Feds expected to give Alberta ‘significant’ aid
Anticipated liquidity package provides some hope to oilpatch hit by price collapse
Alberta’s Minister of Energy Sonya Savage expects the federal government to announce a “liquidity package” this week that would help oil and gas companies in her province survive through the severe price collapse caused by the COVID-19 pandemic.
“I know they’re working on something that’s quite significant,” the minister told the Financial Post on Monday.
“Numbers that we’ve looked at, that the (Alberta) premier (Jason Kenney) has looked at, is we need $20 billion to $30 billion coming into our (oil and) gas sector, inclusive of the service sector and the drillers — that’s the kind of program we’re looking at if we’re going to get to the other side.”
Describing it as an unprecedented situation, Savage said she has been in close contact with Federal Minister of Finance Bill Morneau as his office attempts to devise a package that will provide credit and liquidity to financially stretched companies in her province.
She added the feds are still studying the best way to get “credit” and liquidity to companies with “numerous” options under consideration. “Obviously it’s pretty complex,” Savage said.
A spokeswoman for Morneau did not provide comment.
Savage made her comments in the wake of the historic agreement reached on Sunday between Saudi Arabia, Russia, the United States and other major oil-producing countries known as OPEC+ struck to cut global production by about 9.7 million barrels per day in the face of a drastic decline in demand for oil resulting from the pandemic.
Meanwhile, G20 energy nations, which includes Canada, pledged to cut about 3.7 million bpd, while various countries are planning to increase oil purchases for their strategic reserves, according to comments that Saudi oil minister Prince Abdulaziz bin Salman made to a group of journalists.
While Canada did not commit to any oil production cuts as part of the global agreement, low prices have already forced Canadian producers to make cuts and more reductions are coming, analysts said.
The G20 energy ministers said they would convene a focus group to respond to changes in the energy market. It left open details of how the focus group would operate.
News of the global cuts provided a ray of hope for the Canadian oil sector, which has been battered in the past month or so by a decline in demand and a simultaneous price war between Saudi Arabia and Russia that increased supply.
Many analysts have said a recovery is still months away as the cuts are not enough to offset the demand destruction caused by COVID-19, or the significant backlog of oil inventory that has already built up.
Savage and others estimate that oil demand has dropped by as much as 30 per cent as a result of the pandemic, as global commuting has ceased entirely, and industrial output has declined significantly.
Western Canadian Select Crude barely budged on Monday, sitting at US$4.42 per barrel, down about 89 per cent from early January when it traded above US$40. U.S. West Texas Intermediate crude slipped 1.5 per cent, to close at US$22.41, its lowest price since April 1.
Jeffrey Craig, an analyst at Veritas Investment Research Group, said the production cuts have not changed spot oil prices very much because “we’re still massively oversupplied” for at least several months. But he said oil futures — options to buy oil for a set date in the future — suggest a recovery could begin towards the end of the year. “The futures market is telling us this is positive for oil, that it will help stem the pain going into the latter half of the year,” he said, “but it doesn’t help today’s problem, it sort of limits the downside.”
In the meantime, Bank of America analysts predicted a “price-driven supply decline across North and South America” of up to four million barrels per day.
In Canada, oilsands mines, for which fixed costs tend to be higher, and whose operations can be stopped and started more easily than conventional or shale oil wells, are likely the first projects that will come offline.
Vancouver-based Teck Resources Ltd., which owns part of the Fort Hills oilsands mine in Alberta, said in March that operations were reduced and the entire project could shut down. Suncor Energy Inc., however, which operates the mine, has not made any public comments indicating plans to shut the mine down are imminent.
Chris Cox, an analyst with Raymond James Ltd., said he expects Canadian oil producers will cut about 1.2 million to 1.5 million barrels per day in coming months — around 30 per cent of Canadian production last year. Cox said it is unlikely that any banks would force Canadian oil producers into bankruptcy by calling in loans. “Quite frankly, I don’t think the banks want to own these assets themselves,” Cox said in an interview.
Still, the oil price depression will have long-term consequences, as oil producers will have less cash to reinvest in their assets when prices recover. That means it will take longer for the sector to bounce back, he said.
“The longer this oil price duration lasts,” and West Texas Intermediate oil trades below US$40 per barrel, the more this issue grows in significance, Cox said.
But the cuts will stem the level of inventory build up, and also signal that producers are interested in addressing the market imbalance.
Kenney tweeted on Sunday that he was glad to see “sanity” return to oil markets.