Canada’s government has been perhaps surprisingly ready to help the country’s ailing oil industry. Interest-only loans, backstopping loans that troubled companies can’t pay have been among the steps taken so far. But they may not be enough. Canada’s oil industry has arguably suffered more than its peers across its southern border or even most producers around the world. Already cheap because of pipeline troubles, Canadian oil slumped to new lows amid the oil price war and the coronavirus pandemic earlier this year. While it has since improved in line with the international benchmarks, it hasn’t improved enough for the comfort of the local extractive industry. And it may drag banks down with it.
Bloomberg reported earlier this month that Canada’s largest banks reported an almost two-fold increase in impaired energy loans over their second quarter due to the oil price plunge and the pandemic. The increase amounted to more than US$1.47 billion (C$2 billion). What’s more, according to the report the country’s top six lenders had boosted their new lending to energy companies jumped by as much as 23 percent during that same quarter.
“Canadian banks’ energy exposure risks are increasing, with oil in a freefall and Canadian oil producers fighting to survive, as cash burn accelerates and liquidity dwindles,” a Bloomberg Intelligence analyst said in April when banks and companies were both bracing for this year’s renegotiation of borrowing bases amid the price plunge. According to Paul Gulberg, if just a tenth of the loans that Canadian banks had on their books at that time went bad, the lenders could lose a collective US$4.40 billion (C$6 billion).
No wonder then that the government is helping. If energy companies fail, they will weigh on banks’ balance sheets when they are already heavy enough: Canada’s top banks have set aside billions to protect themselves from loan impairments, and as elsewhere, they took the respective blow to their earnings.
Yet banks were happy to lend to oil companies before the price slump blow struck. In February, Bloomberg reported that the six biggest banks in the country had increased their loans to the energy industry by 59 percent over the last five years. That was despite their growing investment in clean energy projects and despite the government’s increasing pressure on oil companies for their role in climate change.
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So how have Canadian oil companies been faring in the meantime? Not so well, which is hardly surprising given they were already in dire straits before Saudi Arabia declared a price war on Russia and before the coronavirus turned from a regional epidemic into a global pandemic that crippled demand for oil across the globe.
Like their U.S. peers, Canadian drillers and oil sands miners were forced to cut production to prop up prices, and now Reuters is reporting that they have also started shelving investments in clean energy, to the tune of US$1.47 billion (C$2 billion) so far. And it’s not the small…