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Canada’s ‘modest’ recovery hopes end after Biden pulls plug on KXL
Gary Park for Petroleum News
The reaction was “modest” to word of a predicted 14% hike this year in Canada’s upstream oil and natural gas sector.
The analysts who took that cautious line were right to hedge their bets.
Less than a week after the Canadian Association of Petroleum Producers targeted a rise of C$3.36 billion from last year’s capital outlay of C$24 billion the industry was jolted out of its brief lull.
Just six hours after he was sworn in as U.S. president, Joe Biden went to work on his list of campaign promises and cancelled a permit allowing TC Energy to complete work on its Keystone XL pipeline.
That scuttled industry hopes of ending a continuous and dramatic decline from a capital spending peak of C$81 billion in 2014, thought TC Energy has yet to disclose how much spending on KXL in Canada will be shelved.
For CAPP the overall spending forecast represented a “stabilizing of industry investment and the beginning of a longer-term economic recovery.”
But Tim McMillan, chief executive officer of the petroleum sector’s chief lobby organization, wisely injected a cautionary note.
“There’s a lot of unknowns,” he said. “There always is.”
Drilling expectations CAPP expects 3,300 new wells will be drilled this year, up from 3,000 in 2020, but far short of the 4,250 wells completed in 2019, which raises a question about how much confidence there is in the Canadian industry over the chances of growing demand and commodity prices.
McMillan noted that the Paris-based International Energy Agency has targeted a 5% growth in global oil demand through the current decade and a 15% gain in natural gas consumption.
“I think there’s great opportunity for growth globally,” McMillan said. “The question then becomes: ‘Is it going to happen in countries like Canada, or will it happen in the Middle East, offshore Brazil or Africa?’”
Like many in the industry, McMillan says there is a case for Canada to seek investors by building on stronger environmental and safety regulations.
Analysts’ views Phil Skolnick, managing director of equity research for Eight Capital, told the Financial Post that commodity prices have been making gains against a complicated background, notably how far the Biden administration will go in ushering in new regulations and incentives to boost renewable energy and electric-powered vehicles. next decade as they try leveraging technology to lower their costs of exploration, production and processing while reducing their greenhouse gas emissions.
“This shift has the potential to improve the free cash flow generation of the assets, which fits with the newfound focus on returns and shareholder yields among North American E&Ps as they emerge from last year’s down-cycle.”
Planned investment in west The planned investment in Canada is primarily concentrated on Canada’s three western provinces.
Conventional oil and gas budgets have been set at C$20 billion, up C$2.8 billion from 2020, while oil sands spending is expected to grow by C$600 million to C$7.3 billion.
In addition, he said political turmoil in Venezuela has dealt a setback to that country’s heavy crude output, which is Canada’s key rival in seeking market share.
Skolnick also noted that COVID-19 has raised questions about oil demand.
“We are finding that a lot of things we thought were essential travel, aren’t essential anymore,” he said. “We’re find out that a lot can be done on Zoom.”
Bob Brackett, an analyst at Sanford C. Bernstein, said oil sands operators are likely to remain cautious over the
One year ago, CAPP’s initial forecast was set at C$37 billion, which collapsed during the oil price war between Russia and Saudi Arabia and COVID-19 which wiped out more than C$12 billion of planned spending.
In Alberta, the initial 2021 upstream investment forecast was expected to rise 18% to C$11.8 billion, bolstered by the Alberta government’s municipal tax relief for new wells and its corporate income tax reduction plan, along with a commitment to slash red tape.
In British Columbia - unaffected by KXL - upstream activity for 2021 is forecast to rise 29% to C$3.9 billion, driven mostly by the province’s support for LNG development.
The B.C. government also gave a lift to industry confidence by announcing it would refund a portion of the provincial carbon tax above C$30 per metric ton.
Saskatchewan is forecast to grow by C$100 million to C$2.8 billion, tied to the province’s vision of a 25% increase in oil output to 600,000 barrels per day, coupled with enhanced investment incentives and a rebate on electricity bills.
All three provinces have also reached equivalency agreements with the Canadian government on methane emission reduction regulations, establishing a regulatory framework that opens the door to a “solutions-focused approach while enabling industry to advance technological innovation.”
In Newfoundland and Labrador offshore investment is expected to remain flat at C$1.5 billion but is encouraged by the creation of an industry task force that will recommend a plan for the distribution of C$320 million in federal funding for the offshore.
- GARY PARK
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