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[CALGARY] After almost two years of sinking oil prices and at least 40,000 job cuts, Canada's petroleum industry still isn't finished tackling its bloated operations.
The next round of layoffs has already begun with Cenovus Energy Inc and Murphy Oil Corp announcing workforce reductions last week. Ongoing cuts by Suncor Energy Inc, Encana Corp and others will likely result in thousands more jobs lost by the end of the year as the Canadian industry shaves billions worth of spending in order to continue operating in one of the world's most expensive oil-producing regions.
"It will probably take another six months before some of the bloated staffing levels are tackled," said Todd Hirsch, chief economist at ATB Financial in Calgary. "Many of these companies are getting employment levels down to the bare bones and over the spring and summer there will be more layoffs." Crude that averaged about US$90 a barrel over five years before starting to collapse in June 2014 supercharged oil sands investment in northern Alberta, where the break-even costs from existing operations are the highest in the world, according to consultancy Rystad Energy. Some companies including Encana will have reduced their workforces to about half their peak levels when they're done.
The largest 27 Canadian producers are set to spend 32 per cent less on average this year, including reductions by Imperial Oil Ltd and Cenovus, according to company forecasts and analysts' estimates compiled by Bloomberg. It follows a similar reduction in spending in 2015.
Collapsing cash flow is the best barometer of the challenges companies face, said Jackie Forrest, vice president at ARC Financial Corp. This year, cash flow will likely fall to about C$17.5 billion (S$18.3 billion), or roughly half last year's level, and less than a fourth of the C$72 billion generated in 2014.
"We're going to see all kinds of innovation on cost cutting," she said. "Unfortunately headcount is one of the first approaches they take." Canada's petroleum industry probably employs about 200,000 people, according to industry estimates. Oil and natural gas account for more than a quarter of the Alberta economy and until 2014 crude was Canada's most valuable export.
Unemployment in Alberta at 7.9 per cent in February is now more than the national average for the first time since 1988, the year Calgary hosted the XV Winter Olympics. Back then, Canadian oil production was about 1.5 million barrels a day, compared with about 4.5 million now. Canada's unemployment rate for March will be disclosed April 8.
While job losses mount in the oil industry, the picture is less dramatic for the overall Canadian economy. Manufacturing helped Canada's gross domestic product rise 0.6 per cent in January from December, the strongest monthly gain in three years.
Still, it will take another two years for Canada to adjust to the oil shock, according to Lynn Patterson, deputy governor of the Bank of Canada. That will likely mean slower consumer spending and household spending.
"We're not at the bottom yet," said Michal Moore, a professor at the University of Calgary. "The people getting really slammed are the ancillary workers because the contracts are drying up. And soon we're going to have to confront a serious unemployment insurance situation." The larger companies probably have more room to cut, while the smaller producers and service providers have already slimmed down their workforces, said Jennifer Stevenson, energy portfolio manager at 1832 Asset Management LP in Calgary.
Suncor, which in February reduced its spending target for this year to a range of $6 billion to $6.5 billion, from $6.7 billion to $7.3 billion in November, is continuing to lower costs, said Sneh Seetal, a company spokeswoman.
"As we continue to look at how we can operate more efficiently, there will be changes that mean people will leave the organization," she said. "This is a stressful time for people and we are committed to being as open and transparent with employees as we can." Encana will cut 20 per cent of its workforce this year, bringing the total workforce reduction since the beginning of 2015 to 50 percent, Chief Executive Officer Doug Suttles said on a Feb 24 conference call. The company aims to save as much as $250 million this year.
Cenovus will cut 440 jobs this year, Brett Harris, a spokesman, said by e-mail. The cuts will leave the company with about 3,600 employees.
"These have been difficult, but necessary decisions given the current economic environment," Harris said.