Canada’s oil and gas sector is clamouring for emergency aid and its leaders have a plethora of proposals for the federal government, including the controversial option of selling equity stakes—potentially converting government loans to companies into ownership shares.
In his March 22 daily briefing, Prime Minister Justin Trudeau said the already-announced $82 billion was “only a very first step.” He has repeatedly said that everything is on the table.
The survival of energy companies is at hand due to the sharp drop in demand caused by the CCP (Chinese Communist Party) virus—commonly known as the novel coronavirus—and due to Russia and Saudi Arabia engaging in an oil price war, thus refusing to cut their production. With the price of the U.S. oil benchmark West Texas Intermediate (WTI) below US$25 a barrel, companies’ cash flow is evaporating. And with Western Canada Select—the Canadian benchmark—at about US$9 a barrel, it’s a money-losing proposition to produce it.
Suncor became the latest company to add to the parade of capital spending cuts on March 23, announcing a 26 percent ($1.5 billion) reduction compared to the original 2020 plan. Its stock is down 60 percent in the last three months and is representative of the pain in the industry. The Toronto Stock Exchange energy sector is down about 50 percent in the last three months.
“It’s incredibly urgent,” Business Council of Alberta president Adam Legge told BNN Bloomberg on March 25. “We’re worried that more and more companies are on the margin.”
He’s looking for the feds to provide the industry with the necessary funds to survive, saying that activity is slowing to a complete halt. The challenge is to keep the doors open at as many companies as possible.
The government has created programs to make loans to companies, but given the diminishing prospects for the industry due to onerous regulation and environmental pushback, getting repaid is anything but a certainty.
Thus the significant amount of loans needed from the government may get converted into equity stakes, which is what happened during the financial crisis with the bailouts of GM and Chrysler.
At a luncheon in Ottawa on March 12, Alberta Premier Jason Kenney, who was part of Stephen Harper’s cabinet during the financial crisis, said the dire situation of the energy sector requires at least as much attention as the automakers received in 2009.
The idea of a U.S.-style TARP (Troubled Asset Relief Program), in which the government buys shares in distressed companies, has been something Kenney and the Business Council of Alberta have advocated.
But Carleton University management professor Ian Lee says the government should not be in the business of owning private companies and dictating how they run their operations.
Picking Winners and Losers
The conflict with taking equity stakes in the oil and gas companies, Lee reiterates, is that the government should not be in the business of picking winners and losers.
“When you’re putting equity into a company, equity is very different from debt. Equity is ownership. And you are really truly picking winners and losers,” he said.
The conflict of interest arises from what might be motivating the government to bail out one company rather than another.
“There are good political reasons, strategic reasons why the governments really shouldn’t take an equity position,” Lee said. “I know in Russia, they do it. In Saudi Arabia, they do it. In China, they do it. But in the Anglo-American world, there is a belief that you don’t.”
The can of worms the government would not want to get involved in is dictating to companies getting bailouts how they should conduct their operations, not to mention imposing limits on buying back stock and paying executive bonuses—something that generated widespread reprisals during the financial crisis.
