Alberta is experiencing a slower-than-expected recovery in spending as high-cost oil sands producers remain wary of pumping money into lavish growth projects.Cooper Neill/Reuters
Oil's collapse is taking a bigger toll on the Canadian economy than the Bank of Canada initially thought.
The central bank on Wednesday slashed its key overnight interest rate by a quarter percentage point and said investment in the oil and gas sector this year would drop roughly 40 per cent amid a "highly uncertain" outlook, reversing an earlier stance that anticipated a short-lived hit to growth and spending levels.
The bank had predicted oil producers would cut spending levels by a third after U.S. and world prices fell more than 50 per cent from last year. But the pullback in oil-rich Alberta has been faster and more widespread than many forecasters predicted, shaving billions from corporate budgets and forcing some of the industry's biggest players into survival mode.
In the latest sign of retrenchment, Teck Resources Ltd. last week said it was delaying startup of its $20.6-billion Frontier oil sands mine by five years, mirroring steps taken by Royal Dutch Shell PLC, Cenovus Energy Inc. and others.
The bank's rate cut is an acknowledgment that such moves are taking a heavy toll on the Canadian economy as non-commodity exports lag, said Judith Dwarkin, an analyst at ITG Investment Research in Calgary.
"They've dropped the lending rate to try and drive an export revival that just isn't happening, because they can't drive up the price of oil, which is what really needs to happen to instigate some momentum into investment," she said.
"The oil sector is going to remain hostage to developments on the global oil market, and there's nothing the Bank of Canada can do to influence that," Ms. Dwarkin said.
Hopes for a year-end recovery in prices have disappeared as the Organization of Petroleum Exporting Countries keeps output well above historic levels and U.S. inventories remain stubbornly high.
Meanwhile, the possible return of Iranian oil shipments next year has accentuated concerns over a supply glut in a market the International Energy Agency says remains "massively oversupplied." The OPEC producer this week struck an accord with six world powers to curb its nuclear program in exchange for easing sanctions that have curtailed the country's oil output.
For Alberta, it adds up to a slower-than-expected recovery in spending as high-cost oil sands producers remain wary of pumping money into lavish growth projects. U.S. West Texas intermediate oil on Wednesday shed 3 per cent to close at $51.41 a barrel (U.S.).
"We were all hoping we'd be closer to a $60 average for 2015. I think with what's gone on in the last two weeks, and with the Iranian [decision], that the market price on average for 2015 may in fact come in lower," said Bruce Edgelow, vice-president of energy at ATB Financial in Calgary.
"And that will just cause a whole ripple effect related to the spending side."
The prospect of deeper cuts comes even as some oil sands players say they are benefiting from the slowdown in activity, which has eased demand for materials and labour in what has long been a red-hot market.
Canadian heavy oil prices have also strengthened in recent months on strong seasonal demand from refineries in the U.S. and supply disruptions in northern Alberta. A weak Canadian dollar is also expected to bolster returns for producers.
"But at the same time, supply has gone up more than people thought, tight oil hasn't slowed down [and] OPEC producers are producing a million barrels more than they were last year," said Jackie Forrest, vice-president at ARC Financial Corp.
ARC estimates industry cash flow in Canada will reach $21-billion (Canadian) this year, well under planned spending of about $38-billion.
"They don't have enough cash flow at today's commodity prices to sustain that level of spending," Ms. Forrest said.