modest uptick expected in oil investment in 2021.
But increase likely to be modest
Capital investment in Canada’s upstream oil and gas projects is expected to rise in 2021, but the increase still may be relatively modest coming off a year in which demand for oil was crushed by the global health pandemic.
On Wednesday, the Canadian Association of Petroleum Producers forecast a 14 per cent increase in upstream investment, amounting to about a $3.36 billion uptick from what the organization’s president described as the “record lows of 2020.”
The situation shows that Canada’s oil and gas industry is confronting a bevy of questions about its prospects despite bullish projections by some analysts that global demand will bounce back in 2021 as the COVID-19 vaccine distribution ramps up, and as air travel and office commuting resumes in greater numbers.
“There’s a lot of unknowns, there always is,” Tim mcmillan, chief executive and president of CAPP, “but maybe now more than ever.”
U.S. West Texas Intermediate (WTI) hit US$53.93 per barrel on Wednesday, its highest since Feb. 20. The index has risen more than 9 per cent year to date, but had fallen 23 per cent last year.
mcmillan noted the $27.3 billion projected investment in upstream oil and natural gas this year, up from $24 billion in 2020, reverses a years long trend of declining investment.
most of that investment will occur in Alberta and British Columbia, with a modest increase in Saskatchewan and stable levels in Atlantic Canada.
CAPP forecasts 3,300 new wells will be drilled in Canada in 2021, up from 3,000 in 2020. But that’s still 22 per cent below the 4,250 wells drilled in 2019.
That leaves questions about whether and how much Canada’s oil and gas industry can be expected to grow in the year ahead.
Mcmillan pointed to the Paris-based International Energy Agency, which predicts that in the next decade, global demand for oil will increase five per cent while demand for natural gas will grow by 15 per cent.
“I think there’s great opportunities for growth globally,” he said. “The question then becomes is it going to happen in countries like Canada or will it happen in the Middle East, and offshore Brazil and in Africa?”
he and others have made the argument that stronger environmental and safety regulations in Canada will drive investors toward energy projects here.
Phil Skolnick, managing director of equity research for Eight Capital, who covers the Canadian energy markets, said prices are rising amid a complicated backdrop.
In the u.s., president-elect Joseph Biden is set to take office later this month, and his administration is expected to usher in a new era of regulations and incentives to boost renewable energy and electric vehicles. But that could also hurt u.s. supply of oil, which is already expected to shrink.
Meanwhile, he said political turmoil in Venezuela has hurt that country’s heavy oil production, which competes for market share with the Canadian oilsands.
While Skolnick is recommending Canadian oil companies as an investment opportunity as vaccines help reinvigorate demand, he acknowledged that the pandemic has also raised questions about demand.
“We are finding that a lot of things we thought were essential travel, aren’t essential anymore,” said Skolnick. “We’re finding out a lot can be done on Zoom.”
The environment has given rise to new restraint and caution among Canadian energy companies. In the past, rising oil prices would have been a cue to increase upstream investment and look for growth, Skolnick said. Instead, most companies are focused on returning capital to investors through share buybacks or dividends.
“Shareholders are saying what not to do, and what not to do is chase growth,” he said.
Bob Brackett, analyst at Sanford C. Bernstein & Co.
LLC, says oilsands operators will remain cautious for environmental and economic reasons over the next decade, and focus on leveraging technology to decrease their costs and lower their greenhouse gas emissions instead of growing production.
“This shift has the potential to improve the free cash flow generation of the assets as well, which fits with the newfound focus on returns and shareholder yields among North American E&PS emerging from (last) year’s downcycle.”
Acquisitions such as Cenovus Energy Inc.’s takeover of husky Energy Inc. for $4.8 billion in October and Whitecap resources Inc.’ $550 million acquisition of Torc Oil and Gas in december signal that companies may look for growth through consolidation rather than upstream investment.
Indeed, the pandemic battered many oil companies’ market capitalizations, making them acquisition targets, particularly as oil prices rise.
“That’s the difference this time, the companies want to get their balance sheets improved and they want to keep their powder dry for potential acquisitions,” he said.
Jim Burkhard, head of oil market research for research firm IHS Markit, said that
the investment environment has totally flipped. during the past decade, he said North American oil and gas producers’ investments in upstream development often outstripped their cash flows by billions of dollars.
“Investors were excited about growth, they didn’t care about making money — just grow,” said Burkhard.
But two price crashes, in 2015 and 2020, plus the pandemic, has changed investors’ tune and they are now seeking discipline from oil companies.
“The investment environment for oil and gas has flipped from the way it was in the” past decade, said Burkhard, adding, “Companies now have to make money.”
despite the pandemic, a
health crisis without modern precedent, he said the push toward climate change not only “survived, but it thrived”.
Countries including China, Japan, South Korea and others made commitments to limit their carbon emissions to net zero in the coming decades as did numerous companies.
Meanwhile, some of the world’s largest investors moved to divest fossil fuel companies from their portfolios as the efforts to limit climate change gained momentum.
“We’re going to look back and say 2020 was the year for energy transition, where it moved beyond slow motion and really accelerated,” he said.