In the face of an economic crisis triggered by the global spread of COVID-19 and worsened by the Saudi Arabia-Russia price war, the outlook for new projects in Alberta’s oil patch – even those already approved – is bleak.
The federal government announced a major economic aid package Wednesday, as the country “teeters on the brink of recession,” according to an economic forecast released Tuesday by the Conference Board of Canada.
In the meantime, a number of oilsands projects that have already secured a greenlight could be in limbo as oil companies face plunging prices, based on a list of approved projects that are not currently operating provided to National Observer by the Alberta Energy Regulator (AER).
The list contains more than 45 projects, including projects that have been “approved but not constructed”; projects that have been “approved, constructed, then postponed or delayed”; projects that have been “approved, constructed, began operating, then suspended”; and projects that have not been constructed “but are planning to operate in the future,” according to the AER.
Prime Minister Justin Trudeau and Finance Minister Bill Morneau announced $82 billion in economic aid Wednesday to help lessen the impact of the COVID-19 pandemic. As of Thursday morning, there were more than 735 confirmed cases of COVID-19 in Canada and 34 probable cases. The Canada-U.S. border has now been closed to all non-essential travel in an effort to slow the spread of the virus.
The government’s economic response to the crisis includes $27 billion in direct support to individuals and businesses and $55 billion in tax deferrals. Targeted measures to support the oil and gas industry and other particularly affected sectors are on their way but have yet to be announced.
“We’re going to actively work with organizations in the oil and gas sector, in the airline sector in order to come up with approaches that enable them to bridge through the challenging time, that’s critical,” Morneau said.
“We’re not far enough along in those discussions to identify specific measures that we will take, but we do recognize the urgency of those discussions and are proceeding with that in mind.”
For Alberta’s oil and gas industry, the situation is nothing short of a crisis, one that’s left the fate of multiple projects uncertain.
Among those that have been approved, but not yet constructed are Suncor’s Meadow Creek projects.
Just last month – two weeks before the Alberta government gave its Meadow Creek West project the final nod – Suncor announced it was shelving both its Meadow Creek West and Meadow Creek East projects until at least 2023.
That was before the U.S. Energy Information Administration downgraded its 2020 oil price forecast for the benchmark West Texas Intermediate to an average $38 U.S. per barrel, down from an earlier forecast of $55 per barrel this year. The WTI was above the $25.00 U.S. a barrel mark mid-day Thursday, while the price for Western Canadian Select was slightly above the $11.00 mark during the same time period.
In light of a major decline in demand brought on by the pandemic and the oil price crash triggered by the price war, Kevin Birn, a crude oil market analyst with IHS Markit, said he thinks “it’s very unlikely that… projects (will) advance at this point.”
Over the last several days, oil companies in Alberta have announced major cuts to their capital budgets for 2020, prompting expectations of layoffs.
“This is going to have a very negative effect for working women and men in the energy services sector,” said Premier Jason Kenney, whose province had the highest unemployment rate of any province outside of Atlantic Canada as of February.
After years of economic stagnation, the province is “facing a triple whammy right now,” he said, and Ottawa “needs to have our back.”
While Kenney has called for major investments and relief from certain planned environmental measures to help keep Alberta’s mainstay industry afloat, others say economic stimulus measures could offer an opportunity to address two emergencies at once – the pressing economic crisis and the relatively longer-term threat of catastrophic climate change.
“For Canada’s oil and gas sector to have greater longevity, it needs to be cleaner, it needs to have lower carbon intensity,” said Dan Woynillowicz, the deputy director of Clean Energy Canada.
New projects already faced challenging conditions. Oilsands producers have been struggling under the weight of depressed prices and limited pipeline access for a number of years now.
That reality was brought into sharp focus earlier this year when Teck Resources pulled the regulatory application for its massive Frontier oilsands mine.
But even before Teck’s surprise decision, analysts were questioning the economic feasibility of such a major undertaking in the oilsands, as well as the fate of numerous other projects, approved already.
