Front Burner - What does $1.6B in federal cash mean for the oil and gas sector?

Episode Date: December 19, 2018

"People are frustrated and they're upset and frankly, they're scared," says CBC business correspondent Peter Armstrong about workers in the oil and gas industry following months of record-low oil prices. On Tuesday the Canadian government announced a $1.6 billion support package for the struggling energy sector. Today on Front Burner, Armstrong explains what's at stake for Canada's oil patch and breaks down how far the funds will really go.

Hey there, I'm David Common. If you're like me, there are things you love about living in the GTA and things that drive you absolutely crazy. Every day on This Is Toronto, we connect you to what matters most about life in the GTA, the news you gotta know, and the conversations your friends will be talking about. Whether you listen on a run through your neighbourhood or while sitting in the parking lot that is the 401, check out This Is Toronto, wherever you get your podcasts. This is a CBC Podcast. Hello, I'm Jamie Poisson. On Tuesday, the Canadian government announced some help for the flailing energy sector.

It came in the form of a $1.6 billion support package, mostly aimed at helping workers in the oil and gas industry through commercial loans. This funding allows companies to survive through difficult times when their cash flows are short or the loans are difficult to gain. Today, as the industry deals with the fallout from months of record low oil prices, I'm talking with CBC national business correspondent Peter Armstrong about what's at stake for Canada's oil and gas industry and how far $1.6 billion, which seems like a lot of money, is really going to go. That's coming up on FrontBurner. Hi, Peter. Hi, nice to see you again. Thanks so much for coming. So we're going

to do oil today. Let's do it. All right. So before we get to the announcement, I'm hoping that you can give me a sense of how bad things have gotten for people in the oil and gas industry in Alberta. What's the feeling like on the ground there? Really bad. And it's hard to understate this. I mean, there have been 126,000 jobs lost since January of 2015. So since the beginning of the oil collapse back then. Calgary's office vacancy is up to almost 28%. So imagine

every tower in the city, 28% is emptied out. So it's not just somebody who works in the oil sands or the CEO or the shareholder of one of these companies, nor the drilling companies or the shipping companies. This is widespread. And it is also a cautionary tale because this will have a material impact on the broader Canadian economy as well. But I mean, Jamie, it's miserable there. And people are frustrated and they're upset. And frankly, they're scared. I got to tell you that I've never seen the province so depressed as it is right now. It's a huge economic crisis for Canada, for Alberta. In the long term, hopefully things can turn around for us and we get back to work because that's all we want to do is we want to work and contribute to this country because that's what makes Canadians great.

So I want to get to the impact that this will have on the Canadian economy. But first, let's let's just go over what was announced today. So it's a one point.6 billion support package. For what? It is aimed to, and we are being told that its purpose is to help companies try to stay afloat and just sort of navigate their way through this particular downturn, which has been awful for them and for their workers. These investments that we are making today will ensure that businesses continue to thrive. They continue to meet with challenges that they're facing. So it's like $1.6 billion. Almost all of that is in commercial

loans. So they're saying, listen, we'll make money available to you. And then they've broken it up into a bunch of different sort of sectors. The $1 billion of it is for capital investments, so big investments into their own businesses and to buy new technology. billion of it is for capital investments, so big investments into their own businesses and to buy new technology. $500 million is for smaller companies that have higher risk, but that are deemed companies that will survive this downturn, but just need a hand sort of getting through it. $150 million in clean growth, how to diversify into cleaner tech. So, I mean, it's a lot of money

to me and you, it's a drop in the bucket for like the oil industry is so capital rich. It takes so much money and so much time and so much effort to pull oil out of the ground and get it into the system and move it to where it can be refined. This isn't a ton of money. And remember these are loans. So imagine if, if, if you were having a hard time at home and you weren't able to pay your grocery bill and somebody say, OK, well, we'll make a cheap loan available to you. That helps. But it doesn't address the underlying problem of you can't pay the bills. It just helps you tread water. It helps you tread water, hoping that the decisions that have already been made, the levers that have already been pulled will begin to have an impact and kick the oil industry back up a little bit, help those oil prices rise a little bit. And we've actually

seen that already happen. I want to get a sense of how this could help regular people, people who are working in this industry right now. Well, I mean, two things. One, they have announced there is sort of money in this for training and skills development programs for job search assistance. One of them is I'm just reading from the release here. This includes work sharing to prevent layoffs and immediate income supports through employment insurance, which is great at a macro level. But at a micro level, if you're losing your job and then they say, well, you might not lose your job, but you have to share it with Armstrong, you're not going to be particularly happy, specifically leading up to Christmas. So it's a little too little too late, I think.

