Oil Update – Edmonton Commercial

It may not feel like spring quite yet, but the drilling industry is in the midst of the annual “spring break-up”.  Around this time each year, the earth thaws and the ground becomes soft, muddy and generally harder to work in.  It is a period of considerable slow down, as evidenced by recent statistics showing roughly 3/4 of the rigs in western Canada are currently inactive.   Spring break-up follows the busiest drilling period of the year.  Trinidad Drilling notes that from October to mid-March “the cold temperatures freeze the ground enough for drilling companies to move rigs without damaging municipal roads.”

While drilling companies are undoubtedly still busy during the break-up, it does allow time to forecast, plan and strategize.  it’s likely of little surprise to hear that this often translates into increased activity in the industrial real estate market.  Anecdotally, we have been experiencing a brisk uptick across the board, which we would attribute to Alberta coming out of a recession, oil prices hovering in the mid $60’s / barrel, and – presumably – this so called spring-break-up-effect.

It also helps the economy is looking better than the past couple of years.  For example, in 2015 (which saw oil prices flirt with $30 / barrel prices), there was industry commentary that expected spring-break up to extend into the fall.

Fast forward to 2018 and the outlook is far more optimistic.  The Petroleum Services Association of Canada (PSAC) is forecasting there will be 7,600 wells drilled in Canada this year, with roughly half of those wells (3,807) expected to be drilled in Alberta.  What’s interesting, it that this forecast is based on oil prices of $55 / barrel (USD:WTI).  With oil prices currently ~18% higher, it’s conceivable there will be an upward adjustment in those numbers.

The contentious Trans Mountain Pipeline also had a win this week, with a federal court rejecting an appeal by BC over the National Energy Board’s approval in February.  Alberta Premier Rachel Notley is steadfastly pushing for the project, and signs look positive for Kinder Morgan to proceed.

Alberta has an economic incentive in seeing the pipeline proceed.  After all, Finance Minister Joe Ceci announced that the province’s budget forecasts are based on it’s success.  We’re looking at a $96 billion debt by 2024, it’s a sobering thought to imagine what that number would be without the pipeline.

So with oil in the mid $60’s / barrel (perhaps on their way to $70?) and reasons to believe the pipeline will help get Alberta oil to tidewater, there is undoubtedly a sense of optimism in the air.

While we are glass-half-full Albertans, it’s important that the glass isn’t half full of Kool-aid.  We only need to look to Bob Ascah, Fellow with the Institute for Public Economics at the University of Alberta who posed the following:

The NDP plan to build $96 billion in debt by 2024 sounds like a lot, but is it? Should Albertans be worried?

It is true that Alberta’s debt is still relatively small compared to its economy. But the growth in debt — leading to interest costs climbing to an estimated $3.7 billion annually in the final year of the balanced budget — plan are alarming.

The economy is indeed better.  The market doesn’t lie.

But this isn’t 2013.  There’s still work to do.

 


 

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