You could be forgiven for thinking the sky is falling on Alberta, with a Liberal government back in Ottawa, a price on carbon coming and frequent news such as Encana Corp. moving its head office to the U.S.
Commentators lament Canada’s “beleaguered” energy sector and the ongoing “tragedy.” Premier Jason Kenney is in high dudgeon about everything from public-sector unions to unbuilt pipelines, and there’s a noisy – although unconvincing – separation movement.
But the hysteria belies the facts.
Alberta’s economy isn’t great, but it’s not that bad either. GDP is up by 2.4% this year and is almost back to where it was in 2014. The unemployment rate is 6.6%: not great, but not bad either. The province’s population continues to grow steadily, up by 1.6% this year to 4.4 million, and it still is relatively young and well paid, which explains one of the biggest burrs under Albertan saddles: why the province never receives federal equalization payments.
And the oil and gas industry is, in many ways, in good shape. Alberta continues to produce almost four million barrels of oil each day and, right up until the Keystone pipeline breach in early November, the price of Western Canadian Select made oilsands producers cash-flow machines. Canadian Natural Resources Ltd. reported $3.8 billion in profits in the first half of this year; Suncor Energy Inc., $4.2 billion. Even Husky Energy Inc., which laid off an unknown number of workers last month, booked a $273-million profit in its most recent fiscal quarter.
While producers are spending much of that money on dividends and debt repayment rather than on new exploration, those numbers are, contrary to popular perception, bringing new investment into the province.
“American institutional investors disillusioned with poor results of many [U.S.] light tight oil producers are moving their capital into the larger oilsands producers,” wrote David Yager, an analyst in Calgary, recently on EnergyNow.ca. “Free cash from production, low to zero decline rates and steady dividends. That’s what attractive oil stocks are supposed to look like.”
Yager cited some of the industry’s macroeconomic numbers in support. From 2014 to 2018, annual oilsands production increased by over 50% to almost 1.1 billion barrels from 717 million barrels. At the same time, operating costs per barrel have plunged by 39%: in 2014, the average was $33.88 per barrel; in 2018, it was down to $20.51.
The biggest problem facing the industry continues to be the collapse in natural gas prices. Gas averaged $7.48 per gigajoule in 2008, but has traded at or below $2 for the past four years. This helps to explain the Encana situation. In Canada, Encana is a natural gas company, having hived off its oil assets in 2009 (creating Cenovus Energy Inc., which made $622 million in the most recent quarter). Since Doug Suttles took over as CEO in 2013, he has gradually shifted Encana’s business to U.S. oil, including the US$7.7-billion purchase of Houston-based Newfield Exploration Co. A year ago, Suttles said Encana would be “headquarter-less,” with primary offices in Calgary, Denver and Houston. Encana’s news last month was just the continuation of a trend.
Meanwhile, there is reason to be optimistic about the prospects for natural gas. The $40-billion LNG Canada project in Kitimat, B.C., is proceeding apace, as is Coastal GasLink Pipeline Ltd.’s pipeline that will supply it. LNG Canada’s first two processing units are designed to handle approximately 1.7 bcf/d of natural gas, or about 11% of Western Canada’s production, giving a huge boost to the sector. First gas won’t flow until 2025, but in the big picture, that’s not long. And, even now, producers are investing in the distribution systems that will feed into Coastal GasLink’s pipeline.
On the oil side, the federal government insists the Trans Mountain pipeline expansion will proceed. That, combined with Enbridge Inc.’s work on Line 3 and the Keystone XL pipeline addition, will ensure plenty of takeaway capacity for Alberta’s resources. These developments may not be everything the industry wants and they’re not guaranteed, but taken together, they’re enough to ensure Alberta continues to have a healthy economy far into the future.
Everyone can just take a breath. IE