A strange, new tone is emerging in the day-to-day news chatter about Canada’s oil and gas sector: after years of blaming regulatory rules and a lack of pipeline capacity for the industry’s financial woes, a couple of analysts close to the Alberta oilpatch are acknowledging some of the bigger issues at play.
It began earlier this month, with a Financial Post opinion piece by Peter Tertzakian, Executive Director of Calgary-based ARC Energy Research Institute. While “megaphone issues” like pipelines, regulation, and commodity price differences have contributed to the rapid drop in investment in Canadian oil and gas exploration and development, he writes, “other factors are contributing to a dearth of financings and capital market liquidity.” That list of seven factors adds up to “a challenge that transcends Canada.”
For all the overheated rhetoric around the federal government’s carbon pricing system, Tertzakian leads his list with a carbon price of a different sort. He calls it the “financier’s carbon tax,” noting that “large institutional investors like pension funds are putting stringent Environmental, Social and Governance, or ESG, principles into their investing criteria. Some have entire teams policing compliance. Many big funds won’t put money into companies unless they demonstrate mitigation of carbon emissions below a threshold. Some are jettisoning their oil and gas investments altogether to bring down portfolio emissions. This ESG trend is gaining momentum, is not unique to Canada, and puts a de facto carbon tax on the industry’s cost of new capital.”
Another key factor, he says, is that “peak oil has peaked,” with the perception of abundant, cheap oil and gas from United States shale fields drawing investors away from other production options—including Alberta.
“American investors used to provide well over half of new funds into Canada,” he explains. “In less than a decade, the United States has turned from needing Canada’s oil and gas to becoming its competitor. It’s not that Canadian plays aren’t viable, but American capital is reluctant to stray from home when there are plenty of new alternatives in Texas, North Dakota, and Pennsylvania.”
And many investors are realizing they can make more money outside the oilpatch, in sectors ranging from real estate to cannabis.
Meanwhile, the rise of electric vehicles is driving a perception among investors that oil and gas is becoming a riskier bet. And when fossil executives recently tried to combat that view with visits to financial decision-makers in New York, London, and Toronto, they learned that half of those contacts had been replaced by software algorithms—quite the irony for an industry that has been working to “de-man” its own operations as fast as it can.
“It’s tough to pitch an equity financing to a motherboard,” Tertzakian notes. “And if you get on the wrong side of one, your performance isn’t relegated to flash memory; it lingers like a bad social media post.”
Tertzakian’s analysis is a welcome counterpoint to a recent report by the C.D. Howe Institute, which blamed the current federal government for the $100 billion in fossil projects it said have been cancelled or delayed since annual investment began declining in 2015, a period of epic uncertainty amid crashing world oil prices.
“While some of the biggest projects killed in Canada have been under the Trudeau government, there were problems getting projects approved and built under the Conservative government of Stephen Harper, as well,” reported Business In Vancouver, in a post picked up by oilpatch newsletter JWN Energy.
“C.D. Howe blames Canada’s sclerotic regulatory regime for the killed and stalled projects and the flight of investment capital,” the article continues. “And it warns that the fix proposed by the Trudeau government, Bill C-69, will make things worse, not better,” positioning the pro-business institute as part of the massive fossil industry push to derail the proposed Impact Assessment Act in Senate.
“We’re in a vulnerable spot,” said report co-author Grant Bishop. “And it does seem that regulatory uncertainty is hindering Canada from attracting resource investment—a trend that’s confirmed by all accounts on the ground. The proponent of Energy East was pretty specific that they felt that regulatory uncertainty was a prime consideration when cancelling the project.”
But Tertzakian has a more pedestrian prescription for Canadian fossils that involves looking at their own performance, rather than throwing around blame for their business woes. “Progressive factions in the industry are starting to respond to the investors’ checklist,” he writes, and “the edict is clear: Produce a better (lower-carbon) product; show you can consistently make money for humans and algorithms; make more money than others; progressively lower costs with technology; and give investors their money back quickly.”
It’s an open question whether Canadian fossils can meet that standard—efforts to reduce the carbon intensity of tar sands/oil sands production have stalled, for example, despite lavish government subsidies. But it’s refreshing to see a respected industry analyst focus on something other than pipeline capacity and regulations.
And Tertzakian is not alone.
On CBC, Calgary Herald reporter Deborah Yedlin reports that Canada was beginning to look like a footnote at the annual CERAWeek oil and gas conference in Houston—the same event where Prime Minister Justin Trudeau famously declared in 2017 that “no country would find 173 billion barrels of oil and just leave it in the ground.” Yedlin acknowledges that some of the standard narrative about pipeline delays has merit, though in contrast to the C.D. Howe Institute report, she puts the responsibility more on Harper more than Trudeau.
“It’s easy to blame this on government policy gone wrong—and when it comes to the challenges approving pipeline infrastructure, that is certainly a more than valid criticism,” she writes. “Increasingly fingers are being pointed directly at legislation passed in 2012 as marking the beginning of the challenges surrounding the timely permitting for projects.”
But “the Canadian energy sector hasn’t done itself any favours, either,” Yedlin reports, noting that only a handful of Canadian fossil executives showed up to see what they could learn from their colleagues, counterparts, and competitors at CERAWeek. Had they attended the conference, “it would have been insightful for Canada’s energy leaders to hear the frequency with which carbon emissions, environmental stewardship and, yes, even carbon pricing, were mentioned,” she states.
“What’s the worst that can happen? You might learn something new. Have an epiphany, perhaps? Learn that what you thought were best practices are being done even better somewhere else.”
Through much of the conference, industry executives predicted decades of strong demand and described natural gas as a “forever fuel”, InsideClimate notes. But “in speeches that would have been unimaginable just a few years ago, executives from some of the world’s largest oil companies said the future is low-carbon and the industry needs to reinvent itself or risk becoming irrelevant as the world turns to cleaner energy.”
That public debate “highlighted the gap between a stated desire to become part of a climate solution and the reality of a booming oil and gas industry that remains the biggest part of the greenhouse gas problem.”
A parade of industry speakers heralded the massive growth of fracked oil and gas in the United States, with participants in almost every session pointing to International Energy Agency projections that natural gas demand will grow for a couple of decades, even in its lower-emission scenario.
“But that IEA scenario also relies on technologies to remove carbon dioxide from the atmosphere in the second half of the century,” InsideClimate notes. “There’s a simpler, proven, and likely cheaper way to cut emissions faster: use less oil and gas. If the industry were serious about cutting emissions as soon as possible, it would produce less oil, not more.”
Even with the obvious contradictions in the conversation, Mark Brownstein of the U.S. Environmental Defense Fund said he was witnessing a dramatic shift.
“When I started coming here, the only time climate change would come up was derisively and dismissively,” he told InsideClimate. Now, “there’s a real sense that the oil and gas industry is part of the conversation, but they don’t control the conversation.” That recognition is just as well, because “there are independent forces at work in the economy that are driving change to some extent, whether the oil and gas industry likes it or not,” Brownstein added. “You have a whole category of companies now that understand the issue of climate change and actually see it as economic opportunity.” So “the only question is whether the oil and gas industry is able to transition itself to see the opportunities and take advantage of them,” or whether it’s left behind.