Updated: Jun 4
Economic fortunes can turn on a dime and none more so than the resource based economies of Western Canada. Commodity prices swing hard every 5-7 years and this time is no exception, caused by the slowdown in China. Alberta’s oil and gas based economy has been particularly affected by this downturn and a simultaneous price war instituted by Saudi Arabia. Alberta’s government has forecast that the recession that began in 2015 will now extend into 2016. It is the first time since the early 1980s oil slump that Alberta’s economy will shrink for two consecutive years. As a result, it’s important to examine the impact of the downturn on the industry, as well as the knock on effects to the provincial economy as a whole.
Alberta’s economy is now expected to contract by 1.1 per cent in 2016, following a decline of 1.5 per cent in 2015. With North American oil prices languishing around $30 (U.S.) per barrel, lower energy royalties and reduced tax revenue will push the province into a deficit of $6.3-billion after consecutive billion dollar surpluses. Complicating matters, years of fast population growth have created a need for continued public sector spending despite the decline in oil prices An example of this is the provincial government’s plan to maintain spending on infrastructure over the rest of this decade, totaling $34-billion on new schools, hospitals and roads.
Investment in the oil and gas sector is expected to decline by a further 20 per cent in 2016, following a double digit decline in 2015. As a result, the unemployment rate is expected to average 7.4 per cent in 2016—the highest rate since 1996. On a point of inter-provincial pride, the Alberta government now expects 6,000 more people will move out of the province in 2016 than decide to settle here from other parts of Canada—the first migration out since 2010.
From an investment perspective the historic glut in global oil and gas inventories has created a collection of have and have-not producers. Integrateds like Husky and Suncor have enjoyed rich margins on their downstream refining operations, which have helped to cushion the decline in prices. Similarly, nimble, junior producers have been able to focus on the sweetest of sweet spots in their drilling programs to deal with the new profit reality. The have-nots are medium to large cap producers such as PennWest Petroleum, which are caught in the squeeze of significant debt and ongoing capital investments required to bring major projects on stream. Rounding out the group are the service companies, always the most volatile segment including names like Trinidad Drilling or Secure Energy Services, which have undergone drastic operational cuts or outright mergers to ensure survival.
Oilsands operators, who are viewed as the highest cost producers in the global supply equation, actually have a different take on the cycle. The heads of Suncor and Cenovus view their operations as more akin to mining projects, requiring long term capital investments over an entire cycle and continuous improvements in their processes to bring down costs and reduce environmental impacts. A renewed emphasis on technological innovation is key as these companies seek additional leverage above and beyond traditional job and spending cuts to manage through the downturn.
At a recent Houston energy conference, the Saudi oil minister pointedly commented that North American producers must lower their costs, borrow cash, or liquidate. Without a doubt Alberta producers are doing all of the above and at a feverish pace. However, as the industry settles on the view that the oil price will be “lower for longer”, it will take all those actions and then some before we see a right-sizing of the Alberta economy.