Should We Keep Investing In Canada’s Oil And Gas Industry?

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There’s a lot of discouraging news around the oil and gas industry these days. It’s under siege from activists, governments, and even investors.  Is there any smart money left in the industry, and is there a case to be made for new investment?

Certainly many don’t think so — or are unwilling to face down societal pressures to stay away.  Universities and other institutions are the targets of concerted campaigns to divest fossil fuel holdings, although some have pushed back in recognition of their fiduciary duty to maximize investment returns.  Climate change activists have decreed oil and gas to be a threat to the planet, and have convinced many politicians that championing their cause is a quick route to political office.  Activist campaigns are infiltrating our educational systems to convince future voters that the road to sunny but not overly warm days ahead will be surfaced (not paved, as that’s an oil product) with something renewable.

But when we observe what people are actually doing, we see some very different facts.  Oil and gas demand is growing worldwide every year, with no end in sight.  Every credible energy forecaster tells us this growth will continue without more aggressive policy interventions — meaning raising energy prices or limiting energy supplies through regulation and taxation.

How’s that working out so far?

  • Provincial governments have been elected in Alberta, Ontario and Saskatchewan on promises to cut carbon taxes;
  • According to surveys in North America, most members of the public are not willing to spend significant dollars to reduce GHG emissions.  In other words, they’re great supporters of reductions as long as somebody else is paying (“cost-free sentiments”).  It seems unlikely they will embrace the requisite policy interventions;
  • Where new policy has raised energy prices, people push back — witness the “yellow jacket” protests in France and the current protests and riots in Chile.  And although gasoline prices in B.C.’s Lower Mainland recently rose on supply (not taxation) issues, people rebelled and demanded reductions (while many opposed expansion of the Trans Mountain pipeline, ultimately their primary gasoline source);
  • And perhaps most tellingly, where activists have delayed or prevented construction of energy infrastructure that affects people directly, there has been strong pushback.  Richmond (B.C.) city council, in the face of multiple protests, permitted a marine terminal, tank farm and pipeline to supply Vancouver Airport with aviation fuel. People obviously decided that flying is more important than emissions reductions. 

In New York state, authorities have refused to permit new natural gas distribution pipelines as activists decry the presence of “fracked” gas.  There are no plans for alternative energy supplies for new homes and businesses in Brooklyn, Queens and Long Island — which now face gas rationing or simply shutting down when cold weather hits.  One wonders how many cold snaps it will take for some solutions to take shape.

In Minnesota, some regulators and presidential candidates insist that Enbridge not be allowed to replace its existing Line 3 pipeline, increasing capacity and improving safety — because the oil “needs to be left in the ground.”  But unions are becoming aware that refineries relying on Line 3 oil will be shut down and jobs lost, so an interesting battle is shaping up.

And overseas?  People in energy-starved developing nations, including China, India, Pakistan and much of Southeast Asia are building energy infrastructure as quickly as they can.  Coal, gas, nuclear, hydro, renewables — whatever it takes to provide the power for modern life.  While some governments may express GHG emission awareness, their actions demonstrate that CO2 levels are not going to slow progress.  They are concerned deeply about air pollution, especially particulates — and so favour natural gas over coal where the choice is available.

So it appears oil and gas demand will very likely continue to rise in the foreseeable future.  What about supply?

Gas supplies appear very secure worldwide.  The hydraulic fracturing revolution is spreading beyond North America, and has potential to yield huge gas resources across the globe.  Oil, however, is a different story.  While fracturing has revitalized onshore U.S. oil production, the bloom is coming off the rose as companies realize they cannot drill wells as close together as originally planned, and therefore can’t recover as much of the resource as had been thought.  Economic returns have fallen along with wellbore performance, and operators are looking for higher prices to support exploitation of acreage outside the best sweet spots.

At the same time, conventional exploration internationally has fallen off since the 2014 oil price shock.  There have been a few great discoveries like offshore Guyana, but industry is not replacing reserves overall.  Major companies under investor pressure and less sophisticated national oil companies (NOCs) may lack the capacity to ramp exploration back up to the necessary levels, although results may not be apparent for a few years yet.

Where does that all leave us on the question of investing in Canadian oil and gas? Canada holds incredible volumes of hydrocarbon resources in diverse settings, some developed and much not developed. Energy needs across the globe will drive increased demand for these resources in the years ahead in every credible energy outlook scenario. Supplies of oil face considerable uncertainty, and while gas supplies are more secure, many countries lack their own resources and are increasingly interested in importing ours.

Smart money invested in good oil and gas projects and companies will eventually yield excellent returns.  This approach is not without risks, and requires the patience to hold positions for years.  But reality will bite when markets — particularly in North America and Europe – finally understand that the wellbeing of humanity in the coming decades depends upon the energy from oil and gas.

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