“New respect” or “no corporate welfare” for Canada’s oilpatch?

Source: bnnbloomberg.ca

Yuri Bilinsky, New Pathway – Ukrainian News.

While the global economy is looking at “the worst economic fallout since the Great Depression,” according to IMF Managing Director Kristalina Georgieva, Canada’s oil and gas industry is going through unprecedented times. The price of the Western Canadian Select oil has recently been in the $3 per barrel territory, among the cheapest in the world. At the same time, Canada is among the highest-cost oil producers globally, $26.64 per barrel in 2016 (Rystad Energy).

No wonder that Canada is currently the most affected oil producer worldwide. RBC Capital Markets expect that Canadian oil producers will have to shut-in about a third of total domestic oil production or up to 1.7 million barrels per day (bpd).

With pressure on oil storage capacity mounting, production cuts may not be enough to deal with the amount of oil available on the back of the low demand. Thus, negative oil prices are widely predicted for Canada in the near future when producers will pay to get rid of their oil.

Suffering from the triple whammy (in order of appearance) – the global oil price crash, which followed the increase in oil production after the dispute between Saudi Arabia and Russia, the COVID-19 pandemic and the global recession, energy is among the hardest hit Canadian industries.

According to Tim McMillan, president and CEO, Canadian Association of Petroleum Producers (CAPP), Canadian energy producers have been forced to pull back between $6.5 billion and $8 billion of investment over the past three weeks.

The near-term outlook for the industry is not rosy either. Rystad Energy expects that after the recent decoupling in the Canadian oil prices from the American ones, the Canadian producers will remain decoupled from any positive price developments stemming from global cuts in oil production. After OPEC and other major producers agreed on April 12 to substantially reduce their output of oil, the price of Western Canadian Select grew to around $7 per barrel, while WTI Crude was at almost $20 per barrel.

On this background, Canada’s energy sector is turning to the government for assistance. Some ideas, which were floated in March, like a $15 billion bailout package and a credit facility similar to the U.S. Troubled Asset Relief Program (TARP), have not been heard of since.

On April 6, several CEOs of oil and gas companies addressed the federal government through a letter published in the Financial Post asking for such measures as a payroll relief plan and purchase of their accounts receivable at a discount.

On April 8, CAPP indicated that it is awaiting additional clarity on the Government of Canada’s intentions with regards to the economic stimulus plan for the energy industry. The Association stressed the need for improved access to existing or new credit support and incentives for the reclamation of inactive and orphan wells that would create jobs at service companies and indigenous communities. CAPP expects that, to ensure stability in the industry, government will now adopt a “do no harm” principle with respect to regulations and a temporary “tools down” approach to new policies.

There are opposing opinions as to whether governments at all levels should take specific measures and support the energy industry in addition to the economy-wide supportive measures.

Calgary energy investor Mac Van Wielingen thinks that that skyrocketing national and provincial deficits will “force more realism” and thus the oil and gas sector may now regain public respect and support. While Greenpeace Canada campaigner Keith Stewart believes that “true pragmatism would recognize that oil is a sunset industry” (globalnews.ca).

The federal government has so far not taken any specific measures to support the energy industry. When asked on March 25 by Senator Rosa Galvez to ensure the government wouldn’t provide corporate welfare for “sunsetting, high-polluting industries,” Finance Minister Bill Morneau said that Canada’s emergency COVID-19 legislation won’t “discriminate” between businesses.

On April 14, Prime Minister Justin Trudeau indicated that a financial aid package for the oil and gas sector was still a possibility: “We will and we are looking at more specific sector-related relief and supports for those sectors that are hardest hit — whether it’s the tourism sector, the airline sector or the oil and gas industry or others — we will have more to say on that shortly.”