March 2016, Vol. 243, No. 3
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Canadian Oil Slammed By Low Prices, Pipeline Woes
Canada has been particularly hit hard during the downturn in oil prices. A major oil-producing country, Canada rode the commodity wave upwards over the past decade, but has suffered from the downturn.
The economy briefly dipped into a recession in 2015. Even after growth resumed, Canada’s GDP slowed the most out of all G7 nations. The unemployment has rate ticked up, especially in Alberta where most of its oil and gas production is concentrated. And the Canadian dollar has plunged in value to its lowest level in over a decade.
The problems for Canada’s oil industry are compounded by several factors. First, Canada’s oil is more costly to produce than other regions, particularly when compared to oil produced in United States where Canada competes for pipeline capacity and market share. Similarly, Canada’s oil sector is also struggling to build enough pipelines to get their oil to market. With elevated levels of production in the U.S., Canadian producers have very few options to move their product. Pipeline routes to the east and west coasts for export abroad are limited, vexing Alberta producers.
That has led to a third problem that puts Canadian producers at a disadvantage to some of their peers: Canadian crude oil sells at a steep discount to more widely recognized benchmarks like WTI. In mid-January, for example, when WTI dropped to $30 per barrel, heavy tar sands in Canada traded at just $8 per barrel temporarily. Canada’s oil, at a lower quality and produced at a higher cost, needs to be discounted in order to entice buyers.
Job losses have proliferated across the oil patch. Earlier this week, Nexen Energy, a Calgary-based subsidiary of China’s Cnooc, announced that it would lay off another 120 workers because of low oil prices. Aside from a crash in oil prices, Nexen has also presided over several technical problems at its facilities. Last summer, a Nexen pipeline spilled 31,500 barrels of oil and sand near its Long Lake project, the worst spill in three decades. And earlier this year two workers died from an explosion, also at the Long Lake facility.
The depressed marketplace for oil is raising concerns about the exposure of some of Canada’s banks to the downturn. The Wall Street Journal reported that there is rising scrutiny from analysts over the vulnerability to Canada’s banks from bad energy debt. “I find it frustrating because I don’t believe what the [Canadian] banks have disclosed with regards to credit truly reflects the quality or the current status of those loan portfolios,” James Shanahan, an analyst at Edward Jones, told the WSJ.
The Bank of Nova Scotia set aside $539 million in the first quarter of the fiscal year (ending on January 31) to deal with rising losses from credit card debt, auto loans, and other consumer credit from people directly and indirectly tied to the oil industry. The bank says that impaired loans doubled to $336 million compared to the previous quarter.
Nevertheless, profits at the bank were up, and Scotia still managed to increase its dividend, suggesting that the pain may not be too extensive. In fact, four of the largest six Canadian banks beat estimates and raised dividends. Scotia says that even in a worst-case scenario in which oil prices remain depressed for two more years, it would still have a minimal impact on the bank’s portfolio.
Meanwhile, Canada’s oil patch continues to endure headaches from the inability to build enough pipelines to connect Alberta oil to the outside world. The Keystone XL pipeline is the most infamous incident, but other major projects also continue to languish amid stiff opposition from Alberta’s neighbors. The province of Quebec said on March 1 that it would seek an injunction against TransCanada’s Energy East pipeline, a 4,600-kilometer pipeline that would carry 1.1 million barrels of oil per day from Alberta to Canada’s east. Quebec’s environmental minister says that the pipeline company has ignored the province’s request for an environmental assessment. Opposition to the $11.7 billion project runs deep in Quebec. In January the mayor of Montreal voiced opposition to Energy East, for example.
At the federal level, the new Prime Minister also presents a challenge for the industry. He has not taken a position on Energy East, but has stepped up emphasis on protecting the environment, dimming the prospects for other large pipeline projects on Canada’s Pacific Coast. Energy East will be reviewed by federal regulators at the National Energy Board. TransCanada says that Quebec’s request for an injunction will not delay the project, although it has already suffered several years of delay.
By Nick Cunningham of Oilprice.com
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