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How badly will the fires in Fort McMurray hit the economy?

While the short-term impact on Fort McMurray and Alberta will be deep and painful, the fires may also force a rethink of some oil sands operations


 
The Suncor oil sands facility seen from a helicopter near Fort McMurray, Alta. (Jeff McIntosh/CP)

The Suncor oil sands facility seen from a helicopter near Fort McMurray, Alta. (Jeff McIntosh/CP)

As wildfires burn out of control in and around Fort McMurray, Alta., the priority remains the safety of the more than 80,000 evacuees and residents of nearby communities. But already concerns are mounting about the potential long-term economic impact on not just the city, but the prized economic asset it supports: the Alberta oil sands.

In Fort McMurray, officials have so far confirmed the loss of about 1,600 buildings and homes, with smoldering neighbourhoods to the south of the city centre like Beacon Hill among the hardest hit. There are also concerns about the safety of employees remaining at the city’s airport, which recently completed a $258-million expansion of its terminal building.

Meanwhile, several oil and gas firms working in the nearby oil sands, which boasts the world’s third-largest reserves, have either curtailed or shut down production as they grapple with the impact on suddenly homeless employees and seek to provide shelter to evacuees in their work camps. Among those that have announced stoppages are Suncor Energy, Shell Canada, ConocoPhillips and Nexxen. Pipelines in the region have also been shut down as a precautionary measure, which has had a ripple effect on producers that rely on them.

Others are keeping a watchful eye on the situation. Will Gibson, a Syncrude spokesperson, who was forced to flee his Fort McMurray home along with everyone else, said the company was operating at minimal levels at its vast Mildred Lake plant and Aurora North mine—both to the north of Fort McMurray. “Our plant is stable and our operation is stable,” he said, adding Syncrude, which is owned by a consortium of oil companies, was sheltering about 1,500 evacuees at one of its work camps, but was hoping to airlift them out by the end of the day.

Added all together, the temporary hit to oil sands production could be on the order of one million barrels per day, according to a research note written by Greg Pardy, an analyst at RBC Capital Markets. But even once the fire is brought under control, Pardy warned there will be near-term challenges “as oil sands companies and employees establish new routines, which may involve fly-in-fly-out programs.” Energy traders, too, are concerned about the potential for a lengthy recovery that impacts North American crude supplies, pushing the price of West Texas Intermediate, the benchmark against which Alberta’s heavy oil is priced, up about 48 cents (US) to US$44.26 on Thursday.

For Fort McMurray, the devastation caused by the wildfires is akin to being kicked while you’re down. The rout in oil prices that began more than a year ago has already forced tens of thousands of job losses in the region and the cancellation or delay of billions worth of new oil sands projects. That, in turn, sparked a provincial recession and a slide in home prices in Calgary, Edmonton and, of course, the once booming town of Fort Mac itself. Edmonton’s police chief even went so far as to blame the oil-induced economic malaise on a surge in crime the provincial capital.

So, how much worse could things get? Todd Hirsch, an economist at ATB Financial, says it’s far too early to calculate the economic impact of the disaster given that Fort McMurray is still burning and the province remains under a state of emergency. Nevertheless, he said it’s safe to assume damage to buildings, homes and other municipal infrastructure will be “in the billions of dollars,” and that “on top of that, you have the disruption of business operations, lost wages and lost incomes.”

In terms of potential magnitude, Hirsch compared the Fort McMurray wildfires to the devastating floods that washed over southern Alberta three years ago and submerged parts of downtown Calgary. The Alberta government later estimated the disaster ultimately resulted in about $500 million in lost economic output for a period of two weeks in June 2013. That translated into about two per cent of the province’s monthly GDP, or about half a per cent of national GDP. The figures didn’t include the roughly $5 billion in damage done to 14,500 homes, roads and bridges throughout the province.

Yet, as devastating as such disasters can be, they tend to have a relatively short-term impact on GDP numbers—largely because of the way GDP is measured (the sum of all the goods and services provided in a given period). In the case of the 2013 floods, for example, the rebuilding effort that followed the catastrophe resulted in a net increase in Alberta’s forecasted growth of about 0.2 per cent in 2013 and 0.4 per cent the following year, according to a 2014 report by TD Economics. But, as the report hastened to point out, that doesn’t mean natural disasters are “good for the economy” since GDP doesn’t reflect the longer-term cost of infrastructure losses or human tragedy (unlike the wildfires, which have miraculously yet to produce a single casualty, five people died during the 2013 Alberta floods) on the public purse—the province’s finances are already in a terrible state because of the oil price collapse—or private companies’ balance sheets.

There is also the risk no one wants to talk about just yet: the possibility that a return to business-as-usual in Fort Mac may simply not be in the cards. Allan Dwyer, an assistant professor of finance at Calgary’s Mount Royal University, says the wildfire is merely the latest wound to be inflicted on the oil sands and its future—and therefore Fort McMurray’s as well. In addition to a depressed global outlook for oil prices, the current list of headwinds facing the industry include the fractious political debate over building more pipelines, mounting concerns about the impact on climate change and recently elected provincial and federal governments that promise economic diversification. “A few years ago, when oil was trading around US$110 a barrel, there would be no doubt about it being an all-hands-on-deck approach to rebuilding and getting people back to work,” Dwyer says. “Now it could be a different response.”

Dwyer also wonders how many homeless oil sands workers will be eager to return to Fort McMurray and rebuild given the doom and gloom that hangs over the sector. “There’s been a growing sense, as the global oil prices has gone down and stayed down, that the oil sands is somewhat of a sunset industry—that it’s yesterday’s aggressive style of producing hydrocarbons,” Dwyer says. “This only adds to that creeping negative sentiment.”

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