It is a massive contradiction between what works and what we’re told we need. No business has done more to drive Calgary’s economy than oil and gas. But many, including successive Alberta governments, claim things will improve when we do something else.
The good news is the old standby is back in the game after two years in the wilderness. The NDP government’s $10.8-billion budget deficit “shock absorber” has failed to protect Calgary from Canada’s highest major urban unemployment rate. Fortunately, oil has returned to pay the bills.
Here’s how a real economic recovery works. Forget platitudes. Heed the numbers. Calgarians should demand a comprehensive explanation of how all the non-oil, non-coal bright ideas will replace or even augment the proven wealth creation of hydrocarbons.
The ARC Energy Research Institute is a unit of iconic private equity manager ARC Financial Corp. For years ARC has prepared a weekly macroeconomic model of Canada’s upstream oil and gas industry. On a trailing and forward-looking basis it tracks and/or estimates commodity prices, production volumes, total revenue, after-tax cash flow for reinvestment, and capital spending on oilsands and conventional reserve growth/replacement.
Everyone remembers 2014 as a great year. No wonder. Revenue totalled a record $149.5 billion, cash flow hit $71.8 billion and reinvestment on oilsands and conventional production totalled $80.7 billion. External equity and debt capital inflows covered the difference between cash flow and spending. Oil was at US$100 a barrel. The economy was rocking. What a ride!
Two years later in 2016 the enormity of the devastation was clear. While they are still only estimates, ARC figures revenue fell to $78.4 billion, 48 per cent less than 2014. This was the lowest number in 15 years. After-tax cash flow to invest was only $20.9 billion, merely 29 per cent of the 2014 figure and the lowest number in 15 years by one-third. Capital spending totalled $36.7 billion, the worst since 2009. With insufficient internal cash flow, oil companies had to bring in billions from other sources to fund oilsands projects already under construction.
Fortunately, 2017 is a whole new story. Thanks to higher oil and gas prices and production volumes, ARC estimates revenue will rise to $111.5 billion, a 42 per cent gain from last year. More importantly, after-tax cash flow to drill wells and hire people is estimated at $46.6 billion, 123 per cent higher than 2016. This additional $26.2 billion is a massive cash injection, 99 per cent of which will be run through the head offices in downtown Calgary. CAPEX on conventional resources will rise by 41 per cent.
That’s why more rigs are drilling. This is a needle-moving capital injection that will be felt across the entire economy. Although not all the money will be spent in Alberta, it will certainly be processed here. The cash flow boost is about 50 per cent of the entire budget of the province. It is not borrowed meaning no interest charges or repayment. If the NDP’s huge deficits are a shock absorber, then oil and gas is the car.
Oil prices are holding steady and may rise. The early stages of a stable, long-term, oil-powered recovery have begun. Proponents of alternative energy, new technologies and new jobs in new industries must explain where their incremental $26.2 billion in investable cash will come from. Because platitudes, promises and dreams don’t pay the bills.