Canada facing a multitude of issues and political uncertainties

Many agree that the biggest issue facing Canadian producers is market access, or more precisely, the lack thereof. On the surface, that is clearly true. But in reality, the biggest obstacle they face is the politicization of the oil and gas industry. Politicians across Canada, starting with the Prime Minister, are clearly willing to fight for votes on the battlefield of oil and gas. The demonization of Alberta’s oil sands, pipelines, and fossil fuels in general, is a function of opportunistic politicians shifting the discussion into divisive rhetoric and fear mongering, hallmarks of populism.

Harmful legislation. On the federal level, Canadian Prime Minister Justin Trudeau has, according to his own Ethics Commissioner, broken the law defending Quebec-based SNC Lavalin, under the guise of saving a few-thousand jobs in Quebec. In the meantime, his government has done little to defend the more than 100,000 jobs lost in Alberta during the downturn. Instead, his government has passed legislation that will severely limit access to the west coast for oil tankers, diminishing any benefit accrued from the federal C$4.5-billion purchase of the TransMountain pipeline in 2018.

In addition, Bill C-69, referred to as the “no more pipelines” bill by Alberta’s newly elected United Conservative Party, was proclaimed in August. Most recently, TransMountain has once more been dragged into the courts, after the Federal Court of Appeal agreed to hear six appeals filed by First Nations that argued Ottawa had failed to fulfill its duty to consult with them. Oddly, the federal government did not bother to send a single representative to argue its side of the case to the court.

Much of the rhetoric around C-69 is subjective. However, Bill C-48 is much clearer, and is a focused attack on the industry’s ability to move oil offshore. The new legislation prohibits oil tankers, that can carry more than 12,500 metric tonnes (88,000 U.S. bbl) from “stopping or unloading crude or persistent oil, at ports or marine installations located along British Colombia’s north coast.” In other words, from the northern tip of Vancouver Island to the provincial border with Alaska. So, why would the federal government bother buying a pipeline, only to subsequently impose restrictions on moving the product it carries?

For its part, C-69 eliminated the previous federal regulator, the National Energy Board, replacing it with the Canadian Energy Regulator, which was stood up Aug. 28. The federal government claims the new regulator has these attributes:

• A modern governance structure
• Will produce timely and predictable decisions
• Has strengthened safety and environmental protection
• Includes greater indigenous participation
• More inclusive public participation.

Opponents have dubbed it the “no more pipelines bill,” claiming the process is more complex than it was with the NEB, and will effectively prevent another major interprovincial or international pipeline from ever being built on Canadian soil.

Further exacerbating the Canadian pipelines discord is the federal government’s apparent refusal to step in and assert jurisdiction in these matters. Recent failures by B.C. to overturn federal approvals of TransMountain have assured that any pipelines that cross provincial or international borders are a matter of national interest, and that they are the only party that has the mandate to assess the need whether or not they are needed.

Nevertheless, the Prime Minister has refused to reconsider the possibility of allowing anyone to construct a pipeline from Alberta to Eastern Canada, where most of its oil is purchased, because Quebec opposes building such a pipeline. Quebec Premier Francois Legault has criticized Alberta for producing “dirty energy” in the past, and said this year, “There’s no social acceptability for an additional oil pipeline.” Ironically, the practice of dumping raw sewage into rivers appears to be very acceptable, with over 60,000 sewage dumps into waterways recorded in Quebec annually.

Given that Quebec has also benefited handsomely—thanks to Canada’s system of equalization payments—to the tune of $200 billion to date, and most of those dollars came thanks to oil-rich Alberta, Quebec’s opposition to pipelines is that much more perplexing.

Climate change. How to address this issue has become extremely contentious and partisan. The federal Liberals’ carbon tax has been fiercely opposed in Alberta, Saskatchewan, Manitoba, Ontario, Prince Edward Island, and New Brunswick, with claims that the tax was poorly conceived, does not achieve its stated goals, runs roughshod over provincial jurisdiction, and that it’s just a cash grab which is desperately needed to offset the federal government’s runaway spending. That extra cash will be needed, after the Liberals announced more than C$2 billion in spending just days before they were expected to call a federal election.

In Alberta, the previous provincial government had implemented its own carbon tax, which is allowed, provided the feds grant it equivalency, which means they believe it will achieve the same things as their tax. The new United Conservative Party, elected to a majority this past April, promptly canceled the provincial tax, but has engaged in discussions with the federal government in an effort to demonstrate that existing measures will still achieve the same results.

Investors exiting. The drawn-out battles over pipelines have clearly affected skittish investors, with producers struggling to find the necessary capital investments to pursue opportunities in Western Canada. In June, Koch Industries sold thousands of hectares of land to Paramount Resources. Additionally, Koch allowed other leases it couldn’t sell to expire, relinquishing them back to Alberta. 

