Economy

The Fort McMurray fire has shut down 40% of oil sands production

Many oil sands production facilities, while not directly harmed by wildfire, have been taken offline as companies evacuate

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(EPA/Twitter/Jeromegarot)

(EPA/Twitter/Jeromegarot)

As wildfire continues to rage in Fort McMurray Alberta, energy industry analysts and insurance companies are waiting for the smoke to clear to assess the extent of the economic damage the disaster has wrought.

While the fire has not directly damaged major oil sands production facilities, it has precipitated major disruption to the industry as companies evacuate employees. The fire has taken about 40% of Canada’s total oil sands output offline.

Analysts agree that attempting to accurately predict how the situation will affect oil prices would be premature. Still, a broad-strokes picture is starting to emerge.

“It’s early days, and it’s a pretty dynamic situation,” says Martin King, a Calgary investment dealer with FirstEnergy Capital. “In terms of market impact, right now it looks like about 800,000 barrels of oil production that has been [shuttered]. There was already some maintenance happening in that area, which shut in roughly 200,000 barrels, so all told we’re looking at about a million barrels of oil, which is about 40% of Canada’s oil sands.”

Less clear is the impact these numbers will have on the markets. King says that it’s largely a question of time: “If things return to their normal output in a week, or 10 days, there should be a fairly short price blip upwards. But if it’s longer than that—which does look possible—we’re going to see a significant rise in the price of crude oil, and in the price of refined products, especially in Western Canada.”

“There’s considerable inventories of oil built up internationally, so the impact this will have on prices is hard to say,” says Gerard Walsh, an economist who works with RBC’s Economic Research team. Walsh says that the team arrived at the same 40% figure King cited. He adds that when it comes to predictions, past data on previous forest fires can provide analysts with additional data: “We’re working off of history and assumptions, pretty much.”

While most companies facilities are not actively under threat, King says that it’s “the human factor” that’s driving the setbacks in production. “It’s happening for precautionary reasons; how soon will people be available to safely return is what companies are thinking about,” he explains. As for when the market can expect them to return their regular output? “Right now, that looks like it could be a ways off yet.”

The energy industry isn’t the only one watching events closely; insurance companies have mobilized as well. Speculation about the incoming flood of insurance claims has already begun. The 2011 wildfire in Slave Lake, Alberta claimed roughly a third of the city’s homes, with damages totalling $742 million. That fire covered 200 square kilometres; the Fort McMurray blaze spans 1,000.

Insurance Bureau of Canada spokesperson Steve Kee says that, while the market has already begun to consider the potential high levels of claims, it’s still too early to be able to accurately predict what the numbers will look like. “What I can say at this point, is that the losses are going to be much greater than what we saw in the Slave Lake area in 2011,” he admits. “These are going to be significant damages.”

Fortunately, affected residents will likely be completely covered by their insurance. The industry received backlash in 2013, when many Albertans were only partially covered for the damages of the year’s disastrous flooding. Citizens of Fort McMurray should receive full coverage for the loss of their homes.

“That’s the positive aspect of the story, really,” says Kee. “There are claim adjusters and insurers on the ground in the area; when you get a greater crisis like this, insurers mobilize quickly.” He says insurers have trailers set up at evacuation camps to help their clients file claims as quickly as possible.

That includes additional living expenses, for the tens of thousands of Albertans who have had to leave their homes with nothing. “We’re trying to get them some money right now, get their claim started, and basically make things as easy as possible for them and make sure they’re in a safe place,” says Rosa Nelson, a spokesperson for Intact Insurance, Canada’s largest property and casualty insurer. “It’s really too soon to know what the numbers will look like, but we can focus on getting them the help they need.” Intact has set up booths at evacuation centres and has increased the staffing levels of its 24/7 helpline.

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