$1.6 billion for a multi-billion dollar industry. Do you think it's a drop in the bucket? Well, of course. Of course. You know, I've been working in the industry for 20 years and the last 10 years it's been going downhill. So these are important and they'll help, but they'll help at a macro level. And they're not like the people that are affected by this aren't going to just aren't going to see a ton, a ton of benefit. And aside from setting up the structure to build these pipelines, this is the kind of thing a federal government can do. So I think to get us to some of these levers that have already been pulled, can we go back a little bit

and sort of talk about how we got here in the first place? How do we get to the place where things are so dire for the oil and gas industry in Alberta? It's a couple of things. And we talk a lot about pipelines and how we're not building new pipelines in this country. And that's partially true and partially a part of why we're seeing such a drop in Canadian oil prices. The other part of this, though, is overproduction. We're simply producing too much oil. Well, if you listen to Rachel Notley, she says that the main issue here

is that we need the Trans Mountain Pipeline to be built so that we can get oil to non-U.S. global markets, to China, for example. It's a good point. For generations, Alberta has been forced to sell our resources to one customer, the United States, and to sell our resources to one customer, the United States, and to sell those resources at a major discount.

Let's not kid ourselves. This is a threat to Canadian sovereignty and Canadian economic security. It is a crisis. I mean, people say we haven't built pipelines. We've built a ton of pipelines. You know, in 2015, Enbridge completed the reversal of Line 9B. In 2010, we saw Keystone, the TransCanada project, come online. 2010, the Enbridge-Alberta Clipper was finished.

So we've been building pipelines. We've just been building them all down towards Cushing, Oklahoma, where we store oil and sell it then on to the Gulf Coast. What we're now saying we need are pipelines that can get this to tidal waters and expand our markets, and that we don't have enough of. pipelines that can get this to tidal waters and expand our markets. And that we don't have enough of. But the other sort of flip side of that is we are producing, even with the capacity we have, too much oil. And it's a problem because the Alberta oil industry, I mean, the oil industry in general, but the Alberta oil industry specifically is so capital rich. It takes so much money and it takes so much time to get anything done that you look at, you know, a recent oil sands operation just came online in September. It was planned back when oil was like a hundred dollars a barrel. And they would have looked at the

landscape back then and said, well, one of these pipelines, sure. Not only is it worth it, but one of these pipelines that we're looking at will eventually be online by the time we get to the point that it's at full production. We're there now. None of those pipelines are operating. So that glut just continues. And you see so much oil pouring into Alberta's sort of, you know, tank fields. And it just doesn't have a way to get out to world markets. And as a result, we're selling it for cheaper and cheaper. Cheaper and cheaper.

And the Canadian oil sands operations are these massive projects. It's just a way more intensive operation. So we've always had a discount, right? That Canadian discount for Western Canada Select has always been there. It's traditionally been around $13 a barrel. But what we've seen as this glut grew is that discount grew to like $40 a barrel. And that's where things hit a crisis point. And does it get to the point where it becomes more expensive to produce the oil than it does to sell it?

Well, yeah. I mean, I think when oil, when Canadian oil, the Western Canada Select Canadian benchmark, was down at like $11 a barrel, these companies were in negative cash flow. They were losing money. Millions of dollars a day. Millions of dollars. Losing money. Millions of dollars. Millions of dollars. I mean, yeah, I think if you, the Scotiabank, for example, crunched the numbers and said Alberta was losing between 15 and 39 billion dollars in lost industry revenue for next year.

