Hunched twice, Canadian Energy Outlook confronts grim future

May 12, 2020

By: Muhammad Fahad Faizan in collaboration with The CommUnity Post


“Just because we're in a health crisis doesn't mean we can neglect the environmental crisis”, said Justin Trudeau, Prime Minister of Canada, during his daily-COVID briefing on the 17th April 2020. With COVID-19 pandemic virtually halting the Canadian economy, the after-effects are being felt in every segment, from real estate and small businesses to consumer spending and large-scale manufacturing. However, coupled with the ongoing fragility in energy markets around the globe, the Canadian energy sector has taken the biggest toll, exposing its over-reliance and dependence on fossil fuels.

The first case of COVID-19 in Canada was reported in late January 2020, whereas the World Health Organisation declared the deadly virus a global pandemic on the 11th of March, triggering the Government of Canada to take drastic measures including border restrictions, school closures, and business shutdowns. At the time of writing, COVID-19 cases in Canada stand at 59,474 with a death toll of 3,682. In order to enact measures to contain the spread of COVID-19, many provincial governments in Canada have declared a state of emergency, resulting in shutdowns and sudden interruptions of most business operations. The consequences of this have been large-scale unemployment and a reduction of the active labour force, with a staggering 1 million jobs lost in March 2020, and the total number of Canadians affected by job loss or reduced work hours reaching 3,100,000, which constitute 9% of the working population (Figure 1). The impacted sectors span from food services, entertainment, transportation, manufacturing, to retail trade. Similarly, social distancing and stay-at-home guidelines have become an integral part of daily Canadian life, resulting in a dramatic drop in economic activity.  

Figure 1. Employment rate (%) in Canada. Source: Statistics Canada

With the shrinking economy, the Government of Canada has injected several stimulus packages. These have been targeted at different sectors, which resulted in varying responses across the Canadian investment (Figure 2) and consumer markets. In a bid to prevent further economic downturn, the Federal Government continued a spending spree, whereas halted consumer expenditure has reduced spending on traveling, machinery, equipment, imports, and exports. It is of no surprise that with such low economic activity inside and outside of Canada, the forecasts for the Canadian economy point to a GDP contraction of 4% this year.  

Figure 2. Toronto Stock Exchange Index. Source: YahooFinance, Cbc news

However, one major segment of the country’s economy facing “double trouble” is the Canadian energy sector. With only essential-designated work (including health, food supply chains, IT services, etc.) allowed to operate, the local energy demand has been considerably reduced. In addition, with COVID-19 containment lockdowns and air travel restrictions in place across the globe, the overall energy demand has tumbled (30% fall in global oil demand), denting hopes for recovery of the Canadian oil sector. With the coronavirus pandemic hampering energy demand, a price war between Russia and Saudi Arabia to capture market share, and the extreme volatility in energy markets, it has all just added insult to injury. 

Even though the Organization of the Petroleum Exporting Countries (OPEC) and Russia reached a historic production cut deal (to keep output at around 10 million barrels/day (BPD)), the supply glut created due to demand shock, continues to drag commodity prices down. The benchmark price in Canada, Western Canadian Select (WCS), a combination of heavy oil mixed with blends of bitumen and diluents, dropped to levels below $5 a barrel from a previous range of $30-$40/barrel, striking a massive blow to a world-class industry that boomed during times of triple-digit prices. Another important subfactor straining the price for Canadian oil giants is the low availability of storage space in Cushing, Oklahoma in the US, the main storage hub in North America. The Cushing storage tanks are filling up quickly due to coronavirus-fueled cratered oil demand, creating a massive oversupply. Canadian producers, due to lack of storage and pipeline infrastructure, face tough choices regarding supply and spending cuts, and postponement of future projects (Figure 3). The latest projections from the industry suggest a Canadian supply cut ranging between 900,000 BPD to output reduction of as much as 1.7 million BPD. With an imminent reduction in output potentially shutting down facilities, calls for an energy bailout to keep the industry afloat is gaining momentum. 

However, PM Justin Trudeau, who championed climate change and stringent environmental protection, has so far offered only an initial package of $1.7 billion for Canadian oil and gas groups to clean up orphan wells. In addition, a $750 million commitment has been made to help companies reduce methane emissions and incite technological innovation. Even though the current energy industry state requires stimulus to the tune of $20-$30 billion, Trudeau has persisted on his climate agenda, which was central to his government’s agenda before the coronavirus pandemic. 

Figure 3. Steps taken by various energy groups across Canada in response
to Covid19 and oil price shock. Source: Motley Fool, Financial times,
Global News

 

The decline of the oil and gas industry, which has been the backbone of the Canadian economy for several decades, presents welcome news for climate change advocates, but at a heavy cost for the fossil fuel industry.  This provides a unique opportunity for federal and provincial Canadian governments to recognize and act on structural changes happening in global energy markets, which include weakening oil forecasts, increased competition between US, Saudi Arabia, Russia and other global powers, a lack of pipeline capacity, and an increasing usage of labor-saving technology. To diversify energy-dependent provincial economies, investments in wind, hydropower and electric vehicles should be made.  An aggressive shift towards adopting renewable and efficient energy measures, such as labor-intensive building retrofits, can ease the employment and economic losses caused by the oil downturn. In addition, investments in demand response programs and integrating energy storage technologies at utility-scale, can deliver government tax revenue and create local jobs. Provincial governments can diversify their economic engines by investing in manufacturing and high-tech sectors. Lastly, in upstream oil and gas sites, carbon capture and storage investments can be made by the federal government to trigger job creation. 

 

Nevertheless, renewable energy itself faces significant challenges in the existing circumstances. Part shortages due to closure of manufacturing plants around the globe, decreasing or soft electricity demand, over-reliance on fossil-fuels, and cheap oil prices could hinder a swift energy transition. For Canada and PM Justin Trudeau, coronavirus and oil shock have unsealed the cracks within the Canadian economy, indicating the ongoing economic and upcoming environmental challenges. Lessons should be learned, and the course must be changed before the opportunity to create a resilient, cleaner, and diversified Canadian economy is lost. 


Published on: 12.5.2020
 


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