The Canadian oil industry received good and bad news April 12 from a new study by the Conference Board of Canada.
On the positive side of the ledger, oil prices are up after three awful years and companies are finally seeing black in on their financial reports. On the negative side, however, the Board is forecasting the creation of only 2,150 jobs over the next five years, hardly the robust job machine Alberta has come to rely upon.
And no surprise to industry watchers, pipeline capacity and Canada’s ability to complete approved projects like Trans Mountain Expansion figure prominently in the industry’s outlook.
“The industry has managed to turn the tide on the downturn it has been experiencing since 2014, but the landscape is changing rapidly,” said Michael Burt, director, Industrial Economic Trends, who supervised the study. “New pipelines that provide access to tidewater will be crucial for Canada to develop new export markets given that Canada’s biggest export market for oil, the United States, is ramping up its own production.”
Kinder Morgan’s 525,000 barrel per day (bbl/d) pipeline from Alberta to the West Coast is bogged down in government wrangling, the 830,000 bbl/d Keystone XL to the U.S. Gulf Coast is still in limbo even though President Donald Trump has approved it, and Enbridge’s 390,000 bbl/d Line 3 upgrade is still waiting for approval from the Minnesota regulator.
The constrained pipeline system has widened the gap between global benchmarks and Canadian oil prices, leading to a more moderate short-term outlook, Burt said in an interview: “We don't see a lot of growth in terms of seeing new projects going forward. There will be some, but it's going to be a very modest pace of growth going forward compared to what we may have been used to a few years ago in terms of the growth in the oil patch.”
Most of the growth prior to 2015 was driven by construction of new facilities in the northern Alberta oil sands sector, but lower prices no longer support greenfield development, leading producers to focus on brownfield expansion and optimization of existing plant, according to Burt.
The Board expects West Texas Intermediate to average $59.20/bbl in 2018, bolstered by solid global economic growth and rising demand for crude oil, up 1.6 MMbbl/d, roughly the same amount as last year. Solid fundamentals should lead to revenue growth of 8% and industry pre-tax profits of $1.4 billion in 2018 after three years of losses.
But Burt cautions that growing Canadian supply (forecast to rise 3.4% a year between 2018 and 2022) will continue to put pressure on shipping capacity, which could lead to a wider than average differential (usually between $10/bbl and $15/bbl, and currently sitting at C$18.76, though it has been as high as $38 in recent months) and lower profits for producers. He also worries about the potential impact of booming output from American shale basins, which could dampen growth in the near term.
“The impact of light sweet shale oil is not so much on the competitiveness of Canadian heavy oil with its customers, with refineries, but more around what impact that shale oil is having on global oil prices,” he said.
Despite the supply growth, direct employment in oil production will stagnate as firms boost labor productivity with new technologies. “There’s been a real shift away from development towards operating more efficiently,” Burt said. “Even if they’re only saving a dollar or two a barrel in terms of operating costs, that can mean the difference between breaking even or making a profit for these projects.”
The trend is especially notable in the oil sands, where huge plants or mines to process bitumen resemble manufacturing factories more than traditional extraction methods.
Gil McGowan is the president of the Alberta Federation of Labour. He says energy workers are worried because the days of plentiful, good paying jobs appear to be coming to an end.
“This is a wakeup call for all Canadians. The labor market is being overturned by new technology and automation,” he said in an interview. “There's an urgent need for policymakers at all levels to get a handle on what's happening because investment and job creation are increasingly becoming decoupled.”
The silver lining for workers is that oilfield services will continue to hire, according to Burt: “A lot of the labor-intensive work that's done in the oil patch is actually done by oilfield services companies which aren't covered in this analysis. Even a relatively modest growth would see significantly more jobs being created.”
When asked if the current environment presents out of the ordinary challenges for the Canadian oil industry, he replies that the pipeline issue aside, the usual cyclical fluctuations of the market are the key underlying factor.
“We were in a higher price phase from the mid-2000s through to the mid-2010s, now we’re into a lower price phase,” he said. “We expect that to persist for the foreseeable future based on the technology that's currently available for oil sands and what's going on with shale on south of the border.”