HOUSTON ALSO HAS A PROBLEM
Disappearing oilpatch jobs, high office vacancy rate, calls for economic diversification. It’s all too familiar, writes Chris Varcoe
With the energy sector in retreat, some 4,000 oilpatch jobs are set to disappear next year within just one city.
The number of wells drilled by the industry has fallen sharply this year, petroleum producers are cutting spending plans for 2020, and the region’s office vacancy rate is more than 26 per cent.
Sound familiar?
This gloomy diagnosis is not about Calgary.
Instead, this economic outlook focuses on Houston, the centre of the U.S. energy boom in recent years, but a city now grappling with an oilpatch downturn as producers spend less money while investors demand more capital discipline.
“For the second time in less than a decade, the industry faces a steep downturn,” says a report from the Greater Houston Partnership released Thursday.
“The situation Houston faces today is eerily similar to what it faced after the 1980s bust — an oversaturated real-estate market, a bleak outlook for oil and gas, and the need for innovation to drive the economy forward.
“But Houston continues to create jobs.”
It’s dangerous to make too many comparisons between
Calgary and a much larger U.S. energy centre that has a metro population of seven million, and access to the busiest port in that country, but there are undeniable similarities between the two energy cities and some of their issues today.
It’s a reminder the oil and gas sector is facing challenges beyond our borders, and communities such as Calgary need to focus on becoming more economically resilient in the future.
“It speaks to the structural change that’s happening in the energy industry and some of that is being induced by technology and some of that, in our case, obviously, by infrastructure,” said Mary Moran, chief executive of Calgary Economic Development.
Like Calgary, job losses in Houston’s energy sector have been mounting recently.
The report by the Houston economic development group says the area has seen 1,100 oilfield service industry jobs disappear since June as U.S. producers face pressure from investors to spend less money on production growth and focus more on profitability — a similar challenge confronting Canadian companies.
The number of wells drilled in Texas has fallen by 16 per cent through the first 10 months of the year. The oilfield services industry has seen more than 10,000 jobs lost in Texas due to the slowdown, although U.S. production continues to rise, expected to top 12 million barrels per day this year.
Exploration activity is projected to contract further in
2020 with capital budget cuts of 10 to 20 per cent anticipated as producers spend within cash flow levels, said Patrick Jankowski, senior vice-president at the partnership.
The trend has implications for other areas on the local economy, such as real estate.
“We are both in the same situation — a quarter of our office space is vacant right now, and it’s because of energy layoffs and because so many developers were building in anticipation of the energy industry growing and now it’s not growing, it’s actually contracting,” Jankowski said in an interview.
In Calgary, the downtown office vacancy rate sat at 26.6 per cent in the third quarter, according to commercial real estate firm CBRE Ltd.
Canadian employment numbers released Friday highlight the challenge facing the city and province, with Alberta seeing 18,000 fewer jobs last month, including the natural resources sector. The provincial unemployment rate increased by half a percentage point to 7.2 per cent, although it dipped slightly in Calgary and now mirrors the provincial figures.
However, there are significant differences to consider when looking at both cities. For example, the Houston area’s unemployment rate sat at just 3.5 per cent in October.
After the 1980s downturn, the city focused on growing global trade and other areas of the local economy. The region exited the
’90s with 500,000 more jobs than it began the decade, although fewer than 5,000 came from oil and gas, the report noted.
Once crude prices tanked in 2014, the city saw 93,000 energy sector jobs vanish, yet the overall economy only lost 5,000 jobs, said Jankowski. Employment increased after oil prices rebounded and the fracking boom took off in the Permian Basin in west Texas in 2016.
The economic agency forecasts the Houston region will see 42,000 new jobs created next year, led by almost 8,000 positions in health care and social assistance, as well as sizable gains in construction, government, and professional, scientific and technical services.
A number of Canadian energy companies have looked south since oil prices fell five years ago, spending money exploring in areas such as the Permian or the Bakken formation in North Dakota.
Since 2017, 29 drilling rigs and work crews have been relocated from Canada to the United States, according to the Canadian Association of Oilwell Drilling Contractors. The recent downturn in the U.S. oil market could crimp that shift.
“I think the big moves have probably been made,” said CAODC president Mark Scholz.
Calgary-based Precision Drilling Corp., one of this country’s largest drillers, has moved rigs and all six of senior executive officers to Houston as its share of the work has expanded south of the border.
CEO Kevin Neveu said Friday that exploration activity in Texas has slowed recently but work in other U.S. areas remains steady, such as drilling for natural gas in the Marcellus formation in the U.S. northeast.
And he points out there are key differences between energy sectors in Calgary and Houston, including Canada’s pipeline problems.
“While there is the same prevailing capital discipline required that we see in Canada, there are no take-away bottlenecks, no take-away discounts,” Neveu said of the U.S. situation.
“So piled up on top of capital discipline, you have got this Canadian concern: Will there ever be take-away capacity? Will these pipelines really get built?” he continued.
Neveu, who spends time in both cities, notes the layoffs in recent years hit Calgary harder than Houston, a city that’s more than five times larger.
“The mood is dramatically different in Houston than in Calgary,” he added.
“Houston does have a diversified economy. They have a strong insurance industry ... a strong medical industry, along with oil and gas.”
Moran said Calgary also has more downtown office space, per capita, than Houston, and filling the vacant buildings is a larger challenge.
But like Houston, Calgary needs to stay focused on creating jobs in all areas of the economy — and understand that we’re not alone in this energy uncertainty.
“The work they did in the ’80s is paying off for them today, to smooth out the transition,” Moran said.
“We can learn a lot from that and it’s important we accelerate those things.”