Canada's Oil Crisis Isn't As Bad As It Seems

Any investor or prospective investor googling “Alberta”--Canada’s key oil-producing province--will likely give up before clicking any further, at this point. The results will be a string of bleaker-than-bleak forecasts for Canada’s oil heartland. Job losses, office vacancies, and oil companies leaving the oil patch all indicate that Canada’s most prolific oil province has fallen on particularly hard times. 

But let’s dial down the headline drama and look at Alberta from a sober perspective. It’s struggling, but the doomsday scenarists have potentially taken things too far. 

There is no question that Alberta has suffered blow after blow—and not just from international oil market trends, but from Canadian governments, too. The Trans-Mountain pipeline saga only deserves to be referred to as a saga because plans to expand the pipeline’s capacity started a feud between Alberta and its neighbor British Columbia—a very big feud.

This feud brought the two provinces to court after a series of mutual threats that culminated in a piece of legislation by the new Alberta parliament that would have allowed the government of the province to stop the flow of any oil to British Columbia. That law was blocked temporarily by a court, but its very existence is evidence enough how far the hostility between the two provinces went.

The latest chapter in the saga is optimistic, however. Construction on the expanded pipeline began earlier this month despite the fact that the federal court of appeals has opened the door for challenges to the project--again. Hearings on these are scheduled for late December.

The future of Trans Mountain is still uncertain, but at the very least the project still has a future. If it does, then so does the Alberta oil industry and the provincial economy. In fact, one might argue that news headlines about Alberta’s situation are often excessively bleak.

This picture includes, for instance, a credit rating downgrade for the Alberta economy by Moody’s, on the grounds of oil industry troubles. "Alberta's oil and gas sector is carbon intensive and Alberta's greenhouse gas emissions are the highest among provinces. Related: The Best And Worst Oil Majors Of 2019

Alberta is also susceptible to natural disasters including wildfires and floods which could lead to significant mitigation costs by the province," Moody’s said, adding, however, that the overall uncertainty in oil also contributed to its decision. The credit ratings agency also said it would revise its outlook for Alberta as soon as the global oil outlook improves, suggesting that emissions and the disasters are only relative threats.

Speaking of emissions, the situation may not be as doomsday-dark as anti-oil activists make it sound. 

Edmonton Journal’s David Staples recently wrote a column stating something that many might find outrageous. “Alberta will soon have the cleanest oil industry in the world,” he said, before going on to explore the investments that local oil miners have been putting into reducing the carbon intensity of their operations and shrinking their overall carbon footprint.

Indeed, government data shows that while overall emissions in Alberta rose by 23 percent between 2005 and 2017, the carbon intensity, or emissions per barrel of oil, fell by 28 percent between 2000 and 2017. Alberta is simply producing more oil than 20 years ago, so its emissions are naturally higher. Yet, the “dirty oil sands” adage is being challenged by the same industry that was responsible for its emergence in the first place.

The struggle with emissions is ongoing, and while it is one more burden for the Alberta oil industry, right up there with the now notorious pipeline shortage, it will hardly break the industry—not when this industry accounts for the biggest chunk of Canada’s exports, at 22 percent, with vehicles a distant second at 13.4 percent, according to 2018 figures.

Yet, for all its importance to the Canadian economy, Alberta is struggling, and everyone acknowledges this. 

Earlier this month, all province Premiers agreed that the federal fiscal stabilization system needed to be reformed in order to respond to Alberta’s troubles. The very fact the province needs fiscal stabilization funds when historically it has overwhelmingly been a provider of such funds is a clear indication that things are difficult in the oil heartland.  Related: The Danger Of Deeper OPEC+ Cuts

Difficult does not necessarily mean hopeless, however.

In a string of budget updates, Alberta’s oil majors gave observers mixed signals. While some planned spending cuts to reflect the difficulties that they are dealing with amid the pipeline shortage, costly railway transportation for their oil, and growing opposition to the whole oil industry, others announced they would increase their budgets for 2020.

That’s hardly the move of a doomed industry.

The long-term outlook is not all that apocalyptic, either. In fact, none other than the federal energy watchdog, the Canada Energy Regulator, forecast the production of crude oil in the country will expand by 50 percent by 2040, to some 7 million bpd.

In recognition of pipeline realities, the regulator wrote that “Canadian oil pricing and production trends will rely heavily on the availability of export pipeline and rail capacity. If approved pipeline projects (Trans Mountain, Keystone XL, Line 3) proceed as announced, along with continued volumes of crude by rail, there will be sufficient takeaway capacity to accommodate production growth over the next 20 years."

Of course, these pipelines may not proceed as announced, and this will affect growth trends in oil. But will it kill the industry? Hardly. 

As Shell’s chief executive summarized the future of the global oil industry: until there is demand, there will be supply. It’s hard to argue with the foundations of economics, after all.

By Irina Slav for Oilprice.com

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