Canada’s oil and gas sector is growing increasingly optimistic about its near-term future as economies recover and oil prices rally. Yet, the industry faces growing challenges in the medium and long term, mainly in the form of the neverending battle over pipeline takeaway capacity and the environmental and activist shareholder urgency to hold the oil industry accountable for climate change. With the U.S. benchmark WTI price rallying this year, Canada’s largest oil companies expect stronger cash flow generation, which would go toward reducing debts and boosting shareholder returns. A year after the pandemic forced operators to curtail oil production, output in the main oil-producing province of Alberta has recovered to pre-crisis levels.
Reopening in Canada and in its key petroleum export outlet, the United States, drives Canadian oil production higher, making companies confident about their near-term prospects. Moreover, government and analyst estimates point to rising oil production in the medium term.
As bright as the near-term outlook of the Canadian oil industry is, as uncertain that outlook has become for the long term, in light of the perennial pipeline problem, the global push toward emissions reductions, and climate activists’ shaming of carbon-intensive crude extraction such as Canada’s oil sands.
In the near term, as economies recover from the pandemic, Canada’s energy sector is “kind of in this goldilocks scenario where demand is increasing, notwithstanding what we’ve heard on electric vehicles and wind and solar: that’s all increasing, but not at a pace to displace the need for diesel and gasoline,” Rob Lauzon, deputy chief investment officer at Middlefield Capital, told Bloomberg in an interview this week.
Oil’s rally to $70 has fueled higher share prices of Canada’s biggest companies, which in turn helped the S&P/TSX composite index, the benchmark index of the Toronto Stock Exchange, to hit an all-time high. The index set new records at the start of this week.
Crude production in top oil province Alberta averaged 3.62 million barrels per day (bpd) in March. This is up by 1.2 percent from March 2020 and 4.4 percent from March 2019—the best March on record, ATB Economics said last month.
Despite challenges in terms of pipeline access and OPEC+ essentially dictating the price of oil at present, “things are looking up for Alberta’s oil patch as global demand bounces back from the pandemic,” ATB Economics said.
“We are enormously excited about it and it’s probably ahead of our expectations by certainly two to three years. We thought we would get to $60, not $70,” Ed LaFehr, CEO at Baytex Energy, told Calgary Herald’s Chris Varcoe this week.
Meanwhile, the Conference Board of Canada expects the oil and gas industry’s recovery to put Alberta in the lead of Canadian provinces in economic recovery this year and next.
While the industry and analysts are bullish on Canada’s near-term oil prospects, the pipeline takeaway capacity issue is lurking around the corner again, while the global net-zero emissions drive presents a challenge to the sector to convince investors it can cut emissions as much as to continue to have “a license to operate” in coming decades.
Major companies, including Cenovus Energy, Suncor Energy, and Canadian Natural Resources, have already pledged to reduce emissions to net-zero by 2050.
Canada’s oil sands, however, have the heaviest CO2 footprint of oil operations worldwide, according to a Rystad Energy analysis earlier this year.
The biggest firms have recently said they would focus on driving down emissions. They believe technology will help them achieve that.
“Canadian Natural has multiple pathways to achieve net zero with actions identified in the near, mid and long term and the strength of the Canadian oil sands mining assets is that with its long life no decline and with its manufacturing like operation, it can have one of the clearest routes, if not the clearest route to net zero of any global assets,” Canadian Natural Resources president Tim McKay said on an earnings call in March.
Apart from pledges to slash emissions, Canadian oil producers and the province of Alberta have another pitch to investors: Canada has a net-zero emissions target to 2050, unlike the major OPEC producers.
Moreover, Canada is one of the world’s largest oil producers not associated with the price-fixing policies of the OPEC+ group. Alberta sees this as an advantage for the Canadian energy sector as a global supplier of resources coming from a democracy with a market economy.
In October 2020, Alberta’s Premier Jason Kenney said:
“The developing world is hungry for our energy. And if we don’t get that energy, including our natural gas, to global markets, guess what? Vladimir Putin’s Russia and the OPEC dictatorships will.”