Pipeline issues. Even in the U.S., where politics dominated its handling of the proposed Keystone XL pipeline during the Obama era, the project still has not begun construction, even after securing all necessary approvals, as court challenges have delayed it further. A positive ruling from the U.S. Court of Appeals for the Ninth Circuit in June, which overturned a lower court injunction that prevented Calgary-based pipeline TC Energy from beginning construction on the 830,000-bpd pipeline, was welcome. The Nebraska Supreme Court also ruled in August that the approval of the pipeline route was valid. But the beleaguered project faces more challenges, as it has now missed critical dates to begin construction in 2019, and opponents have vowed to continue the fight.

The lack of pipeline capacity also led to a massive increase in crude-by-rail shipments in 2018, but a move to increase depressed oil prices in Alberta led to a disincentive to maintain the more costly rail option. The former government in Alberta instituted production curtailment in early 2019, and it resulted in narrowing the massive gap between Alberta spot prices and WTI. There is traditionally a gap between the two, but last year it had increased to record levels, resulting in the OPEC-style measure. Since the first cut (325,000 bpd) was announced, the government has eased off several times. The curtailment currently sits at 125,000 bpd, as the UCP government relaxed it further this July. The UCP also reversed the previous government’s decision to buy rail cars, offering to exchange its rail contracts for curtailment credits.

Commodity prices. After a downward spike this spring, Alberta benchmark prices began to rise again this summer, hovering around C$55/bbl. Unfortunately, natural gas prices have become a far greater concern. Despite recovering from 2018’s historically low levels, there is little that can be done to positively influence prices. Dry gas producers are increasingly at risk, and a number have declared bankruptcy. In response, the Alberta government has named an associate Minister of Natural Gas, who is working with gas producers to find ways to alleviate the difficulties they are experiencing. Producers have suggested royalty cuts or some other form of tax relief to keep them in the black financially. Most observers agree that curtailment would not achieve the same increased prices that occurred on the oil side.

M&A. Uncertain times often result in increased mergers and acquisitions activity, but in 2019, it’s led to a much more conservative approach, with just C$5.4 billion in deals, down 29% from $7.6 billion in 2018, according to Sayer Energy Advisors. Most of that total came from one deal, as Canadian Natural Resources Limited (CNRL) acquired all of Devon Canada’s northern Alberta oil sands and heavy oil operations for C$3.8 billion in May, completing Devon’s exit from Canada.

Capital expenditures. Given the chaos that has been 2019, producers—particularly on the gas side—have substantially scaled back spending, which has manifested in big decreases to drilling and land sale activity. Canada’s largest producer, CNRL, noted that it’s first-half spending (not including the Devon acquisition) was $190 million less than projected expenditures at the half. Overall, the company indicated it would spend C$4.7 – C$5 billion in 2019. Suncor Energy has announced spending will decrease slightly, from a maximum of C$5.6 billion to $5.4 billion, while Husky Energy announced last December they would be reducing spending 10%, to $3.15 billion in 2019.

Fig. 1. Canadian wells drilled, 2007–2019.

Drilling activity (Fig. 1) has also fallen substantially year-over-year, with 2,328 wells drilled, down 26% from 3,140 in the first half of 2018. Overall, metres drilled fell 25%. According to World Oil survey results, the Canadian Association of Petroleum Producers is forecasting a 21.4% drop in drilling this year, to just 5,220 wells.

Meanwhile, The Canadian Association of Oilwell Drilling Contractors has not issued an updated forecast since its original prediction of a slight increase to 6,962 wells was released last November. However, the bearish Petroleum Services Association of Canada recently revised its forecast, predicting that 5,100 wells will be drilled, substantially lower than its original, 6,600-well projection.

Land sales, which indicate the industry’s interest in future development, have fallen significantly through the first half of 2019. According to the Daily Oil Bulletin, spending in Western Canada was C$76.5 million, down 72% from the $272.88 million collected in the first half of 2018, and a mere fraction of the record set in 2006, when governments took in $2.66 billion.

Alberta once again led the way, taking in 72% of the total amount, $55.29 million, down 71% from the $191.25 million collected in 2018. Much of the spending in Alberta this year has again been driven by interest in the Duvernay play.

Spending in B.C. has fallen to almost zero through six months, with the province taking in a meagre $2.62 million, a decrease of 95.6% from the $59.44 million collected through six months last year. The highest annual total for B.C. is $609 million, in 2010. Saskatchewan totals fell to $18.18 million through six months, down 17%, from $21.94 million at the halfway point of 2018. WO