Estevan’s business community was given a crash course in how to handle some of difficult challenges they face as a result of the suffering oil and gas industry, on April 6.
The Estevan Chamber of Commerce hosted The State of the Oil and Gas Industry luncheon at the Estevan Days Inn, which featured knowledge of representatives from the Business Development Bank of Canada (BDC).
Tom Corner, an economist with BDC discussed the various conditions that have led to the downturn in the price of oil, on a domestic and international level. He spoke about how an unprecedented over-supply of oil, starting in the North American market, specifically from the U.S., and eventually among member nations of the Organization of the Petroleum Exporting Countries (OPEC), lead to the crash in the price of oil.
“This is a year of rebalancing, especially in the U.S. We’re seeing (overall) declines in oil output, and in Canada we should be one of the few non-OPEC countries to see an overall supply growth,” said Corner, pointing out Canada’s lower oil output compared to other nations.
Corner said that many major economic institutions have predicted that U.S. light shale oil output will decline, and that a globally significant decline in overall oil production will take place in the U.S. over the next two years. He said such a statistic is important to Saskatchewan because of its proximity to major oilfields in the U.S. and the fact that Saskatchewan also produces light shale oil.
Corner said the rebalancing will entail a slow global growth of demand for oil, but almost exclusively in the countries with emerging markets, which are consuming an increasing amount of oil, such as China, Indonesia, and some Latin American countries.
A critical point in Corner’s speech was the economic theory that the days of US$100 per barrel oil have ended. He noted that the U.S. Energy Information Administration has predicted a long, slow-in-coming recovery for oil, with a “new normal” price per barrel, which will be significantly lower than the price before the crash. This new normal will entail prices estimated to rise and stay around US$45 or US$50 per barrel.
Corner said that Canada will not contribute as much to the rebalancing because of its comparatively smaller contribution of four million barrels per day of oil.
Corner said any price outlook is difficult to predict, because it’s affected by factors like OPEC output, sustainability of recent productivity gains and the global demand for growth – things that can vary and are, themselves, difficult to predict. He noted that the political stability of OPEC nations, capital spending, and rig productivity in those nations are factors that make OPEC’s influence difficult to determine at such a time.
Touching briefly on how to cope with the conditions of such a market, Corner advised to diversify business interests, citing multiple studies that showed businesses with higher levels of diversification fare far better than those without a strategy that favours diversification.
Lyndon Holm, vice-president of consulting for the Prairies and Western Canada with BDC, gave guests strategies on how to deal with economic conditions he described with a rafting metaphor, referring to them as “white water” conditions.
Holm said having a plan and a proactive response with a full awareness of the forces driving the situation are the best response the problems that the market is giving businesses in the downturn. He strongly advised against being a drifter, without a plan, hoping for a positive change.
Holm said Saskatchewan, in particular, has fared well, with a GDP that is projected to grow 1.5 per cent, because of its diversified economy, with the real estate, rental leasing, educational service, arts and entertainment, and accommodation and food sectors doing quite well.
Holm advised businesses to “stop the bleeding,” and get control of their finances by renegotiating any debts and making spending and cost cuts wherever applicable, particularly in unprofitable investments, to minimize losses. He said human resources strategies such as the retraining of employees or reorganization of businesses are also sound options.
Holm advocated that business people see the opportunity in the danger of a poor market for oil and gas, and use such an uncertain time as a chance to make use of great potential to change or grow. Buyouts, mergers, and acquisitions were among the strategies Holm said should be considered.
“When you’re dealing with white water you need to know your environment, read the signs, have the right reporting, deal with the pressing issues first and stop the bleeding,” said Holm, in closing. “Look at other opportunities to improve productivity, be strong, be agile and confident.
“You need to develop strategies in productivity, growth, organizational capabilities and hopefully that is going to help you weather the storm, and continue to contribute to the local economy.”
