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A multibillion-dollar government aid package for Canada’s energy industry could be at least week away from being finalized as federal officials deal first with financial supports for people across the country to contain the economic fallout from the COVID-19 crisis.

The oil and gas sector is reeling from a massive drop in revenues owing to the contagion and an oil-price war being waged by Saudi Arabia and Russia.

A report released on Monday by TD Securities Inc. pegged spending cuts by energy companies in North America at US$20-billion as they struggle to stay afloat, and more reductions are on the way. Of the total, Canadian companies have slashed spending by more than US$3-billion.

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The industry had expected the federal and Alberta governments to announce details of a support package this week. This is now unlikely, according to a senior federal source not authorized to speak publicly on the matter.

“This week’s focus is passing legislation to deliver a COVID-19 emergency response package for all Canadians,” the source said. “Work is under way on further support for energy and other impacted sectors of our economy.”

Oil prices have tumbled by more than 60 per cent this year as the global response to the coronavirus has sapped demand, and Saudi Arabia and Russia have cranked open the taps to wrest market share from each other. Neither has signalled any intention to relent, and they are exacting economic pain on other oil-producing countries, including Canada and the United States.

On Monday, the price of benchmark West Texas Intermediate crude climbed by 73 US cents to US$23.36 a barrel, a level that still renders most North American oil operations unprofitable.

In Canada, the federal and Alberta governments – both facing recession worries – are devising a series of measures to help the industry cope with plummeting revenues and the prospect of reduced access to credit, which could lead to mass layoffs. Alberta has already announced it will waive fees collected by the Alberta Energy Regulator from the industry, and extend oil and gas leases by one year, to give resource companies more time to raise capital and plan.

Alberta Premier Jason Kenney said on Monday that talks with the federal government about support for the sector are still going on. He said he would welcome direct federal government investment into oil and gas reclamation.

“That would create good, blue-collar jobs in the oil field service sector into work this spring as many people are being laid off,” Mr. Kenney said.

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Last week, federal Finance Minister Bill Morneau mentioned plans to help finance the cleanup of orphan oil and gas wells as well as approaches that enable companies "to bridge through the challenging time.”

Cuts to Canadian and U.S. capital spending by energy companies represent more than 31 per cent of corporate 2020 budgets, TD Securities said in a report to clients.

The clawback could reduce forecast production by 1.3 million barrels a day (b/d). To put that figure into perspective, combined U.S. and Canadian production is 17 million barrels of oil equivalent a day. In addition, roughly one-third of the forgone output would include associated natural gas and natural gas liquids, rather than crude oil.

“This is a massive reduction, but pales in comparison to near-term global demand destruction,” TD analyst Aaron Bilkoski said in the report. Various estimates peg the demand drop at eight million to 11 million b/d this year, from global consumption of 100.75 million b/d in 2019, according to the U.S. Energy Information Administration.

The TD report notes that global cuts in corporate budgets will likely be much greater, particularly when factoring in cuts from major oil companies. Five of those – Royal Dutch Shell PLC, Exxon Mobil Corp., Chevron Corp., Total SA and Eni SpA – have collective annual spending of US$100-billion on upstream operations.

“While some have signaled spending reductions, the magnitude of these reductions has not yet been specified,” Mr. Bilkoski wrote.

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Calgary-based Cenovus Energy Inc. has cut its capital budget by 32 per cent, putting possible expansions at its Christina Lake and Foster Creek oil sands projects on hold and suspending other plans.

Husky Energy Inc. has reduced its spending by $1-billion. On the weekend, it suspended the expansion of its White Rose project off Canada’s East Coast – an annual expenditure of several hundred million dollars – citing COVID-19 risks for the construction work force.

Canadian Natural Resources Ltd. clawed back its capital spending by more than $1-billion and reduced executive salaries. President Tim McKay’s compensation is being cut by 20 per cent.

As large as the drop in capital spending is, the corresponding drop in expected output is unlikely to counteract the destruction of global oil demand owing to the economic slowdown caused by the fight to contain COVID-19.

“While the price war remains the focal point of the oil price plunge, the demand side of the equation has taken the oil market hostage and will define the near-term price path as the market searches for a bottom,” said Michael Tran, managing director, global energy strategy for RBC Capital Markets. “In other words, while [capital spending] cuts are piling up in a hurry, oil demand destruction is currently multiples of the supply response.”

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