2020 Forecast - Canadian E&P

Fig. 1. It looks like another year of diminished expectations for Canada’s upstream industry, particularly if pipeline bottlenecks are not addressed. Image: Repsol Canada.

The waters that producers must currently navigate are fraught with dangers, most of which are global in scope, although political battles at home have also conspired to limit the Canadian industry’s hopes for any economic recovery. There was some early optimism, with oil prices spiking on U.S./Iran tensions, and a modest recovery in domestic natural gas prices, but it seems that optimism may have been overstated, Fig. 1.

Pipelines and problems. The domestic issues that face the industry are many, but the most critical remains the lack of pipeline capacity from landlocked Alberta to tidewater. Ongoing political issues have also hurt the industry, including new federal CO₂ emissions targets, and other provincial jurisdictions that have deliberately set out to oppose both pipeline development, and further development of Alberta’s oil sands deposits.

In fact, the issue of hydrocarbon development has blossomed into a full-scale national crisis, with some politicians abandoning any semblance of a national perspective, focusing almost exclusively on regional issues. This has led to court challenges, divisive policymaking, negative rhetoric, and hypocritical bombast designed to win local votes, irrespective of the national cost.

The issue has been complicated by the confusing and often oppositional policies of Prime Minister Justin Trudeau’s Liberal party, which narrowly won the federal election last fall, and now sits as a minority government. Trudeau appears to support industry, in that his government purchased the Trans Mountain pipeline in May 2018, and since then, has consistently stated it will be built, asserting the federal government’s primacy over provincial jurisdiction in these matters.

But the same government has implemented a carbon tax that appears to unfairly target Alberta’s oil and gas industry, and in particular oil sands development; banned oil tankers from much of Canada’s west coast; and instituted project review requirements that most believe will make approving another major pipeline next to impossible.

Trans Mountain recently received some good news, as one of the last challenges to its approval was rejected in February of this year. A group of First Nations had appealed the federal government’s approval, but the Federal Court of Appeal ruled that the government’s consultations with Indigenous groups about the pipeline were adequate. The groups still have the option to petition the Supreme Court of Canada, but in the meantime, construction that is underway may continue. Meanwhile, the Canadian Energy Regulator resumed hearings to review detailed routing on contested portions of the pipeline’s route from Alberta to the west coast.

And, of course, Quebec continues its opposition to any pipeline projects that would cross its borders, despite its heavy, if indirect, reliance on oil and gas revenues from Alberta. Since the federal government first implemented its revenue sharing formula, or “equalization,” in 1957, Quebec has received more than $200 billion, most of which came from Alberta. In oil-poor Quebec, the politicians are seemingly willfully blind to their startling hypocrisy.

The one other positive sign on the horizon is the Trump administration’s approval in January of a right-of-way allowing the Keystone XL oil sands pipeline to be built across the U.S., nudging the controversial $8-billion project that much closer to completion.

Alberta’s perspective. In Alberta, the provincial government has done what it can to try and stimulate moribund price markets, but with mixed success. Production cuts have had some success, intervention in the crude-by-rail markets was ultimately rejected by the new provincial government, and incentives, like tax cuts, are simply not enough to overcome the stark market realities facing the Canadian industry.

Canadian producers still often sell their oil at a discount between the Western Canada Select benchmark price and West Texas Intermediate, due primarily to ongoing market access constraints. Efforts to establish a made-in-Alberta carbon tax have failed to date. The province faces the implementation of two separate carbon taxes: one provincial; one federal.

Alberta’s provincial government also has established the Canadian Energy Centre, known as the energy “war room,” to counter the overwhelming tide of false rhetoric propagated by ideological special interest groups and foreign activists, and designed to cripple the Canadian industry. The damage done by this misinformation has caused incalculable damage to Alberta, and by extension Canada, and Alberta Premier Jason Kenney’s government hopes that this initiative may at least provide a counter in this war of words.

Despite these efforts, industry continues to delay or cancel projects, reducing spending, and limiting its exposure to the current negative market conditions. As a result, land sale revenues and drilling numbers are once again trending downward, and early results in 2020 are not encouraging for the year ahead.

