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Energy Visions
Economic situation
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How will the Canadian economy fare in
a lower oil price environment?
The Bank of Canada warns that low oil prices are expected to have an
‘unambiguously negative effect’ on Canada as a whole despite some
positive economic boosts for consumers. The plunge in prices has triggered
an economic slowdown in Western Canada which has been pivotal for
economic growth in the country. Alberta’s oil sands in particular represent
Canada’s largest export industry as well as billions in capital investment
annually. Outside of energy, strong non-commodity exports and improving
business confidence offer a modest bright spot for various sectors, but even
these gains can be called into question by the uncertainty surrounding an
oil price recovery, particularly if prices remain weak into 2016.
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Economic situation | From have to have not
Columbia, we are still waiting for the first LNG
project to receive approval. We have a number of
proposed pipelines that would move oil to the West
Coast, but no overarching statement of national
purpose.”
What is the energy sector’s role in the
Canadian economy?
Although it is easy to see how low oil prices can
affect the average consumer’s daily life, do most
Canadians understand the role that the energy
sector plays in Canada’s economic outlook?
Darren Andruko, Deputy CFO and Treasurer at
Husky Energy, believes that, “Many Canadians
do understand the value of the resource sector,
they’re not just watching the price at the pump.
I believe that Canadians are relatively well
informed.”
Support for this comes from the large fiscal
role the energy sector plays in the Canadian
economy. The Canadian Association of
Petroleum Producers (CAPP) found that as a
whole, the oil and natural gas industry is the
single largest private sector investor in Canada,
and invested CA$73 billion in capital projects in
2014 as well as contributed an estimated CA$18
billion in government revenues through royalty
payments, income taxes, and land payments.
Kevin Lynch goes on to explain that in order to
foster a competitive environment for Canadian
producers, “Governments have to set fiscal
and royalty regimes that balance international
competitiveness and a reasonable return to the
taxpayers of the province where the resources are
extracted.”
The federal government did act to take
advantage of tax policy to support investment in
the Canadian gas industry through the recently
announced accelerated capital costs allowance
(CCA) for the BC LNG industry. Kevin Lynch’s
article, Rewrite Canada’s Energy Sector Script
notes that, “LNG exports to China, South Korea,
India, Taiwan and Japan represent an enormous
opportunity for Canada,but the window of
opportunity will not remain open indefinitely.”
Finally in Kevin Lynch’s article Becoming an
Energy Superpower, he argues that in order
to secure a prosperous energy future it “will
take leadership from both governments and the
business community. As the debate over free trade
demonstrated, Canadians are willing to reject the
status quo and make transformative changes, but
only if they are engaged in a meaningful public
discussion—one that fosters an understanding of
the potential risks and benefits of any proposed
policy change.”
Despite the significant contribution and
importance of the energy sector, Kevin Lynch,
Vice Chairman of BMO Financial Group, agrees
that there needs to be a better national dialogue
and shared vision about Canada’s “energy script”
but, “it is difficult to envisage building such a
shared vision without either active federal and
provincial government leadership or vibrant and
informed public discussion.”
What are the effects of low oil on the
dollar and GDP?
The outlook for Canada’s competitive position
in global energy markets is directly tied to this
domestic “Canadian energy narrative” according
to Lynch, and as such it is waning especially
in regards to the LNG market. “In British
Oil prices and the Canadian dollar have
historically had a strong relationship and tend
to move in tandem. In the current environment,
with lower oil prices contributing to a weakened
economy, the Canadian dollar is facing double
In the words of Stephen Poloz, Governor of
Canada’s central bank, low oil prices are already
having an “atrocious” effect on the Canadian
economy and in April the central bank cut its
2015 outlook growth rate to 1.9% from the
2.1% forecasted in January, based on the fact
that there was virtually no growth in Q1 2015.
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Energy Visions
the pressure from slower growth and a more
accommodating central bank. Both of these
factors contribute to a weaker loonie versus
the US dollar. The lower dollar in turn helps
stimulate growth in non-energy exports and
keeps interest rates lower than what they
would otherwise be. This provides a cushion for
commodity exporters, whose goods are priced
in US dollars. Manufacturers fare better with a
lower Canadian dollar, but currency volatility
will deter some direct foreign investment.
