Those of us who live in Alberta can sometimes be smug about the “Alberta Advantage”, which we like to attribute to our business acumen and hard work. While we indeed may have our fair share of those characteristics, watching the peaks and valleys of the industry sector does make me wonder how much of our perceived advantage is actually built on the back of high priced oil. With some customers asking for 20 per cent discounts, it looks like we will find out in 2016 and beyond.
A large portion of the Canadian oil patch was built on the back of $80 to $100 USD per barrel or more, as we saw when prices spiked above $120. Those prices were necessary to cover the ever escalating service costs and provide investment capital for the next round of development in the energy industry. The question is whether Alberta, in particular, can bring costs down fast enough to be competitive on a global basis? The shale plays in the United States have generally been more successful in bringing their costs down, to the point where at $60 USD per barrel they will be much more profitable than most investment in Western Canadian Sedimentary Basin or the oil sands. That means if the oversupply of oil does not resolve itself somehow in a major way, it will take several years to reduce or eliminate the glut of oil. In the short term, most operators will continue to produce oil but will have little left to invest in new projects. Fewer projects mean fewer jobs and lower payroll and corporate taxes, a vicious spiral that may see the NDP government take unexpected actions to raise additional revenue. Royalty uncertainty, higher corporate taxes, and an unknown effect from newly proposed environmental standards all combine to add to the uncertainty many businesses find themselves now.
The current cost structure must change as it is not sustainable. If not, the oil sands industry, in particular, will find itself out of business. The smaller oil sands developers with only one or two projects are the ones that are struggling the most without the access to additional capital available to the larger players. Southern Pacific Resource Corp. has already filed for creditor protection and Connacher Oil and Gas Ltd. has been forced to recapitalize.
It is time for all businesses to look at what makes them great and consider legitimate business opportunities available to them. It is no longer “business as usual” in the oil patch and there is little hope of a short or even medium term resolution. There will also be some unique opportunities available through acquisition and other means as we work our way through this.
By Malcolm Roach, President, Open Door Technology