Final investment decisions have yet to be made for a number of the approved projects on the list provided to National Observer by the AER, including MEG Energy’s Surmont Project, a proposed multi-phase, in-situ project that could produce up to 120,000 barrels per day.
Though the company secured regulatory approval for the project in 2019, MEG Energy shifted the Surmont Project out of its current development plan, a move “consistent with its strategic focus on the continued application of all free cash flow to debt reduction,” according to corporate documents.
In March 2019, just a few months after Imperial Oil announced it was moving forward with its $2.6 billion Aspen project, the company announced it was slowing the pace of development due to the Alberta Government’s curtailment policy.
“We cannot invest billions of dollars on behalf of our shareholders given the uncertainty in the current business environment. That said, our goal is to ensure the work we do this year will enable us to effectively and efficiently resume planned activity levels when the time is right,” Rich Kruger, the then-CEO of Imperial Oil, said in a statement.
Suncor, meanwhile, has deferred an investment decision on its Meadow Creek in-situ projects until 2023 in favour of lower-cost opportunities to improve production at its Firebag site, CEO Mark Little said during the company’s 2019 fourth-quarter investor call in early February.
“As you would expect in line with our capital discipline principles, we’re carefully evaluating future projects,” Little said. “We take into account the current environment of volatile commodity prices, market access challenges and government intervention into crude markets, while at the same time we’re making progress on new technology development, which has the potential to significantly reduce capital and operating costs, greenhouse gas emissions and water use.”
In 2015, due to low oil prices, Cenovus deferred new spending on construction for the first phase of its Narrows Lake project, which received approval for three phases in 2012, according to corporate financial documents. The project, which was initially designed to have the capacity to produce 130,000 barrels per day, is now being reconceived as a lower-cost “tieback” project. Meaning, the company is looking at using its existing infrastructure at its Christina Lake site to produce the Narrows Lake resource.
While expected production would be in the 65,000 barrels per day range, the approach could cut costs by more than 30 percent compared with the previous plan, according to an October 2019 presentation to investors. At the time, Cenovus said it could be ready to make a final investment decision in the second half of 2020, depending on market access.
Capital investments in the oil patch have declined since 2014, but just a few months ago, there was some expectation that the investment picture in the oilsands would improve this year as new pipelines came online.
“Of course, that’s all changed now,” said Pedro Antunes, the chief economist at the Conference Board of Canada in an interview with National Observer.
In the wake of the price crash, oilsands companies have made dramatic cuts to capital budgets for the year ahead.
On Wednesday, Canadian Natural Resources Limited announced a $1 billion-reduction to its 2020 capital spending budget, though the company noted in a release today that it “is well-positioned through the current global COVID-19 challenges.”
Cenovus announced it was cutting its capital spending plans by 32 percent and “deferring final investment decision on major growth projects.”
MEG Energy announced a 20 percent reduction to its 2020 capital budget, and ARC Resources cut its 2020 capital budget from $500 million to at-most $300 million.
Husky Energy, meanwhile, scrapped $1 billion from its capital investment plans this year. “Investment in resource plays and conventional heavy oil projects in Western Canada has been halted, with a focus on optimizing existing production and lowering costs,” the company said in a release last week.
A pandemic and a price war. The novel coronavirus outbreak and the related slowdown of China’s economy had a dramatic effect on the demand for oil. As manufacturing and transportation stalled, supply quickly outpaced demand, said Birn.
As more countries take steps to slow the spread of the virus, demand could decline even further. This week Prime Minister Justin Trudeau announced the federal government was restricting inbound international flights to just four Canadian airports and closing the borders for non-essential travel.
In its February Oil Market Report, the International Energy Agency said global demand for oil is expected to decline in the first quarter of 2020 in what would be “the first quarterly contraction in more than 10 years.”
Prices were already expected to slide throughout the year as demand fell further and stockpiles grew, said Birn. Then, the situation took a turn for the worse.