OILPATCH IN ‘PARTICULARLY VULNERABLE’ SPOT
Fatih Birol, executive director of the International Energy Agency, said Thursday that billions of people around the world are in lockdown mode to contain the virus, and global demand could drop at some points this year by about 20 million barrels a day.
Oil prices have fallen by more than 60 per cent since the start of the year, with West Texas Intermediate crude closing at US$22.60 on Thursday.
In Canada, the price for Western Canadian Select (WCS) oil plunged by more than $2 a barrel to just US$6.45 on Thursday, according to Bloomberg data, a catastrophic situation for Alberta producers if it continues for long.
“Canada’s petroleum sector has never faced a greater threat to its existence than it does right now,” says an analysis released this week by the University of Calgary’s School of Public Policy.
A report by Rystad Energy points out that with a global oil glut, Western Canadian crude production is filling up domestic inventory levels and needs to be cut by about 440,000 barrels per day — about 11 per cent of output — by the middle of next month as the country is quickly running out of available storage capacity.
“With the collapse of benchmark prices globally, the question has really moved from a survival price to how do we stave off the very worst of this . ... Theoretically, you could end up at a point where WCS (oil) could trend negative,” Rystad’s senior analyst Thomas Liles said in an interview.
“The Canadian oilpatch is particularly vulnerable, just given the extent of the price discount that applies to so much of its production.”
With falling prices, Canadian producers have slashed drilling programs by more than $6 billion during the past two weeks. Federal action is needed to protect jobs and address liquidity issues for energy companies.
Measures that lower costs from government would also help the financial strength of oil companies, said Tim Mcmillan, president of the Canadian Association of Petroleum Producers.
“We are being hit from multiple fronts,” Mcmillan said, noting the impact is rippling throughout the industry.
“It’s the upstream survivability, it is the service sector survivability and the communities and individual companies that are all down the value chain that will all be affected by the actions of the next few days and weeks,” he added
A federal package is expected shortly.
On Wednesday, Morneau told a Senate committee that Ottawa would ensure credit opportunities are available, particularly for junior and medium-sized energy firms, although larger producers are also under strain.
The oilfield-services industry is also at risk, as drilling and related activities are expected to largely dry up for the rest of the year.
The Canadian Association of Oilwell Drilling Contractors would like Morneau to consider a type of accounts receivable backstop, as drilling and service rig firms are owed almost $500 million.
Under the proposal, the federal Business Development Bank of Canada and Export Development Canada could purchase a portion of the outstanding receivables at a discount price.
The two institutions would then provide relief to petroleum producers that owe the amounts outstanding through an interest-free loan.
The association would also like to see Ottawa allow Canadian drillers to defer GST/HST and payroll remittance for six months. Together, these two measures could provide up to $500 million in additional liquidity to Canadian service firms.
“Our industry is facing a crisis unlike any that we’ve ever seen before,” said CAODC president Mark Scholz.
“Without substantive support from the government, we are going to see significant business failures in the oilpatch,” he added.
Crafting a perfect plan will be tricky, but the broader questions are more straightforward.
Does Ottawa see the oil sector as an engine for economic growth when the situation stabilizes?
Will it help position the industry to not only survive, but grow in the future?
And just how far it will go — and how much money will it provide — to assist thousands of oilpatch workers and companies as two momentous events batter the foundation of the industry?
We’re about to find out.