The Morning Brief – 04.22.20

By Bruce Carson


Economy—Oil Prices Fall into Negative Territory

Will there be more Help from Ottawa?

What form will it take, and will Oil producing Provinces Receive Aid?

Last Friday, Prime Minister Trudeau at his daily media availability announced two measures that were directed at the energy industry and would also address environmental concerns. Cleaning up orphan wells and reducing methane emissions plus some money for Newfoundland and Labrador for environmental concerns arising from the offshore were seen as positive measures, but they were made public while oil prices were still in the positive range.

While the Alberta government, Premier Kenney and Energy Minister Sonya Savage thanked the federal government for its help, the gratitude was based on their understanding, along with many in the industry, that these announcements were a good first step.

As noted, on Friday, oil prices were still in the positive range.

Then on Monday, the price of a barrel of West Texas Intermediate fell into the negative range around -US$37per barrel.

The need for more serious help for the energy industry was no longer an academic exercise of good to have, but need to have, immediately. The aid is needed now. As Kevin Neveu, CEO of Precision Drilling said yesterday, capital investment has completely dried up.

So there was some anticipation that yesterday at his usual media availability, Trudeau would be asked about aid to the energy sector. Surprisingly it was the second last question of the avail.

The question was “On oil prices, is there going to be further support for the oil industry, and beyond that, will there be support for provinces that rely heavily on oil revenues and that might need help with their finances, their debt to recover from the downturn?”

The prime minister’s answer repeated talking points he has used numerous times when asked about aid for this sector, unchanged to accommodate the new oil price issues.

He replied “our focus from the beginning has been on helping Canadians, families, workers across the country. And we have put in place significant measures that have an impact on all industries, including the oil industry, with CERB and the wage subsidy, which has helped thousands of workers across Alberta, across the whole oil sector in this country.

We’ve moved forward on other measures as well to help out that sector specifically, and we’re always open to working more on helping particular industries or particular areas that need support to get through this COVID-19 crisis. We will continue those discussions.

On supporting the provinces, we recognize that various provinces are facing real challenges in terms of cash crunches, in terms of liquidity, and our Department of Finance and others are engaged closely with different provinces on the challenges that they’re facing specifically.”

In other words the energy sector should get in line with others hit hard by COVID-19 and provinces hit hard have the chilling answer that the Finance Department is there for you. There seemed to be no recognition, at least yesterday, that the energy industry is not like the others, in the number of Canadians employed directly and indirectly across Canada, 800,000 and its contribution to Canada’s GDP, revenues to government coffers and as Canada’s leading export.

If the Trudeau government wants to use COVID-19 as its opportunity to pivot away from the fossil fuel, energy sector, it should say so. But there are mixed messages coming from the government.

On Sunday, on Evan Solomon’s Question Period, Finance Minister Morneau was asked if more help was coming for the energy industry. He spoke about the help announced on Friday and that medium sized energy companies could apply to EDC or BDC for loans to provide a bridge to the other side of COVID-19.

He was asked specifically if Canada would be willing to buy shares in energy companies and become equity partners. This was done in 2009 to salvage the auto industry. His response was that the energy sector wants credit support. He added that the government is trying to make sure companies don’t get close to bankruptcy. Asked once again “is equity on the table,” the response was that “credit support will be there.”

Yesterday, on Power and Politics, Vassy Kapelos asked Dwight Ball, Premier of Newfoundland and Labrador about conversations with the federal government on further aid. He responded that he “expects more.” Ball spoke about the oil produced from the offshore as being low in carbon and would be useful as the world transforms from fossil fuels. But his province needs money for offshore drilling. He said that “something is coming for us” for offshore development.

Premier Kenney commenting after the fall in prices into negative territory is quoted by Calgary Herald columnist Chris Varcoe as saying “we need to understand that hundreds of thousands of Canadian jobs are on the line.” He added “if this continues for any period of time the implications are serious, could not be more serious for the industry.”

He reiterated that more needs to be done by Ottawa and talked about a credit backstop of $15 to $30 billion. Ottawa could take an equity stake in oil and gas companies which would avoid saddling companies with further debt.

Kenney also let it be known that the provincial deficit could be as much as $20 billion in 2020.

Companies are cutting output as demand falls and Kenney believes the output cut could be as much as 800,000 barrels per day, in addition to the curtailment of 300,000 barrels.  Kevin Neveu, head of Precision Drilling believes the cut will be deeper, in the range of 1 million barrels per day and “possibly 2 million barrels per day.”

The lack of available storage combined with falling demand from the economic stop caused by COVID-19, as well as oversupply from the Saudi-Russia price war have combined to create this perfect storm hitting the oil industry.

Former Alberta Treasurer Jim Dinning quoted by Varcoe advanced an optimistic view saying “Alberta still has a helluva future, period, but it is about getting through the storm and coming out the other side.”

On occasions when the prime minister is asked about sectoral aid flowing to companies hurt by COVID-19 he has lumped energy in with tourism and airlines as industries particularly hard hit by the economic consequences of COVID-19. If he doesn’t want to single out aid specifically to the energy sector, then a broad recovery package targeting all three industries might be a solution.

What the prime minister must realize is that all of the aid he has targeted for workers will be for naught, if there are no employers left to hire these workers. And as noted above, if the prime minister and his COVID-19 recovery team headed by Ministers Wilkinson and McKenna want to move away now from fossil fuels, they should find a more elegant and transparent way to do so.

To Come

  • CPI numbers for March to be released
April 23
  • EI numbers for February to be released
April 24
  • Virtual vigil to celebrate the lives of those murdered in the Nova Scotia weekend attack
April 27
  • Applications open for the wage subsidy program
April 28-29
  • U.S. Fed meets
April 29
  • House of Commons scheduled to meet in person
April 30
  • GDP for February to be released