So, like, this is massive consequences for millions of people. Even as we've seen just an immediate reaction to the production cuts, we're able to see that price bounce back up, not all the way to where you'd want it, but back to a point where at least these companies are making money. Right. And let's talk about those production cuts. Rachel Notley recently announced an 8.7% cut in oil production. We are giving it away for next to nothing. This is hurting jobs and could hurt Alberta's economic recovery. In the short term, we are therefore curtailing production to raise the price and protect jobs. And so she's just trying to manage the glut of oil. Right. So that we can sell it for more money a barrel.

Yeah, to bring the price back into something more manageable. Imagine if you've just got everything pouring in to these oil fields, the tanker fields in Hardesty, Alberta, you can't get it out fast enough. So the value of the stuff that's left sloshing around in Alberta waiting to get to market, obviously, and very quickly, dramatically falls. So by cutting the production, we'll see less new oil pumping into that glut. We're going to bring in more rail capacity. So as we can increase the amount of stuff we can ship to market and lower the amount of stuff that's sloshing around is waiting to get to market, that price differential should balance itself out. And when you say rail capacity, I know she's been talking a lot about these rail cars.

She wants to do the job that the Trans Mountain Pipeline is supposed to do with rail cars. She wants to move the oil. And so what's happening with these? They want to get it to whatever market at this point that they can. I think 7,000 rail cars and 80 locomotives. Now, don't mistake me. This is also not the long-term solution. But until pipelines are built, we need to move more oil by rail.

And imagine if you've ever seen a unit train, which is like 100, 110 rail cars that are just shipping oil. It's got like three locomotives. If you're moving one of those a day, that can move 60,000 barrels of oil a day. Now, there you're talking about a small pipeline, but that's a pipeline capacity. So the problem is you need a whole fleet of these things to be moving to get to that 60,000 barrels a day. Now, if they can do that, plus we've seen a lot of the companies have already committed to moving more oil by rail, then you can start to see that really eat in. In September of this year, we were already moving about 300,000 barrels a day by rail, then you can start to see that really eat in. In September of this year, we were already moving about 300,000 barrels a day by rail. We're expecting, we don't have the data for this yet, but we're expecting by now that

should have gone up between four and 500,000 barrels a day. And as we see this new capacity coming online through 2019, that could go as high as seven, 750,000 barrels of crude a day. There, you're actually, that's the equivalent of Keystone XL. So, you know what I mean? So, it could conceivably replace a pipeline. But we were talking back when they were planning a lot of these newer operations, we were talking about Energy East and Northern Gateway and Keystone XL and Trans Mountain Pipeline,

and none of those came online. So oil prices have rebounded since Rachel Notley announced this cut to oil production. And so does that mean that things are looking up now? It does and it doesn't. And here's why that's confusing is kind of how the Alberta story is split into two things of overproduction and not enough shipping capacity. The global situation is equally compounding all of this problem. is equally compounding all of this problem. So if you look at the Canadian price of oil is basically you take the North American benchmark, we call it WTI, West Texas Intermediate,

and we traded a discount to that, right? So usually, I said that was around $13 a barrel. It fell to as much as $40 a barrel, and it's rebounded a little bit now. The global price of oil has fallen $20 a barrel in a month and a half. And again, for a lot of the same issues, right? The oversupply.

The Russians are producing more than they have since the end of the Soviet Union. The Americans are producing more than they ever have in the history of that country. The Saudis are producing more than they ever have in the history of that country. All at a time when we expected Iran's oil exports to drop to zero because of sanctions from the U.S.

That didn't happen. The U.S. ended up handing off all these waivers to Iran. So the world is dealing with this glut of oil, much as Alberta is. And so, yes, the things that we've done in Alberta have addressed that differential. But that global price of oil has fallen again back down to like $40 a barrel, $46 a barrel. So really low levels at that international benchmark from which we traded a discount. And there's nothing we can do or very little we can do about that. That's on OPEC and on the US and on sort of global market forces. So there's a much more complicated story that's

happening sort of above and beyond the Alberta industry that's compounding everything that's happening and making every move that we make in Alberta just a little bit more difficult and just a little bit trickier to manage for these companies. On the ground, it feels like so much of the frustration is being directed at the federal government and towards the pipeline. Right. You know, the Trans Mountain Pipeline that they have now bought for $4.5 billion.

