Global oil majors flooding market with crude earlier this year requires ‘special response’ from Ottawa, says Louis Vachon

Global oil majors flooding market with crude earlier this year requires ‘special response’ from Ottawa, says Louis Vachon

Saudi Arabia’s decision last month to slash oil prices was an “act of economic warfare” that will require a unique response, the chief executive of National Bank of Canada suggested on Friday.
“The governments have been very focused on the COVID-19 situation, rightfully so, but at some point over the next few weeks or next few months we will have to address the other problem related to the energy industry, which was that particular policy by that government,” said Louis Vachon, the CEO of Quebec-based National, Canada’s sixth-largest bank.
Although he did not name names in an interview with the Post, Vachon’s reference was to Saudi Arabia’s government.
Saudi Arabia slashed crude prices in early March after Russia spurned a deal with the kingdom and the Organization of the Petroleum Exporting Countries to which it belongs on reducing oil production in the face of the new coronavirus.
The price war sent costs per barrel plummeting before OPEC, Russia and other countries struck a deal two weeks ago to throttle output. Oil prices have not recovered, with the West Texas Intermediate benchmark on Monday slipping into negative-price territory for the first time ever.
Vachon said the energy industry requires additional attention because of the collapse in demand prompted by the coronavirus pandemic, but also because of the hit to the supply side of the business, “an act of economic warfare by a foreign government, which tried to … shrink” the North American energy industry.
“I think I’ve measured my words very carefully,” Vachon said in an interview after National Bank’s annual shareholder meeting on Friday. “But how would you describe the current situation, when predatory pricing is looking to put out of business a portion, or a significant portion, of the North American energy industry?”
The drop in oil prices has been a problem for the Canadian economy, but it is also an issue for Canada’s big banks, which, despite diversifying in recent years, are still key lenders and financiers for the domestic energy industry.
Vachon, however, said low oil and gas prices are also a negative for new renewable energy projects, such as wind and solar. Those projects can be affected by commodity costs, as lower natural gas prices, for example, could entice investment in electricity production from that source, rather than a wind or solar farm.
The situation requires a “special” response, Vachon said, including discussions with the United States and consideration of a more North American-centric industry.
Financially, there should be enough capital to protect a significant part of the industry and its production capacity, both in oil and gas and in renewables, he added.
Export Development Canada’s recent announcement of additional financial support to the oil and gas sector was helpful, but Vachon was unsure if it would be enough, and suggested more equity capital could be required. The federal government has also earmarked approximately $2.4-billion for the energy industry to clean up orphaned oil and gas wells and reduce emissions.
“I think we need to have a dialogue in this county on whether we want a foreign government dictating what our long-term energy policy will be,” Vachon said. “We need to sit down and think of a thoughtful and measured response to the situation, but there should be a response, both domestically and outside of Canada, to the situation.”
Email: gzochodne@nationalpost.com | Twitter: GeoffZochodne

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