Energy Sector Cuts Blow Oil-Sands-Sized Hole in Alberta Economy

(Bloomberg) -- For Alberta’s economy this year, it’s almost as if the oil sands have gone missing.

Canadian energy companies ranging from oil and gas producers to pipeline operators and service companies have announced plans to cut as much as C$11.4 billion ($8.1 billion) in capital spending, with giants Suncor Energy Inc. and Canadian Natural Resources Ltd. each disclosing their second rounds of reductions this week.

Those reductions would amount to more than the entire C$10.7 billion invested in oil-sands production last year. An industry group had forecast a similar level of spending in 2020.

In other words, spending cuts across the Canadian energy sector have been so vast, they effectively cancel out all the new capital that oil-sands growth was expected to bring into Alberta this year -- before the crude price crash forced companies to rewrite their plans.

The effect of those spending reductions showed up in a dismal employment report Friday. The province lost 243,800 jobs in April and the unemployment rate spiked to 13.4%, the highest of Canada’s four western provinces, Statistics Canada said.

While the oil sands will still employ tens of thousands of people and produce millions of barrels of oil a day, providing billions of dollars in tax revenue, it’s their spending that, to a large extent, had made Alberta’s economy tick for years. Plus, that tax income will be significantly less than the province had expected when benchmark oil traded above $60 a barrel in New York early this year, with prices at $25 now.

Thousands of mechanics, truck drivers, welders and backhoe operators will be out of work, and scores of white-collar experts and investors won’t be flying in like they used to, with a devastating domino effect on sectors like real estate and retail. All that on top of the economic tsunami caused by the global virus outbreak.

“Every company has reduced its capital spending, so I view it as bad for Canada in the sense that it has jobs attached to it,” Canadian Natural President Tim McKay said in an interview. “Spending drives the economy, and if people have jobs, then they spend their money on goods and services.”

It’s possible that the actual amount of cuts in 2020 could be less drastic, but they will have a huge economic impact either way. At the low end of companies’ announcements so far, about C$8.5 billion in capital spending would be reduced.

In any case, the cuts dash hopes for a long-awaited revival of spending in the sector. The Canadian Association of Petroleum Producers had estimated overall oil and gas capital spending this year would rise 5.4% to C$37 billion. Oil-sands spending had been expected to climb 8.4%, the first gain in five years.

©2020 Bloomberg L.P.