There were protests this weekend, you know, pro-pipeline protests directed at Justin Trudeau in Calgary and in Grand Prairie. Build our future! Come on, louder, louder, louder! The oil field has dished out a lot of people, a lot of money to people across Canada, but nobody's helping us back. And so it seems like this isn't scoring him any political points. No. And there is a deep and profound disappointment with Justin Trudeau and with the Liberals. And the electoral promise that was made was that we're going to introduce a carbon tax. That's going to buy us license to build pipelines. We're going to get this done.

We can sort of thread this needle. I've been making a case for a long time that one of the most fundamental responsibilities of any Canadian prime minister is to get our resources to market. But the way to do that in the 21st century is to make sure that you're both building a strong economy and protecting the environment at the same time. And as we now know, needle didn't get threaded. None of those pipelines got built. They had to buy Trans Mountain. And now they own an operating pipeline, but they still got to figure out how to build the extension of it, the expansion of it. And there's not a lot of faith on the ground that that's going to get done. And I think a lot of people there will say he never wanted to do it in the first place.

And I think a lot of people in Alberta would say, this guy is just selling us out and hanging us out to dry. That isn't backed up by the facts. The problem is, is how do you close that gap? And as I say, we're talking about 120,000, 126,000 jobs have been lost. This has immediate and very real consequences. And when you say, hey, we have a plan, but it's going to take us a few years to get there. It just doesn't mean anything to people.

You know, another question I have is that if you add up all the government subsidies to this business, so we have a $4.5 billion pipeline, billion in new support for an industry that was already receiving more than $3.3 billion a year in government subsidies. Adds up pretty fast. Yeah. Right. And so, interestingly, when you look at Jonathan Gatehouse, who works over at The National Crunch, some of those numbers today, and said that when you look at how Canada compares to the rest of the world in terms of subsidizing the oil and gas industry, we used to be near the bottom. And with this and with the $4.5 billion on Trans Mountain, that propels us

back up only to the middle of the pack, but to the middle of the pack. And you think about some of the big oil producing nations out there, Russia, for example, heavy, heavy subsidies. So it's not even a level playing field in terms of how we compare ourselves against other countries and how much they pay to subsidize the industry there. And why? Why would we want to pay to subsidize the industry? And I think this maybe gets to how important this industry is for not just Alberta, but for the whole country. It's funny.

We saw in 2014 when the global price of oil fell, everybody, all the glass tower economists said, hey, listen, this is a drag for Alberta. Don't get me wrong. But from that big macroeconomic perspective, the, this is a drag for Alberta. Don't get me wrong. But from that big macroeconomic perspective, the Canadian economy is going to flip around. And as the dollar recovers, the dollar drops off, we'll see more manufacturing kick in. And there's just sort of natural transitions in economy and everything's going to work out just fine. This should be a couple of quarters of bad news. And then macro, we should turn this around.

We all now know that didn't happen. It took years for the Canadian economy to recover because the oil industry in this country has far more profound. It has a way bigger reach than I think anybody really understood even that short time ago. Canada's economy suffered because the oil patch suffered. And the argument now here is if Alberta's energy industry is in trouble, the rest of the Canadian economy is in trouble. That it's like 6.8% of Canada's GDP. This, what we're dealing with- That's a massive amount for one industry. And you have to think, yeah, we're talking billions and billions and billions of dollars.

This, you know, the car industry, for example, the auto manufacturing industry makes up like 1.8%. So just to give you some perspective on how big of an industry this, how important it is, and that it's not just people working at these oil operations and maybe the CEO in a tower in Calgary, it is shipping, it is trades, it is construction, it is traders. It reaches so far and so wide, and it really does impact us all. Peter, I think that's a good place to leave it. Thank you so much for walking us through Canada's oil industry today. I really appreciate it. Cheers. That's it for today.

Thanks for listening to FrontBurner. I'm Jamie Poisson. She names it Gay Girl in Damascus. Am I crazy? Maybe. As her profile grows, so does the danger. The object of the email was, please read this while sitting down. It's like a genie came out of the bottle and you can't put it back. Gay Girl Gone. Available now.