ALBERTA RIDING THE OIL SLIDE
Sectors of the economy must cope with a falling oil prices. Players in the oilsands are cutting back capital spending for 2015, while stressing they have the flexibility to revise those plans if necessary, write David Howell and Bill Mah
A precipitous slide in the price of oil since midsummer is causing widespread concern across Alberta.
Government, industry and consumers alike have big questions about the impacts that will be felt in 2015.
The tumbling prices — Friday closed at $57.81 US — stem from a glut of OPEC and United States oil on world markets.
Premier Jim Prentice has warned that continued low crude prices could dig a $7-billion hole in the province’s revenues that “will be felt in every corner of this province.”
The government had originally budgeted for oil to average $95.22 for fiscal 2014-15; every $1-a-barrel drop in the price of oil over the course of a year costs the provincial treasury about $215 million.
The $933-million surplus forecast for the current budget year — itself a downward revision of an earlier projection — is in jeopardy, Prentice said.
Here is a look at how lower oil prices and continuing volatility could impact certain sectors of the economy.
OILSANDS DEVELOPERS
Players in the oilsands are cutting back capital spending plans for 2015, while stressing they have the flexibility to revise those plans if necessary.
“The recent volatility in world oil prices is creating a challenging environment in which to set plans for 2015,” Brian Ferguson, president and CEO of Cenovus Energy, told a conference call Thursday.
Cenovus expects to see continued volatility in oil prices through 2015 which it will manage by exercising “capital discipline,” Ferguson said. Capital spending will be cut by about 15 per cent to between $2.5 billion and $2.7 billion. Cenovus said it doesn’t plan layoffs but won’t increase its workforce. It will also slow development plans at Narrows Lake, its third oilsands project.
Andrew Leach, Enbridge professor of energy policy at the University of Alberta, said another growing concern is the slide in prices on the long-term oil futures market.
“I don’t think we’re at a point yet where it’s making sense for anybody to significantly delay or cancel projects that are already well into construction,” Leach said.
“But in terms of the projects that we were expecting to see go into construction this year or next year, to be producing oil closer to the end of the decade, those are the ones where people might say, ‘Hmm, maybe I want to hang around and wait a little bit and see how things shake out on the oil-price side.’”
DRILLING INDUSTRY
Lower commodity prices are hitting the drilling industry hard, said Mark Scholz, president of the Canadian Association of Oilwell Drilling Contractors. In a forecast issued in November, CAODC predicted 2015 would see a 10-per-cent reduction in wells drilled and operating days over 2014 levels.
The continued slide in prices has already made that forecast outdated. It will be reviewed early in 2015, Scholz said.
“I can assure you that if we see commodity prices in the $60-$65 range, there is no question that we will see a continual erosion beyond what we had originally predicted in activity,” he said.
Each working rig generates about 135 direct and indirect jobs, he said. When rigs are idle, jobs are lost and cash flow dries up. Well-servicing companies will feel the effects of a slowdown and so will the small communities where rig workers spend their money on groceries and beer, Scholz said.
PIPELINES
Short-term drops in the price of oil are not a major concern to pipeline builders, but continuing low prices are another matter.
“We are in this business for the long term,” Leon Zupan, chief operating officer for Enbridge’s Liquid Pipelines division, said in Edmonton last week.
“We’ve got $36 billion worth of new projects that are coming on stream over the next five years, because there is a demand to get by pipeline to the markets that we are going to be able to serve.
“There will be impacts within the province. There will be impacts for certainly the province of Alberta itself, but for Enbridge itself, it is business as usual.”
At the U of A, Leach said the business case for future pipeline projects might become questionable in the long term if prices remain low, expansion projects don’t get built and oilsands production doesn’t meet industry forecasts.
A pipeline proposal such as Energy East, Keystone XL or Northern Gateway could disappear “and you would still have enough pipeline capacity,” Leach said.
GAS PRICES
Drivers are getting bonus spending power.
In Calgary, the price for local gasoline averaged 92.9 cents a litre on Friday, with the lowest prices in the city at 84.9 cents, according to GasBuddy.com. A year ago, the price averaged 106.8 cents a litre. In Edmonton, the average local price for regular gasoline has dropped to about 85 cents a litre.
“That savings of 35 to 40 cents a litre is putting an extra $30 or $35 per week in the jeans of every motorist,” said Dan McTeague, senior petroleum analyst at GasBuddy.
“This year looks like a bit of a giveback and it will certainly give a bit of a boost to retail, as well as allowing some to even pay down debt.”
But McTeague warns of longterm economic repercussions that outweigh a cheap tank of gas.
“It’s not just a question of how much money governments take from the actual sale of gasoline from the taxes they have on it, but more meaningfully, the economic impacts in terms of economic growth, jobs, and economic outlook. We’re all at risk here.”
RETAIL/CONSUMER CONFIDENCE
Despite a break at the pump, ATB Financial senior economist Todd Hirsch warns of a chill in consumer confidence.
“Most everybody in this province — we’re either directly or indirectly employed by the energy sector,” Hirsch said. “If prices stay where they are or lower well into 2015, it will shake the nerves of some people.”
News or rumours about layoffs will convince consumers to tighten spending. Others may put off buying big-ticket items like vehicles and houses, thinking it may be cheaper a year from now.
According to RBC Economics, a negative spillover into non-energy sectors hasn’t materialized because “boom-like conditions continue to prevail across the province and attract a large number of people to move to Alberta.”
The bank said “positive demographics” and tight job markets are sustaining solid consumer demand with impressive housing market gains and strong retail sales in the second half of 2014.