Oilpatch stares at boots amid record prices
Deborah Yedlin, Calgary Herald
Published: Saturday, July 12, 2008
With oil and natural gas trading at more than double where they were during Stampede Week last year, you'd think there would be a feeling of ebullience around town for this year's festivities.
Wrong.
For some reason, there's an unmistakably muted feeling. Sure, there are always the Stampede curmudgeons who opt to leave town or refuse to don their jeans and cowboy boots, but this year it's different.
The corporate crowd seems pre-occupied. Those with a history longer than a decade in the oilpatch -- and who remember the last time everyone thought prices would stay up forever -- are looking at the current state of affairs and walking around with furrowed brows. No matter which Stampede function one attends, it doesn't take long for the conversation to turn to the sustainability of energy prices, the paradoxical softness in the stock market, what the impact of all the environmental chatter will be on the sector and, yes, the impact of higher costs in the agriculture sector.
One has to keep in mind that much has happened since last year's Stampede. Not only was the energy sector justifiably twisted over the changes stemming from the provincial royalty review last fall, the environmental missives south of the border haven't helped and, despite what many would think, oil prices at $140-ish per barrel are causing uncertainty.
Then there are the energy trusts with an eye cast toward 2011 -- preoccupied with issues of growth and the impending disappearance of that corporate structure.
Beyond energy, there is continued concern over the impact of a U.S. recession on the Canadian economy and the ongoing credit crisis south of the border.
Today more than ever, it is clear even this bubble called Alberta is part of the global economy and there is no hiding from the impact of what might happen elsewhere. In short, putting the finger on one specific issue contributing to the melancholia around town is not easy.
Are oil prices going to come down? If they do, what will be the precipitating event?
Companies in the midst of a sale process, or about to launch asset dispositions are wondering what price decks to use for valuation purposes.
Is it the 12-month forward strip, that is currently showing an average price of $143.24 US, or does it make more sense to use the price forecasts put forward by the reserve engineers and commercial banks that are always lower than what the market is suggesting?
On the issue of valuation, the cowpokes with institutional memory remember the days when stocks went "no bid;" in other words, investors were too paralyzed by uncertainty and fear to wade into the market.
In today's world, there are many in the patch who have never seen anything but a bull market and don't have a clue how to manage what might be ahead. The question is whether this has already started.
Since Stampede week began, the S&P/TSX energy index has dropped five per cent while the S&P/TSX Composite Index has lost a little more than three per cent; even the suggestion by the late John Templeton -- to say a prayer -- isn't going to help much in the current market.
This last week brought news illustrating yet again the challenges in the energy business. While lower share prices translate into a higher cost of capital, the issue of rising costs refuses to go away. TransCanada Corp. now expects the second phase of its Keystone pipeline into Texas will cost $7 billion.
Enbridge has moved back the timeline on its pipeline into Texas because of uncertainty relating to the level of oilsands production. The issue of uncertainty also extends to the provincial regulatory regime.
Once viewed as reliable and comprehensive, energy types say the system today -- everything from land use to water use -- is too fragmented, and there is no sense of how the pieces fit together.
This points to a lack of clarity, and therefore more uncertainty. But it's not just the state of affairs in the market that is causing consternation. It's the political situation too. The provincial Tories being handed an overwhelming majority last March -- even with the lowest voter turnout of any provincial election in the country's history -- has the business community feeling shut out. More troubling is that they have no confidence "Edmonton" has the necessary willpower to comprehensively address the challenges facing Alberta, not to mention set a bold course for the future. This, despite the government's $4-billion announcement last Tuesday allocating money to carbon capture sequestration and transportation infrastructure.
A high degree of frustration is also directed at the federal Conservatives. Natural Resource Minister Gary Lunn, who put in an appearance at FirstEnergy Capital's First Rowdy party Monday, said that everywhere he has been (Spain, Saudi Arabia and Japan) the message he is getting is for Canada to boost its oil production. Lunn was quite proud of this. What he fails to understand is the growth in production is going to come from the oilsands -- the same segment of the oilpatch that is being vilified at every turn.
Moreover, the federal government -- which he is part of -- is conspicuously absent in its support for the oilpatch on the issue of the environment.
Prime Minister Stephen Harper is selling Canada as an energy superpower, but is doing a poor job representing the interests of the Canadian oilpatch on the international stage.
So there it is.
High commodity prices are not enough to induce euphoria in the oilpatch. At least not today. The combination of the royalty review and the impact it will have on companies effective Jan. 1, 2009, the lack of regulatory certainty, the spectre of a U.S. recession (or prolonged period of stagflation), the dwindling suite of opportunities and the growing environmental sensitivities are all conspiring to wipe the smiles off those running a critical component of Canada's economy.
dyedlin@theherald.canwest.com
© The Calgary Herald 2008
http://www.canada.com/calgaryherald/news/calgarybusiness/story.html?id=f...
