With crude at record low, Canada is a price-war casualty
In the oil price war between Saudi Arabia and Russia, the first big victim is likely to be Canada.
Hit by unfettered supply from Russia and Saudi Arabia and reduced demand as a result of the coronavirus, the benchmark blend of crude produced from Canada’s oil sands plunged to a record low of $7.47 a barrel on Wednesday. The fallout: Virtually every barrel of oil now produced there will come at a loss at a time when the energy industry generates 10 percent of Canada’s gross domestic product and a fifth of its exports.
Making matters worse, certain quirks of oil-sands production limit how much they can throttle back money-losing output without raising the risk of permanent damage to their resources. The situation means Canadian producers may be forced to bleed red ink for weeks or months, depending on how long the price war lasts, before capitulating and shutting in output.
“We are probably going to see another wave of layoffs,” said said Dinara Millington, vice president of research at the Canadian Energy Research Institute.“We will see a reduction in terms of how much the producers are paying the government in terms of tax revenue and royalties.”
While the Candian crude benchmark fell below $8 a barrel, West Texas Intermediate futures in New York fell as much as 26 percent to $20.06 a barrel, the lowest since February 2002. Oil is now cheaper than any time during the global financial crisis, when the world economy largely came to halt for a few days. Demand is in free fall, with some traders saying it could drop by more than 10 percent compared with last year.
For all of its wealth, the Canadian energy industry is still in recovery mode after the last big oil rout in 2014. Historically conservative Alberta has also been locked in a struggle with Prime Minister Justin Trudeau’s liberal government in Ottawa over carbon taxes and regulations governing pipeline projects and crude-tanker rules, reducing some investors’ confidence in the sector.
The results of those conflicts are grim. Alberta’s unemployment rate has remained above 6 percent for more than four years and stood at 7.2 percent in February.
How bad could the latest losses be? Suncor Energy, Canada’s largest integrated energy company, reported cash operating costs of C$28.20 per barrel in its oil-sands operations last year. Canadian Natural Resources., the country’s largest oil and natural gas producer, had operating costs of C$10.83 a barrel in its thermal in situ operations last year.
The latest crisis is underpinned by the nature of Canada’s oil sands, a mix of sand, water and heavy oil called bitumen that is difficult and expensive to turn into usable fuel.
Shallow oil-sands deposits can be mined, with the material scooped up by heavy machinery and dropped into large trucks that cart it off to facilities where the mixture is steamed and separated to release the oil. Mines, though, are limited in their ability to reduce production because they have high fixed costs that make them less profitable the less they produce.
To access deeper deposits that can’t be mined, producers inject steam into the ground through one pipe to get the viscous mixture to flow into a parallel pipe that transports it to the surface. Those operations require a constant flow of steam in and bitumen out, and if that flow is slowed too much for too long, the reservoir can lock up, permanently reducing how much oil can be recovered from it over the long term.