No Celebration for High Oil Prices in Cowtown
Posted by mhudema on July 15, 2008
Here’s one stampede Calgary isn’t celebrating
CALGARY — The cowboy hats are back on the closet shelf; the cartoonish western window paintings that decorate most of the downtown office buildings here will soon be scrubbed away. The Calgary Stampede – a 10-day party during which “the productivity rate goes down and the birth rate goes up,” as one financial type puts it – is over. But in the oil patch, a sense of excitement remains.
Or does it? With oil above $140 (U.S.) a barrel and natural gas prices in the double digits, you might think you’d be able to literally smell the money in Canada’s energy capital. But the unmistakable scent of prosperity is tinged with – what is it? “Fear” is too strong a word. But “worry” isn’t far off.
“It’s not fun,” says Jim Davidson, chief executive officer of First Energy Capital.
One hundred and forty dollar oil isn’t fun? Why not? “Because you have the potential of making a very, very serious mistake in an environment like this. … We’re nervous here.”
Big acquisitions are tempting, but risky. When copper and nickel prices jumped a few years ago, some mining companies like Xstrata made big bets that they would stay high, and paid up for deals. It worked. But should oil companies follow? Royal Dutch Shell’s $5.2-billion play for Duvernay Oil – more than three times Duvernay’s value last December – highlights that assets are getting expensive, and fast.
More mundane business decisions are also tough. Take Mr. Davidson’s investment bank, which has about 85 employees and partners and probably needs more. “At the moment, all my staff are extremely tired,” he says (and not, sadly, because of late-night carousing or baby making). Even Stampede week brought little respite from the herd of investors coming through, nor from the companies looking to get money. On the day of our interview, Mr. Davidson noted, every meeting room was full. He wonders: Should First Energy hire more aggressively and expand?
Here’s the problem. If a herd mentality has gripped energy markets – if there’s panic buying among portfolio managers, if it seems like every economist is united in the view that oil can never, ever go down to even $80 a barrel again – well, that’s enough to worry anyone who remembers what the other side of the cycle looks like. Recession is usually followed by lower energy prices. The world’s economic pain comes to Calgary, eventually.
“We understand that we’re in a bubble here, in terms of what’s going on from a worldwide perspective,” says Mr. Davidson, who started in the energy business in 1981, just as it was crashing. “I don’t think the world economy can sustain $150, $170 oil. … This movement from $60 to $140 is too dramatic and too quick. Whenever you see this steep incline” – he stiffens his hand and holds it in front of him, nearly vertical – “it causes us huge concern.”
Here’s what else expensive oil does: It brings out the hostility in politicians.
Standing up to Big Oil is a no-lose proposition. In 2006, when the federal Tories came down hard on income trusts, they steadfastly refused to exempt the energy sector – even though an exemption might have been easy to justify – and forestalled EnCana’s conversion to trust status. The shrieks of outrage persist but the episode did only minor damage to the Harper government. In 2007, when Ed Stelmach, the Accidental Premier, needed to prove how tough he was, he cranked up energy royalties. The oil patch howled, but he won a huge majority in the March election.
Today, thanks to higher prices, the industry appears to have cried wolf on royalties. Predictions of disaster were incorrect; sales of prospective oil and gas land in Alberta are again soaring. “It looks like less of a problem at $130 oil and $12 gas than it did at much lower price levels,” says Mike Tims, chairman of Peters & Co. But the new concern is the race among politicos to out-green each other.
The federal Liberals’ carbon tax is met mostly with derision – “dismissed out of hand,” one city financier puts it – but the cost of a Tory carbon reduction plan is still a big unknown. The provincial government, having won the royalty lottery, has tried to help, announcing a $2-billion fund for projects to capture carbon emissions and store them underground. But even that drew complaints that it should be spending the money on, say, Calgary’s stuffed hospitals rather than starting a cleanup service for the oil sands.
Hence the lack of jubilation in downtown Calgary. This boom has been a long one, but what will follow it? Oil and gas prices can drop quickly, but higher royalties and higher carbon costs are likely to stick. Many in the oil patch would trade lower prices in return for having fewer TV cameras roaming around Fort McMurray, taking video of the grubby oil sands and making worse the industry’s image problem. “The presumption of the world is that we’re dirty industrialists who don’t give a shit about the environment,” bemoans Mr. Davidson. It’s not a bad burden to have, to be rich and mistrusted and nervous. But it’s a burden all the same.