Ottawa’s response to the dire situation in Canada’s energy patch is being likened to “a drop in the ocean” and a bad wedding gift from an out-of-touch older relative, as a fresh batch of negative headlines cast gloom over the troubled sector.
Over the weekend, Alberta Premier Jason Kenney said the price of benchmark heavy crude from Canada’s energy patch turned negative, raising the grim prospect of storage costs eclipsing the value of Western Canadian Select (WCS) oil.
Western Canadian Select oil is now trading at negative prices.👇— Jason Kenney (@jkenney) April 20, 2020
Killing & delaying pipelines landlocked us.#Covid19 collapsed demand.
The Russian-Saudi price war surged supply, filling up inventories.
The future of hundreds of thousands of Canadian jobs is at stake. pic.twitter.com/n2pGHsh30E
Some analysts have questioned the now widely-shared WCS quote, suggesting the reading may be a function of technical factors, such as the monthly contract rolling over.
Analysts have, however, said it's a plausible scenario given the current mismatch between supply and demand brought on by COVID-19 and persisting Saudi-Russian tensions.
WCS traded in the US$7-range on Monday, a far cry from the more than US$50 a barrel it fetched in early April of last year. The price of North American benchmark West Texas Intermediate (CL=F) turned negative for the first time in history on Monday.
Investors also started the week with news that two major Canadian producers, Husky Energy (HSE.TO) and Crescent Point Energy (CPG.TO)(CPG), were slashing their spending plans for a second time and slowing production to cope with the tough environment for oil.
This latest helping of bad news comes on the heels of Ottawa’s $2.45 billion plan to see oil and gas companies through the one-two punch of the COVID-19 pandemic and foreign oversupply concerns. The plan unveiled on Friday is a three-pronged approach involving the cleanup of orphaned wells, emissions reduction investment, and additional credit.
However, Laurentian Bank analyst Todd Kepler expects the new supports will do little to support an industry ravaged by the oil price crash.
“Most of us have received non-ideal wedding gifts from older relatives. They mean well, and we don’t intend to look the gift horse in the mouth. However, there was not a lot of substance to this first stab at assistance to the oil and gas sector by the Liberals,” he wrote in a research note on Monday.
Kepler questions Ottawa’s motivation for channeling funds specifically to orphaned wells, suggesting it’s not a top priority given Alberta’s plan to clean up its orphaned wells and facilities in five years time.
“With current WTI [strip prices] below US$40 per barrel for the next few years, perhaps the Liberals have determined that there’s no way they are going to keep the lights on for most of these producers. So they might as well prepare for the deluge of orphan wells coming,” he wrote on Monday.
Stifel FirstEnergy analysts called the federal government’s response “only a drop in the ocean.” They predict it will take a number of years for well-cleanup capital to be deployed.
“We do not believe the package put forth by the Government of Canada will have a material positive impact on our energy services coverage universe, nor will it stem the significant job losses happening in the Canadian energy industry,” they wrote on Monday.
Note: Yahoo Finance Canada could not verify Premier Kenney’s claim that WCS prices dipped into negative territory.
Jeff Lagerquist is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jefflagerquist.