Energy provinces are in need of ‘Ottawa’s help’
Concerns growing over aid delay
OTTAWA • Early in 2020, before COVID-19 put a halt to the Canadian economy, analysts expected this would be the year that oil-producing provinces finally completed their rebound from the 2014 oil market crash. Instead, they now face the sharpest economic collapse in recent memory.
Alberta, Saskatchewan and Newfoundland and Labrador are gearing up for a long, painful climb back to health as Canadian oil continues to trade around US$4 per barrel, sapping provincial revenues and closing off conventional lines of credit. The scope of the downturn has forced provincial leaders to recalibrate their views around what shape an eventual recovery might take.
“I’m very concerned about what the economy is going to be like, what businesses and employees and families are going to go through when we get on the other side of COVID-19,” Newfoundland Finance Minister Tom Osborne said.
And of increasing concern is a promised aid package from the federal government that for reasons unknown has been delayed.
In its last budget, Newfoundland had finally managed to get a grip on its ballooning deficit, trimming it down to $600 million from $2.4 billion in 2016. Then the pandemic hit, evaporating government revenues and sending international bond markets into a tailspin.
In an effort to fill the gap, the Newfoundland finance department in mid-March sought out the Big 6 banks to take on its bonds, which would help fund government operations and economic stabilization programs. The banks rejected the bid, according to a source, due to the growing liabilities on any oil-fuelled debts.
Osborne said the situation in Newfoundland was similar to what was faced in other provinces, particularly those reliant on oil revenues, who were “feeling the tightening of the bond market” as investors continued to flee. Similar to the 2014 downturn, Newfoundland, like others, is turning to the federal government to help.
“We needed Ottawa’s help, and now we absolutely need Ottawa’s help,” Osborne said.
It remains unclear what specific form that help will take, but observers say it has been met with delays.
“They’ve been saying ‘days’ for weeks,” said one government official in Alberta, who declined to speak on the record.
Most believe the package will involve lines of credit for cash-strapped energy companies, as well as funds to reclaim abandoned oil and gas wells, among other things. Discussions between the provinces and feds, according to another source, slowed after aspects of the package were leaked to the media last month. Officials in the federal finance ministry declined to provide a timeline on the aid package.
Meanwhile, provincial leaders continue to wrestle with their new realities. In a speech on Tuesday, Alberta Premier Jason Kenney warned that the COVID-19 pandemic and decimated oil prices present the greatest challenge in the province’s modern history and will push Alberta’s deficit up to $20 billion.
“I cannot overstate how grave the implications of this will be for jobs, the economy, and the financial security of Albertans,” Kenney said.
Saskatchewan Premier Scott Moe has said his province is in “uncharted territory” as it navigates the pandemic. Newfoundland Premier Dwight Ball, in a letter to Prime Minster Justin Trudeau first reported by CBC, said the province was “out of time” and needed immediate assistance.
Executives at the front lines of the oilpatch are bracing for a painful crunch in the next weeks and months.
“It’s been the harshest downturn we’ve seen,” said Grant Fagerheim, founder of Calgary-based Whitecap Resources. Fagerheim said the oil and gas sector will be crucial in determining how quickly Canada can bounce back from the pandemic.
“Energy is going to be a massive component of how we dig ourselves out of this. And we need liquidity in order to do that.”
The Arc Energy Research Institute estimates that Canadian oil output could fall by one million barrels per day or more as global demand dries up — roughly a quarter of the country’s total production. Demand for oil has fallen so far that storage facilities are full to the brim, leading some analysts to suggest that negative oil prices could be on the horizon.
Canadian oil benchmark Western Canadian Select has fallen from around US$30 in early March to as low as US$4 per barrel, owing to the demand shock and a subsequent decision by Saudi Arabia and Russia to continue increasing supply.
Falling demand has already pummelled the outlook for drilling and other services that provide crucial support to producers, who have been cutting back spending plans as oil prices fall.
“The services side is going to be decimated,” said Kevin Krausert, CEO at Beaver Drilling, based in Edmonton.
Krausert, among a number of other energy executives, has been in discussions with federal officials over what Ottawa should include in its aid package. In addition to immediate liquidity to firms, Krausert said the federal government should leverage leading energy technologies to help lower carbon emissions and create new lines of profit.
“I think we need to take a way broader view around what the oil and gas industry looks like, even in the medium term.”
As oil demand falls off a cliff, Canadian producers have continued to face a discount in prices compared to their American counterparts, largely due to a shortage of available pipeline capacity in Alberta. Kenney in recent days announced that the province would take a $1.5-billion equity stake in the proposed Keystone XL pipeline, plus another $6 billion in loan guarantees, in an effort to ensure the project moves ahead and eases the Canadian price discount.