Canada’s Oil and Gas Sector Says Feds Need to Do Much More

Oil market turmoil reflects oversupply, lack of storage capacity
April 22, 2020 Updated: April 22, 2020

News Analysis

The aid that the feds have on the table so far for the oil and gas sector is certainly not the “big bazooka.” It represents an incremental step in the right direction, but it’s being received with mixed feelings mainly because it lacks sufficient firepower.

Finance Minister Bill Morneau had been promising something for the beleaguered industry, saying a few weeks ago that it was imminent. 

“They are going to need a bridge through this time and credit availability. In many cases, it will be challenging. That’s what we’re trying to ensure that we’re there to provide,” he said in an interview with BNN Bloomberg on April 17 after the government’s support package for the energy sector was announced.

In addition to trying to tide businesses over until the CCP (Chinese Communist Party) virus, commonly known as novel coronavirus, pandemic passes, the bailout aims to steer activity in the sector toward the Liberals’ goal of protecting the environment. 

The centrepiece of the government’s bailout is a well-received $1.72 billion for cleaning up abandoned wells. This is good for the servicing companies, although it wouldn’t do much for the producers. Another $750 million is pledged to help companies take steps to reduce methane emissions. The government expects that these measures will help retain and create about 10,000 well-paying jobs.

But the industry is calling for support in the magnitude of $15 billion to $30 billion, and Alberta senator Doug Black told The Epoch Times that the $14 billion bailout of GM and Chrysler in 2009 is a fair benchmark.

When the automotive industry’s survival in Canada was threatened during the financial crisis, the government of Canada stepped up, Black said.

“Alberta [also] recognized the automotive industry is important to Canada, and we could not let it fail,” Black said. “And that is a very good model and I think that the Government of Canada, as I’ve indicated, needs to step up.”

Significant Sector for Canada’s Federation

Jack Mintz, President’s Fellow at the University of Calgary’s School of Public Policy, reiterates that Canada is a federation. “We should be helping each other in dire times,” he told The Epoch Times.

Alberta, Saskatchewan, and Newfoundland and Labrador are getting hit both from COVID-19 and the crash in crude prices. In good times, taxes from oil revenue can be significant contributions to federal coffers.

Epoch Times Photo
A Suncor oilsands facility is seen near Fort McMurray, Alta. in a file photo. (The Canadian Press/Jeff McIntosh)

“If the federal government starts selecting some regions and industries that should be more supported than others, I think that’s going to be very bad for federation down the road,” Mintz said.

Ian Dundas, president & CEO of Enerplus, told BNN Bloomberg that the current federal measures don’t go far enough given the liquidity challenges companies are facing.

“We have support for several companies to come up with … we’re looking for something that is going to be meaningfully larger,” he said while also referencing what was provided for the auto sector.

The simplest answer, said Black, would be for the government to provide the big banks with loan guarantees so that they could in turn provide the energy companies with the billions they need.

The destruction in demand due to the CCP virus-mandated economic shutdowns means revenue is drying up quickly. The longer the economic shutdowns last, the greater the lack of income problem becomes, according to Carleton University management professor Ian Lee.

“At that point, they’ve got to step in with sheer, straight, old-fashioned grants,” Lee told The Epoch Times.

Given the size of the energy sector in Canada, Lee says it’s too big to let it fail—much like the auto sector was deemed to be back in 2009. In 2018, the energy sector employed over 830,000 people (4.5 percent of Canada’s total employment) and made up 10.6 percent of the GDP, or $221 billion. This is notably larger than the auto sector’s $19 billion contribution to GDP.

Helping Viable Companies

But there will still be a lot of pain in the industry, notwithstanding government backing, and companies are continuing to pare back capital spending. 

“They cannot replace every dollar of loss that every company has experienced. So the weakest ones will fail, even with government support,” Lee said. The ones that fail will be the small and mid-sized companies, which have far less resources.

Through Business Development Canada (BDC) and Export Development Canada (EDC), the government is providing loans from $15 million to $60 million to help financially viable companies get through 12 months of operational needs. 

“I’m encouraged by the general tone of what the federal government is talking about in terms of … not trying to pick, or save companies that were in distress before this downturn, but looking to provide a bridge through this unprecedented shutdown,” said Daniel Halyk, president and CEO of Total Energy Services, in an interview with BNN Bloomberg.

The feds are making it clear that they do not mean to prop up companies on the brink of bankruptcy. The idea is to not create a bunch of zombie companies.

“If there are companies that had good balance sheets before going into this current period, they would be able to get some additional help, so I think the federal package is going to be helpful with that,” Mintz said.

Too Much Oil: Paying Buyers to Buy

The situation in the energy sector has worsened since the April 17 announcements. 

In addition to onerous regulation, mounting environmental hurdles, falling demand due to the lockdowns, and oversupply, the lack of storage for crude is creating chaos in oil markets.

The price of the U.S. benchmark West Texas Intermediate (WTI) settled at negative US$37.63 on April 20, marking the first time the contract ever traded below zero. Its price fell by more than 300 percent from its prior closing level. 

Epoch Times Photo
A price chart of West Texas Intermediate (WTI) shows the plunge into negative territory on April 20, 2020. (Bloomberg)

The bizarre phenomenon meant that oil producers had to pay buyers to take the crude off their hands that day, as this was less costly than shutting down oil wells and having to restart them. Prices rebounded the following day but remain at extremely low levels.

More well shutdowns are required to cut supply. 

“The 10 million or 9.7 million barrels a day agreed to two weeks ago by OPEC+ is woefully inadequate and the market is saying so, and they’re going to have to cut a lot more. But the only permanent solution is for the economy, for companies, for people to go back to work,” Lee said.

Canada’s benchmark Western Canada Select price also briefly went negative and is hovering at close to zero.

Balancing Objectives

Black says the balance between protecting the environment and the health of the energy sector has not yet been achieved by the Trudeau government. But he remains hopeful.

“We have a moment in time now, where the government can signal that they believe the words that they have been saying—that you can balance resource extraction and maintain and enhance the environment. This can be done,” Black said. “And this is exactly what we’re waiting for in Alberta.”

Canada, like just about every other nation, faces soaring deficits, and Black says that more than ever the government needs the tax revenue from the energy sector.

“Without the oil and gas industry producing at the levels that it has been … the government would be biting off its nose to spite its face because the opportunity of the energy industry to continue to contribute to the national wealth and prosperity would be irreparably harmed,” he said.

Follow Rahul on Twitter: @RV_ETBiz