Alberta's oil patch and government are watching nervously as the slump in world oil markets threatens the province's economic boom.
The price of West Texas Intermediate (WTI) crude, a grade used as a benchmark in pricing, fell slightly to $81.78 (U.S) a barrel on Wednesday, extending a recent rout that has taken it down 10 per cent this month alone. Oil prices have tumbled as the demand for crude in major economies has fallen and producing countries have stared each other down, refusing to cut output for fear of losing market share.
For Alberta, the oil plunge is rekindling bitter memories. In the financial crisis of late 2008 and early 2009, skidding oil prices and a credit crunch forced the Canadian industry to cancel or shelve as much as $90-billion (Canadian) worth of energy expansion plans, many in the oil sands. At the time, WTI sank below $40 (U.S.) a barrel.
Suddenly, some high-cost projects in Alberta are again at risk, and sustained weak pricing could hamper the industry's current forecast for oil sands output to double over the next decade. Any cutbacks will reverberate through the Alberta economy, which has driven economic growth in Canada in recent years.
Energy prices weigh "extremely heavily" on the whole Alberta economy, said Douglas Porter, chief economist at BMO Capital Markets. "Now that we've seen oil prices correct so heavily, there is a risk that the damage spreads far beyond just the energy sector," he said.
A recent study by BMO Nesbitt Burns pegged the average cost of developing an oil-sands mine and operating it profitably at about $90 per barrel, well above the current price of crude. For example, the study said, costs at CNOOC Ltd.'s Long Lake project are well over $100 a barrel, and costs for the Suncor Energy Inc.-Total SA Fort Hills development, now under construction, are above $90.
Investors have already driven down the share prices of oil producers amid growing fears that profit margins will be squeezed and plans delayed or cancelled.
However, many well-established oil projects remain profitable at current or lower prices. The core operations of Suncor and Syncrude Canada Ltd. have costs of less than $50 a barrel. Some steam-driven oil sands projects, such as MEG Energy Corp.'s Christina Lake development and Imperial Oil Ltd.'s Cold Lake venture, have costs under $65, according to the study, giving them breathing room.
Other factors are also working in favour of the energy sector now compared with the financial crisis. Credit remains available, the falling Canadian dollar is cushioning the blow of weaker oil prices, and demand for Alberta's domestic heavy crude remains strong.
Still, some fear the shaky crude market will erode investor and consumer confidence, and hinder job growth and the real estate market in the province of four million people.
The Progressive Conservative government, under new Premier Jim Prentice, is watching the situation closely, but points out that the province is in a good position to weather the current downturn because its budget assumptions early in the year underestimated oil prices. As recently as August, the government said its operational surplus was on track to hit $3.2-billion (Canadian), up more than half a billion from the March prediction.
The WTI oil price could fall as far as $75 (U.S.) a barrel if OPEC members cut production at their Nov. 27 meeting, and $60 if they refuse to act, said Martin King, analyst at FirstEnergy Capital Corp. The length of the downturn will be key, however, he said.
"With the price meltdown here, if you want to call it that – it's only really been dramatic over the last 10 days – to start basing annual budgets and everything on a 10-day movement in crude oil prices is ridiculous, where it is going up or going down," Mr. King said.
The oil rout has been cited as pushing the Canadian dollar to five-year lows. The loonie fetched 88.87 U.S. cents late on Wednesday. As a major exporter, the oil patch benefits from a weaker domestic currency because oil is priced in U.S. dollars. As a result, these companies take in the stronger U.S. dollars from sales and spend Canadian dollars on operations.
And the discount on Western Canadian Select, the benchmark for prices of Canadian heavy oil, has been unusually narrow at less than $13 a barrel below WTI, compared with as much as $40 late last year. Canadian oil has traditionally been priced lower because bottlenecks getting it to U.S. markets created a surplus. Because of new U.S. pipelines and more capacity for shipping crude by rail, the difference has narrowed.
That has counteracted the effect of weakening world oil prices on export revenues for energy producers as well as the government's take, said Amina Beecroft, president of A2B2 Analytics Inc., which tracks the impact of oil and currency on the province's finances. In Alberta's current budget, every 1 per cent change in the heavy oil discount translates into $274-million in government revenue, Dr. Beecroft said. "As the differential gets narrower, that's additional revenue," she said.
Alberta remains a magnet for job seekers. Unemployment in September was 4.4 per cent, well below the national jobless rate of 6.8 per cent. And the province's finances are strong, Mr. Porter said.
Still, BMO forecasts growth there will slip below 3 per cent next year from about 3.5 per cent this year. "By any other yardstick, growth of almost 3 per cent would still be very good, but it does mark a slowdown for the province," he said. "And that's based on our assumption that oil prices do come back a little bit in 2015."
With a report from Jeff Lewis