Economists have pointed out that the
manufacturing sectors in Quebec and
Ontario, the two largest provinces, are
expected to benefit through increased export
competitiveness from the weaker loonie
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accompanied by strong US economic growth.
However, others believe that the manufacturing
sector is not big enough to drive overall
economic growth in Canada, especially in light
of the fact that the sector has shrunk in the last
15 years.
Cenovus President & CEO Brian Ferguson
agrees as he points out that “Canada relying on
a lower Canadian dollar is effectively a subsidy
for our manufacturing sector. We have got to be
competitive on a productivity base, and can’t rely
on subsidies because of a weak dollar. The thing
that people haven’t fully appreciated is the cost
of a weak dollar in terms of our imports and how
that pushes up a lot of our costs.”
Economic situation | From have to have not
He goes on to say, “If you want to
have a strong economy it can’t be
because of a weak dollar. It’s got to be
because of structural advantage around
productivity. That is a reality that has
to get managed.”
of Canadian crude into Central and
Eastern Canada, and you’ve also got an
export market and you’re talking about
a CA$12 billion capital project inside
our own country. How can that not be
anything but good for the economy?”
Despite the evident challenges, for
some there may be a silver-lining in
the current situation. Brian Ferguson
explains that “I am of the view that
while there may be a lot of ‘hurrah’
around cheaper transportation fuels,
cheaper heating fuels, liquid feedstock
fuels, that are helpful in the short run,
Canada has to be competitive and
operate in a global environment and we
do have a golden opportunity here. You
can always take the approach that the
glass is half full or half empty. I think
it’s half full.”
Ken Lueers, President at
ConocoPhillips Canada, builds on
this point saying that the interprovincials “ripples here, as much as
Eastern Canada may think that it is a
non-event, because of cheaper fuel, will
actually have a greater impact than
they realize because of the number
of vendors that we go and access in
Ontario and all across Canada. It is
not a small number. And then all the
services that go along with that. It
will take a little while for that to get
realized.”
How will low prices alter the
regional inputs into the energy
sector?
The labour variable: does
Canada have a sustainable
supply of labour?
While evidently the resource-rich
provinces are the main contributors
to Canada’s energy sector, other
provinces provide a fair share in
services and labour, which points to a
much wider national effect of low oil
prices on Canada.
According to CAPP, the energy
industry accounts for an estimated
550,000 direct and indirect Canadian
jobs, however the risk remains that
there may not be enough skilled
labour to satisfy the needs of future
energy projects.
The largest impact will undoubtedly
be felt by oil sands producers. Brian
Ferguson from Cenovus says that “the
epicenter of the impact is going to be in
Western Canada, not just in Alberta,
it’s BC as well. Natural gas is down
40% year over year.”
For example, Kevin Lynch explains
that there are currently 19 proposed
LNG projects in BC. “If three or four of
them come to fruition, it is questionable
as to whether Canada will have enough
skilled labour to fill all the positions.”
But the full impact is not unique to
Western Canada. Brian Ferguson goes
on to give an example illustrating
the interlacing nature of the energy
industry across the provinces,
“TransCanada’s Energy East is an
amazing example of a project that, all
along the economic chain, can only
be good for our country, where we
displace several hundred thousand
barrels of oil a day imported, you move
several hundred thousand barrels
“Ultimately we’ll come out well, but I
don’t think it’s going to be easy. And
we have regulatory burdens, more
environmental burdens, in some
ways that’s a good thing, a lot more
oversight, we have to keep up to high
standards.”
Steve Laut
President,
Canadian Natural Resources Limited
and big growth in the activity levels
and so what you get is escalating costs,
escalating labour costs and logistics
costs.”
Brian Ferguson at Cenovus suggests
that despite it being difficult to
address broader changes to the
industry as a whole in Canada, “We
have also got to have this change in
our long-term mindset and approach
around cost of labour, business
processes and technology.” ¢
Rich Kruger, CEO at Imperial Oil,
laments about the situation, “I’ve been
in Canada a couple of years now and
about the only thing I’ve found wrong
with Canada is that there are not
enough Canadians! So that means from
a labour front, costs go up, although
the current business environment is
impacting the labour market.”
He continues to point out the
difficulties of a labour shortage in
regions such as Western Canada that
have “relatively smaller populations
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