By Irina Slav
The provincial government of Alberta and the federal government of Canada are the culprits behind the continuing problems of the country’s oil industry, which have now swelled to the size of a full-blown crisis, according to the latest Oil & Gas Survey Outlook Report by the Daily Oil Bulletin.
As many as two-thirds of the 150 respondents in the survey said they were pessimistic about the immediate prospects of the oil and gas industry, the Daily Oil Bulletin reports, with over a third being very pessimistic. To make the picture even grimmer, only 3 percent said they were very optimistic, with 27 percent expressing some degree of optimism.
These outtakes are hardly surprising. Canada’s oil industry survived the 2014 oil price crisis only to face a pipeline capacity shortage that has forced non-integrated producers to switch to oil trains to move their product to refiners south of the border. This has pressured margins and plunged the benchmark Western Canadian Select price to a discount of more than US$50 a barrel to West Texas Intermediate last year.
To counter the discount and its effects on the industry, the Albertan NPD government last December announced obligatory oil production cuts that pushed up prices quickly enough. Yet many were yet again unhappy: now Canadian crude was proving to be too expensive for refiners that quickly got used to the supercheap heavy crude. Luckily for Canadian drillers, however, heavy crude has been in increasingly shorter supply after the last round of U.S. sanctions against Venezuela, boosting demand for the heavy crude that is available, despite the higher price.
Even with this little light at the end of the tunnel, prospects are understandably grim and the Daily Oil Bulletin forecasts markedly lower capital expenditure in the industry this year. It’s worth noting that the biggest chunk of this will not go into exploration and production but into maintenance and repairs. Exploration and production will this year account for just 21 percent versus 57 percent last year, with maintenance and repairs accounting for 49 percent.
Even more worrisome is the survey outtake regarding regions of growth. This year, this will be the United States rather than Canada: as much as a quarter of respondents said they expected their business to register the strongest growth south of the border. The reasons cited for this expectation were the same as the reasons for the overall pessimism and basically boiled down to lack of growth prospects and obstacles in the form of regulatory hurdles to business expansion in Alberta and on the federal level.
Indeed both the provincial government and the one in Ottawa have failed to solve what is perhaps the biggest problem of Alberta drillers: export capacity. The single new oil pipeline project that Justin Trudeau’s government approved, the Trans Mountain expansion, has become notorious for its vicissitudes that eventually forced Kinder Morgan to sell it to the federal government, which is now looking for buyers. In the meantime, the government of British Columbia is pressing on with its legal challenge of the project, determined to cancel it once and for all.
Now Alberta has a new, conservative, government that seems even more determined to have that pipeline built. It’s still early days, but Premier-designate Jason Kenney has already threatened B.C. to turn its oil and gas taps off if it doesn’t have a change of heart about the Trans Mountain debate—a threat that former Premier Rachel Notley also put on the table, but never followed through with. In any case, the industry’s pessimism has ample ground to thrive in the next few months or until something concrete is actually done about the most pressing problems.
By Irina Slav for Oilprice.com