National Bank CEO calls for stronger response to ‘economic warfare’ in oil markets

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Canadian energy companies are victims of an “act of economic warfare” by Saudi Arabia, according to National Bank of Canada chief executive Louis Vachon, who called for a robust and co-ordinated response to the oil-rich kingdom’s power play on crude during the coronavirus crisis.

Mr. Vachon says the Saudis are taking advantage of the upheaval caused by the crisis “to try to squeeze North American producers out of business.”

Canada’s oil and gas sector has been hit hard by falling demand due to restrictive measures to control the spread of COVID-19. But Mr. Vachon said rock-bottom petroleum prices are also damaging to the long-term viability of the burgeoning renewable energy sector, which includes wind, solar and hydroelectric power sources.

To limit or reverse some of the damage, he said Canada needs to rethink its energy policies, especially those on energy security, and develop “a foreign-policy response at some point” in co-ordination with the United States.

“I don’t think we should let a foreign government dictate what our energy policy should be,” Mr. Vachon said in a telephone interview after the bank’s annual meeting of shareholders on Friday, which was webcast from Montreal. “How do you deal with foreign governments who pretend to be our friends from a diplomatic and military front, who are acting a completely different way on the economic front?”

As the global economic slowdown caused by COVID-19 began to weaken demand for crude in early March, Saudi Arabia and Russia failed to agree on production cuts. Instead, the two oil-producing powers kept battling for market share by vastly increasing shipments, putting heavy pressure on oil prices just as demand for fuels around the world collapsed.

By the time Russia, Saudi Arabia and their allies inside and outside OPEC agreed to rein in output two weeks ago, the damage had already been done. Instead of recovering, prices have crashed further, and on Monday, the price of a futures contract for delivery of benchmark West Texas Intermediate crude went negative for the first time.

“I think the policy of that foreign government [Saudi Arabia] is targeting not only the oil and gas industry, but it’s targeting also new renewable energy projects in North America," Mr. Vachon said. “It’s difficult to launch or to produce solar or wind energy when the front month of oil and gas is trading at negative prices.”

As one example, he noted that Hydro-Québec’s short-term electricity exports to the U.S. “are tied to the price of oil, so it’s all linked.”

Canadian oil prices were already weighed down by a lack of pipeline export capacity, and they have been pushed down further by the COVID-19 crisis and the global glut. Benchmark Western Canadian Select has been selling in the single digits per barrel for weeks – well below break-even for virtually every producer in the country.

Until now, Ottawa has focused primarily on delivering long-awaited emergency relief to the energy sector, which arrived last week in the form of $2.4-billion in aid to help laid-off workers clean up orphaned oil and gas wells and reduce methane emissions. The federal government hopes the measures will create about 10,000 jobs.

Export Development Canada also announced that it will guarantee loans of up to $100-million by banks to junior energy companies, in an effort to keep lenders from reducing the credit available to them.

“I think the EDC plan that was announced last week is very constructive,” Mr. Vachon said. “Will it require more? Yes, it does. From a liquidity and capital standpoint, I suspect more will be required.”

U.S. and Canadian officials, as well as senior business leaders, have also begun exploring the concept of creating a North American oil market, which could apply tariffs on crude from overseas, to help stabilize prices. Mr. Vachon said that idea should “absolutely” be considered as part of any future discussions.

Canada should be “thoughtful and measured in our response. But I think it does require a response of some kind," he said. “I would put everything on the table."

With a report from Emma Graney in Calgary

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