The poor performance of the Canadian dollar, which continues to hover around the U.S. 75-cent mark, provides a buffer, benefitting the export-driven oil and gas industry, which still ships substantial volumes of oil and gas south to U.S. customers.

Alberta’s vast oil sands continue to be both a driver of the provincial economy and a flashpoint for pro- and anti-oil forces. Currently, Teck Resources Limited’s proposed C$20-billion Frontier Oil Sands Project, designed to produce 260,000 bpd, is awaiting a decision by the federal government on whether it will receive approval to proceed. The project was already subject to a joint Alberta/Canada hearing, after which the joint review panel recommended approval. The company has said that even if it clears this final hurdle, it will still have to make a determination whether it will proceed. Much of that will hinge on whether pipeline constraints.

Ultimately, access to markets—or lack thereof—will be the clearest signal of a return to profitability and, perhaps, stability for the Canadian industry. With global demand on the increase, there is some long-range hope that Canadian oil may, indeed, fetch a fair market price.

Typically, uncertainty and poor industry performance make conditions ripe for companies looking to expand via mergers and acquisitions. But in 2019, much like many other factors, M&A bucked that trend, with only C$8 billion worth of deals, compared to C$12.1 billion in 2018, according to Calgary-based Sayer Energy Advisors. Most pundits are less bullish for 2020, and most, including Sayer, are forecasting a modest increase from 2019 levels in the year ahead.

Drilling levels ended up lower than forecast in 2019, and the bearish outlook remains in place for 2020. According to Daily Oil Bulletin records, there were just 5,545 wells drilled in 2019, a 25% drop from the 7,424 wells drilled in 2018. Of the total drilled last year, 68.1% were oil wells, and 94% were categorized as development drilling.

In Alberta, drilling fell 33.5%, to 2,410 wells drilled, compared to 3,626 the year before. In Saskatchewan, drilling was down 26.1%, with 1,890 wells drilled, versus 2,557 in 2018. In British Columbia, operators drilled 364 wells in 2019, down 17.1% from 439 in the previous year. And in Manitoba, drilling fell 19.6%, to 222 wells in 2019, compared to 276 in 2018.

For the year ahead, the Canadian Association of Oilwell Drilling Contractors is predicting that drilling will remain virtually flat, with 4,905 wells drilled, citing the Liberal election victory (and implementation of punitive legislation) as the main contributing factor. Meanwhile, the Petroleum Services Association of Canada is far more bearish, calling for a total of 4,800 which is actually an increase from its projection last fall, with some hope for LNG projects prompting a recovery in natural gas prices.

World Oil survey results, from provincial agencies and the Canadian Association of Petroleum Producers, are a bit of a mixed bag, with CAPP forecasting that drilling will fall by another 8.4% in 2020. Alberta is less bearish, projecting a 2.6% increase in drilling for the province this year.

Land sales continued their freefall in 2019, with industry spending just C$172.25 million in western Canada, down more than 67% from the C$527.1 million collected in 2018. The downward trend clearly indicates industry’s continued misgivings about its overall fiscal health. It was just 11 years ago that industry set the record high of $5 billion in 2008.

In Alberta, spending was $131.5 million, a drop of 68% from last year’s total of $411.4 million. Three years ago, Alberta collected just $148.6 million, which at that time made 2016 the lowest total recorded in Alberta in more than 20 years. That dubious distinction now goes to 2019.

British Columbia’s anti-oil government seems to be achieving some results in their home province, where industry spent just $14.7 million, down 77% from the $64.1 million in bonus bids collected in 2018. This also eclipses the province’s all-time low in land sale revenues, also set in 2016, when it took in just $15.2 million.

Saskatchewan experienced the lowest decline, at just under 50%, to $25.4 million, from $50.7 million in 2018. And Manitoba took in $102,032 last year, compared to $828,580 in 2018.

Given that the acquisition of land inventories is one of the most consistent indicators of future drilling activity; it appears that industry is looking to spend as little as possible until stronger signals emerge that more stability, and profitability, is ahead. Early returns in 2020 suggest that spending could drop even further in the year ahead.