Oil-Sands Exodus Seen Curbing Canada Economic Growth After 2020

  • ATB forecasts industry expansion slowing to last-decade levels
  • Projects not yet sanctioned need $60-$80 WTI: National Bank

A global crude price slump that’s crimping Canada’s economy is poised to continue having a damping effect for years to come as more oil-sands projects are shelved.

Royal Dutch Shell Plc’s decision to put on ice its Carmon Creek drilling project, announced Tuesday, lengthens the list of oil-sands developments that companies have scrapped or deferred in the market downturn to 18, according to ARC Financial Corp. The slowdown is part of a worldwide reduction in spending by energy producers trying to withstand a price rout that has dragged on for 16 months.

The pullback in northern Alberta ends a period of rampant activity in the oil sands that started around 2010 and brings the sector’s expansion back to the more moderate levels of a decade ago, according to ATB Financial. Given that much of the construction for new projects was scheduled for the coming years, the decreased work is expected to crimp Canada’s gross domestic product growth past 2020.

“A lot of that slowdown in the growth profile of the oil sands is not happening until later, the end of this decade and beyond,” Mike Burt, director of industrial economic trends at the Conference Board of Canada in Ottawa, said in a phone interview. “Going forward, the industry’s definitely not going to be the same growth driver of the Canadian economy as it has in recent years.”

Sluggish Economy

Already, oil’s crash from its peak in June 2014 has weighed on Canada’s economic growth as companies reduce drilling. The downturn triggered the nation’s recession in the first half of the year and ended energy’s eight-year run as Canada’s biggest export, with autos overtaking petroleum products in July. The Canadian dollar, a so-called petro currency, has also weakened relative to the U.S. greenback.

Job cuts have amounted to more than 36,000 in the oil and gas sector alone, according to an estimate this month by the Canadian Association of Petroleum Producers. About C$20 billion ($15 billion) less investment in energy this year than in 2014 has probably meant 150,000 job losses in other industries including construction and manufacturing, according to the Conference Board of Canada. Shell had predicted Carmon Creek would require 1,000 workers at peak construction.

Oil-sands projects that are already under construction will probably continue, such as Suncor Energy Inc.’s Fort Hills mine and Cenovus Energy Inc.’s expansions at its Foster Creek and Christina Lake drilling sites, according to Kyle Preston, an analyst at National Bank Financial in Calgary. Developments that hadn’t yet been started will be put off, he said.

Back Burner

“The general commentary from companies has been that any projects that have not yet been sanctioned have clearly been put on the back burner in this environment,” Preston said. Oil-sands companies need to see West Texas Intermediate crude prices rising to between $60 and $80 a barrel before they’ll move ahead with new ventures, he said.

The U.S. benchmark is sitting just above $45 a barrel, down 57 percent from its high last year. Futures contract prices aren’t currently trading higher than $60 until 2021.

Lost Years

“Even if prices recover much more than people expect, we’re going to lose a few years of investment,” Burt said.

The Conference Board of Canada lowered its forecast for Canadian oil production in 2030 by 1 million barrels a day, to about 5.5 million, because of the reduced spending tied to the oil crash. Bitumen production in the oil sands grew by 46 percent from 2010 to 2014, compared with a more modest growth rate of about 18 percent between 2004 and 2008, according to data from the Canadian Association of Petroleum Producers.

“It’s back to the future -- we’ve returned to an environment like the mid-2000s,” said Todd Hirsch, chief economist at ATB. The upside is that the reduced activity will allow energy companies to rein in cost inflation and emerge from the downturn more profitable, he said. “It is a correcting of the industry that had become overheated.”

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