they will never be the same.”

A big difference between the Canadian oilpatch today and the Detroit-based automakers a decade ago is their level of desperation. The chief executives of the auto companies went to Washington in person in 2007, begging for money.

You haven’t seen that yet from the leaders of Canada’s biggest oil companies. Pourbaix prefaced his allusion to the auto rescue with a reminder that Cenovus is fine for now. And when he talks about “liquidity” for the industry, he means government-backed loans with few strings attached, not equity stakes that would give Ottawa a say in the future of the oilsands, nor bankruptcy proceedings that would wipe out current shareholders.

So, similar to what Ontario got, but not the same.

PROVINCIAL POLITICIANS AND CEOs SHOULD THINK LONG AND HARD

BEFORE THEY TURN OVER CONTROL OF THEIR COMPANIES TO OTTAWA

— AND TO PROTECT TAXPAYERS, THAT CHANGE OF CONTROL IS WHAT MUST

HAPPEN. — PAUL BOOTHE, WHO OVERSAW CANADA’S ROLE IN AUTO RESCUE