Oilpatch worries rise as prices plummet
Mike Rathje has been watching oil prices see-saw as economic panic spreads with the novel coronavirus, and he doesn’t like what he sees.
“There is growing concern with it, for sure,” said Rathje, owner and partner at Integrity Oilfield Hauling in Carnduff.
“We’re going to probably be doing our due diligence on cutting costs and preparing for the worst.”
Rathje’s company employs about 50 people. But he figures he’ll have to lay off at least 80 per cent of his workforce, more than he usually would at the already troublesome spring break-up season.
Oil prices have cratered over news this weekend that Saudi Arabia and Russia appear to be heading for a price war in the midst of the COVID-19 threat, which is already causing reduced global demand. The benchmark West Texas Intermediate was down 23 per cent to US$32.80 as of Monday morning, while Western Canadian Select was at US$22.51.
That’s about US$13 lower than late February, as infections began spreading far beyond China.
With the provincial economy and budget still dependent on the fortunes of the energy sector, a prolonged downturn could exact a heavy toll on Saskatchewan. Oil and gas production was valued at $9.8 billion in 2018, while non-renewable resource revenue was budgeted at $1.8 billion for 201920.
Energy and Resources Minister Bronwyn Eyre is hoping the pain will only be for the short term.
“Obviously it’s of concern,” said Eyre. “I think we all have been watching and monitoring the news around that, over the last 24 hours at any rate. It’s too early to tell in terms of long-term impact. Obviously we hope that things correct.”
Brad Herald of the Canadian Association of Petroleum Producers said the industry is resilient enough to ride through the challenges, at least for now. He’s expecting prices to rebound before long, as major oil-producing countries are eventually forced to adjust supply.
“If it was a long-term thing, I think it would be very challenging for everybody,” said Herald, who was in Regina on Monday for a separate announcement.
He said producers are in a better place than they were years ago, with many going on a “diet” and reducing costs.
“We are in a much better space than we were several years ago,” said Herald. “We’ve been used to this volatility, we’ve been used to low prices, the companies that are here are tough.”
Dennis Mainil isn’t so sure that Herald and Eyre are right. His Weyburn-based oilfield maintenance and construction company named for his father, Jerry Mainil Ltd., has felt the pain of the oil downturn for five years. He fears the latest crisis will just drag it out longer, as he sees no sign the Saudis will pull back on the taps anytime soon.
“We’re at their mercy,” he said. According to Mainil, there’s “no optimism” in Saskatchewan’s oil industry. He’s already had to throttle back. He’s bracing to do so again if prices stay so low.
“Just continuing to maintain the business has been a challenge,” Mainil said. “If there’s less work, it’s definitely going to be less people required to do it.
“It’s going to hit the whole industry.”
A continued downturn would turn the provincial budget, due on March 18, into a fiction. Finance Minister Donna Harpauer said the numbers are already set. The last budget pegged WTI oil prices at US$58, and a decrease of US$1 costs about $15 million in government revenue.
Harpauer said Monday that oil downturns of the sort that hit this weekend are generally short term. While she acknowledged prices likely won’t rocket back up, she doubts they will remain at $30 per barrel.
It seems clear that’s not the number she plans to table in the budget’s economic assumptions.
“If you knee-jerk react and then make the decisions you need to for an entire 12 months of $30 a barrel, I think that’s irresponsible,” said Harpauer.