Alberta feels the pain
Home to the marginal barrel, Canada’s energy patch is hurting from the price collapse. But oil sands output is still rising and resistance is building
Canada’s former prime minister Stephen Harper once boasted that his country would become a “global energy superpower” by 2020. Buoyed by $100-a-barrel crude and endowed with abundant resources of oil sands and natural gas, his country seemed on pace to become the world’s fourth-largest energy producer, behind Saudi Arabia, Russia and the US.
Now, just a few months after Harper was turfed from office in Canada’s federal elections, those aspirations have been indefinitely put on hold, if not dashed. Alberta’s oil patch has been through as many busts as booms, but rarely have downturns been as bad as this one.
Canada’s dependence on petroleum exports means its economy has fared worse than most of its G7 peers since oil started tumbling in mid-2014. In 2013 oil accounted for a tenth of its GDP and a third of its exports, or roughly C$129bn ($88.4bn) per year of its C$1.8 trillion economy.
Oil’s fall threatens Canada’s once-leading economic performance. Layoffs in the energy sector – concentrated in Alberta -- have already topped 100,000, with more than 20,000 administrative positions axed in Calgary alone.
Black humourists quip that the morning commute into Calgary’s downtown core has been cut in half. Commercial vacancies have doubled in the city’s gleaming skyscrapers, which are increasingly devoid of workers.
While difficult to quantify, indirect job losses in restaurants and service industries that support oil and gas are easily double that number. Alberta’s unemployment rate has trebled to 7% in less than six months, the highest level in the province since the 1980s.
The job losses continue to mount as the province’s mighty oil companies slash spending. Statistics Canada, a government body, estimated that oil and gas expenditures fell 40% in 2015, to barely C$45bn, from C$73bn in 2014. According to Alberta Treasury Branch economist Todd Hirsch, capital spending in the oil sands fell to C$23bn last year from C$33bn in 2014. After companies announced another round of cost cutting late in the autumn, the 2016 numbers are likely to be much worse.
The end of the superpower dream?
Oil’s crash has also affected the broader national economy. The Canadian dollar, which traded near par or above the greenback barely a year ago, has fallen by almost a third to levels not seen since 2003. This has raised the prospect of price inflation for everything from food to clothing, effects which will be felt in 2016.
In addition to falling oil prices, setbacks have included US President Barack Obama’s rejection of the Keystone XL (KXL) pipeline, which may have dealt a final blow to Canada’s dreams of energy superpowerdom.
Domestic regulatory challenges are also mounting. Canada’s new prime minister, the Liberal leader Justin Trudeau, made ambitious emissions-reductions promises at the UN climate conference in Paris. His father Pierre, a prime minister in the 1970s and 1980s, angered Alberta’s oil industry with his National Energy Programme four decades ago. The younger Trudeau has followed in his father’s footsteps, revived some of those fears.
Topping it off, Alberta’s left-leaning New Democratic government, elected last spring, has embarked on parallel environmental and royalty reviews which have only deepened the angst among Calgary’s energy executives.
A show of support for the Alberta government’s climate-change policies by four of Canada’s leading oil sands producers – led by Canadian Natural Resources chairman Murray Edwards and the top executives from Cenovus, Shell Canada and Suncor – quickly descended into a backroom brawl over who would share the spoils from the added allowable emissions, which will be capped at 100 megatonnes per year by 2020 from the present 70 megatonnes.
Although the cap will allow overall CO2 levels to increase, absent a quantum leap in technology this will effectively limit oil sands growth to another 1m barrels a day over the 2.2m b/d produced at present. It is far short of the 4m b/d of output previously expected from the oil sands by 2020, let alone the 5m b/d by 2035 predicted by industry groups. Smaller oil sands players like Meg Energy and Athabasca Oil Sands cried foul. Even the bigger producers like Imperial Oil, majority-owned by ExxonMobil, and Husky Energy were reluctant to endorse the deal.
Telling was the Canadian Association of Petroleum Producers’ (Capp) silence on the issue. As the industry’s largest lobby group, Capp’s reluctance to get involved spoke volumes on the division that grips Canada’s energy sector.
But the bigger problems are market-related – a price collapse engineered elsewhere was always going to hurt Canada’s oil sands, home to some of the highest-cost marginal barrels in the world. A supply glut in Alberta’s sole export market, the US, has also damaged the oil sands’ prospects.
This has hardly been helped by the failure of Canada’s producers – and authorities – to find new pipeline routes to Canada’s coasts. Resistance to a suite of pipeline expansions to both coasts – Kinder Morgan’s TransMountain expansion to Vancouver, Enbridge’s Northern Gateway to Prince Rupert, and TransCanada’s Energy East pipeline conversion project to Saint John, New Brunswick – threatens to shut in nearly 2m b/d of planned incremental capacity.
On 11 January the Chippewas of the Thames First Nation petitioned the Supreme Court of Canada to block the Energy East pipeline to Canada’s east. Other routes are faring no better. Despite an endorsement from the National Energy Board, a government body, prime minister Trudeau has effectively killed Northern Gateway with a pledge to ban oil tankers off Canada’s west coast. Opposition to KXL has denied oil sands producers easy access to the US Gulf Coast too. The barrels seeking international markets beyond the US must now be moved to the continent’s ports by rail, if at all.
Despite the price and pipeline problems, looming climate-change policies and the KXL blow, the oil sands have some fight in them yet. Production is still growing; operators are reducing costs and getting more efficient; and rail is providing an outlet.
Nearly 500,000 b/d of new supply is expected to come on stream by 2017, the fruit of new projects and expansions that were already underway or sanctioned before prices started to swoon. In the oil sands’ mining regions, Imperial continues to ramp up production at its 110,000 b/d Kearl mine expansion, which came online in 2015. Suncor is pressing ahead with French major Total to build the 220,000 b/d Fort Hills project. Canadian Natural Resources is expanding its Horizon mine by 100,000 b/d. Syncrude, Canada’s largest oil sands mine, has approvals in hand for another 100,000 b/d, although those plans have been put on hold while Suncor engages in a hostile takeover for Canadian Oil Sands, which owns 37% of the Syncrude joint venture. None of this includes planned increases in thermal bitumen, although these are easier to defer until market conditions improve.
Nonetheless, despite the growth total forecast output is down about 1.1m b/d from previous models. Last year Capp said total oil production – including oil sands, conventional and unconventional — would reach 6.4m b/d by 2030. Now it will struggle to rise above 5.3m b/d in the same period.
For companies that can survive the downturn, though, the future looks less bleak. A study by Barclays found that production costs have fallen by 20% since the price slump began and have room to move lower. Technology advances will make the industry more efficient and more profitable at lower price levels. When prices bottom out a leaner and more competitive oil sands industry should emerge from the detritus.
Developers certainly aren’t giving up yet. So far some C$100bn worth of expansions have been delayed - but not killed. The only major cancellation to date has been Shell’s Carmon Creek thermal-bitumen project, a move the company blamed on pipeline constraints.
Even in dangerous times, that is the good news and it offers a measure of hope for those who can hold out. Albertans have been down this road before, points out Rachel Notley, Alberta’s premier. After years of bloated growth, she vows that the downturn will allow the province to become one of the most “progressive energy producing jurisdictions in the world”. Notley said she was “very conscious” of the province’s predicament. “We are reliant on oil. No government can’t turn on a dime. We need to get creative.”