CALGARY — Fears of persistently lower demand for oil are hitting home for industry workers as the world economy slowly strengthens following the deepest disruptions of the COVID-19 crisis.
Oil and gas producer Ovintiv Inc. is the latest to reduce staff, confirming it handed layoff notices to 25 per cent or about 650 of its 2,600 staff in Canada and the United States starting on Monday.
“We feel like the industry and Ovintiv is transitioning to lower production growth levels. We just feel that’s the direction we’re headed,” said director of communications Cindy Hassler in an interview on Thursday.
“The new model we feel going forward will combine free cash generation, stronger balance sheet and modest growth. So more at maintenance activity levels.”
The company, which moved its headquarters from Calgary to Denver last year and changed its name from Encana Corp., has also dramatically reduced activity in the field to address fossil fuel demand destruction and the oil price collapse caused by the pandemic, she said.
In May, the PetroLMI Division of Energy Safety Canada reported more than 7,700 oil and gas sector jobs were lost in April in Canada, with 6,500 of the lost jobs from the oilfield services sector.
Moody’s Investors Service, meanwhile, warned in a report Thursday that recessionary forces and weaker long-term growth expectations will reduce corporate and household demand for oil at the same time that consumers embrace increasing use of biofuels, electric vehicles and improved engine efficiency.
“Oil demand may take a long time to recover to 2019 levels due to the combination of weaker economic growth, decarbonization trends and behavioural shifts, increasing the possibility that demand peaked in that year,” said James Leaton, vice-president and senior credit officer at Moody’s, in a news release.
The credit rating agency considered two scenarios where oil demand is either three or five per cent lower than 2019 levels going into 2021.
In the first, demand doesn’t return to 2019 levels until at least 2025, and the full recovery takes even longer in the second.
Any forecast that includes a return to 2019 levels, a record oil production year after a decade of growth, is a good one for the industry, said Tim McMillan, CEO of the Canadian Association of Petroleum Producers.
“I think everyone agrees that this pandemic is going to change the way people travel. It’s going to change the way they live their lives and some of that will demand more energy and some of it will demand less,” he said in an interview.
“Even if oil was at 2015 levels, the amount of investment globally (and) the opportunity that Canada has in the future is immense.”
The unprecedented velocity of the oil market crash in March makes forecasting a recovery unreliable at best, especially if there’s a second wave of COVID-19, said Kevin Birn, a Calgary-based oil market analyst at IHS Markit.
But he said he does expect a recovery, pointing out that even at the height of the lockdowns and transportation bans, the world was still consuming over two-thirds of the 100 million barrels per day it needed before the outbreak.
“Both 2019 and 2020 may be poor predictors of where we end up in 2021 and even 2022.” he said.
Prices will eventually recover even if demand falls, he added, because higher prices are needed to pay for exploration to replace declining oil supplies as wells are depleted.
Credit rating agency DBRS Morningstar changed the status of Calgary-based energy giants Suncor Energy Inc., Imperial Oil Ltd. and Husky Energy Inc. to “under review-negative” in March because of the sudden drop in oil prices and related uncertainty.
Earlier this week, it confirmed Suncor’s credit rating but downgraded Imperial and Husky, while leaving them at investment grade.
The three companies’ refining and retail operations have traditionally supported their oil producing divisions when commodity prices fall, but that hasn’t happened this time as the pandemic also reduced demand for refined fuels, said DBRS senior vice-president Victor Vallance on Thursday.
“We think by 2022 there will be balance in the market, not only supply-demand, but this large overhang of inventory that was built up with the collapse in demand and oversupply, that will be drained by that time,” he said.
The forecast could change if there’s a second wave of the coronavirus and could also be influenced if consumers turn to alternative forms of energy, he conceded.
This report by The Canadian Press was first published June 18, 2020.
Companies in this story: (TSX:SU, TSX:IMO, TSX:HSE)
Dan Healing, The Canadian Press