In the oil price war between Saudi Arabia and Russia, the first big victim is likely to be Canada.
Hit by unfettered supply from the world’s top two crude exporters and reduced demand from the coronavirus, the benchmark blend of crude produced from Canada’s oil sands plunged to a record low of $7.47 a barrel on Wednesday.
The fallout: Virtually every barrel of oil produced there will come at a loss at a time when the energy industry generates 10 per cent of Canada’s gross domestic product and a fifth of its exports.
The losses could spur a stark turnaround for a country that boasted one of the strongest economies in the Group of Seven heading into the crisis, and for Alberta, a province that’s long balanced its budget on its oil royalties. The region was already struggling with a pipeline shortage that curbed growth. The latest blow could spark a “domino effect” across governments, said Dinara Millington, vice president of research at the Canadian Energy Research Institute.
“We are probably going to see another wave of layoffs,” Millington told Bloomberg News by telephone. “We will see a reduction in terms of how much the producers are paying the government in terms of tax revenue and royalties.” At the same time, she said, the crisis could have ramifications beyond the purely economic, including “social unrest.”
The distance from Alberta’s oil sands to refineries on the U.S. Gulf Coast, with insufficient pipeline infrastructure along the way, forces Canadian producers to sell their crude at a discount to compete with an abundance of shale supplies.
Making matters worse, the Canadians can’t turn production on and off as nimbly as producers in Texas. Certain quirks of oil-sands production limit how much they can throttle back output without raising the risk of permanent damage to their resources. The situation means Canadian producers may be forced to bleed red ink for weeks or months, depending on how long the price war lasts, before capitulating and shutting in output.
“Most operators will choose to operate at a loss for a few months or a few weeks before making that decision,” according to Mark Oberstoetter, lead analyst for upstream research at Wood Mackenzie Ltd. in Calgary. Meanwhile, “everyone is losing at this price,” he said. “No one is in the black.”
(Bloomberg News)
