Capital spending in Alberta's oilpatch expected to fall by 30% this year - Action News
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Capital spending in Alberta's oilpatch expected to fall by 30% this year

Capital spending on oil and gas extraction in Albertais expected to fall byroughly $7 billionfrom last year to $16.6 billion in 2020, according to ATB Financial.

Impact of spending decline felt across the provincial economy, ATB Financial economist says

Capital spending on oil and gas extraction in Albertais expected to fall byroughly $7 billionfrom last year to $16.6 billion in 2020, according to ATB Financial. (Jeff McIntosh/The Canadian Press)

Capital spending on oil and gas extraction in Albertais expected to fall byroughly $7 billionfrom last year to$16.6 billion in 2020 a plunge of about 30 per cent, according to ATB Financial.

In an analysis released Wednesday, the provincial Crown corporation said it would bethe lowest spending tally since at least 2006. It saidspending by the oil and gas extraction sector will be 58 per cent lower than the 10-year average.

"Oil and gas capital spending was originally expected to be roughly the same as last year which was already 39 per cent below the 10-year average but the estimate has been lowered in light of the oil price crash and the global pandemic,"said ATB's economics and research team.

Although the numbers weren't a surprise, the report said it was "definitely not good news," noting themoney spent on oil and gas extraction has accountedfor more than half of the total capital spending in the province over the last decade.

Oil rig floorhands work on an oil rig south of Fort McMurray, Alta., in this file photo. The drop in capital spending this year has impacted jobs in the sector. (Reuters)

Rob Roach, managing director of research atATBEconomics, said the drop in capital spending not only affects jobs in the oilpatchbut the impactof the plunge also ripples out across the province.

"There's less economic activity, less construction, less suppliers," Roach said in an interview.

"Overall, it lowers the amount of investment, the amount of ... other economic activity in the province. So, on both levels, it slows the economy down and reduces employment."

Oil and gas companies reined in production and spending this spring as the COVID-19 pandemic squeezed fuel demand and an international oil price war between Russia and Saudi Arabia helped sink crude prices.

At one point, the North American benchmark price for oil turned negative.

Sector in 'maintenance mode'

Those prices have since recovered to over $40 US a barrel, allowing some companies to ramp upproduction again,but uncertainty surrounding the pandemic still clouds the industry's outlook.

"Right now, the sector is basically in maintenance mode it's keeping what they're doing now running," Roach said.

"For that to grow, we do need the global economy and the national [economy] and, especially, the U.S. economy, to recover from the pandemic."

Kevin Birn,a crude oil market analyst at IHS Markit in Calgary, said the $7-billion decline in spending on oil and gas extraction is an "extraordinarily" large number. But he said it's even bigger when looking at spending reductions made toconventional, unconventional, midstream and petrochemical projects.

An IHS Markit report this spring pegged that number at close to $9billion.

Birnsaidproduction is coming back and he anticipatesit will continue recovering over fall and into early next year in Western Canada.

He sees oil prices eventually improving as well, but it will be a "tough slog" with morehead winds from the pandemic. As prices eventually creep up, so should spending, he said.

However, Birnsaidthe sector was facing challenges before the pandemic,including completing pipeline projectsandincreasing social pressure around energy transition.

ATBalso said Wednesday thattotal capital spending in Alberta is expected to be down by $11.4 billion, or nearly 20 per cent. Excludingoil and gas, spending is expected to be down by 12 per cent, or $4.3 billion.

Nationally, capital spending is expected to be nine per cent lower than in 2019.

ATB's analysis is based on Statistics Canada's report this week on spending intentions.