2022 Forecast: Positives try to outweigh the negatives in Canada’s upstream
As the Covid-19 crisis appears to be shifting into the endemic phase, protests across Canada are focused on the temporary measures put into place by governments and their impacts. What’s been lost is the federal government’s almost singular focus on eliminating fossil fuels dependence and dismantling the industry that has been the single most-important driver of the country’s economy for the vast majority of the past century.
THE BIG PICTURE
Ironically, the Canadian oil patch is widely regarded as innovative, forward-thinking, and green, compared to most jurisdictions around the globe. There is a huge opportunity for governments to tap into that resourcefulness. They can partner with industry and put Canada at the vanguard of a measured and informed transition, into an energy mix that includes new technologies, more reliable and less costly renewables, and the continued use of fossil fuels with significantly reduced environmental impacts.
A measured and thoughtful transition also would reduce the enormous financial burden associated with a forced and uneven transition—a burden that will be borne by taxpayers. To date, those looming impacts have not been communicated effectively to average Canadians, and the opportunities to collaborate are largely ignored.
The result is an industry plagued by uncertainty and doubt, guarded in its planning because it must hedge against political risk. Meanwhile, billions of dollars have been diverted elsewhere, often to jurisdictions that have little or no regard for the environment or basic human rights. Instead of leading the way as a beacon of change and hope, Canada’s oil and gas industry remains in a year-to-year planning cycle, waiting for the next ideological edict from politicians more interested in virtue-signaling than tackling real-world problems in a meaningful and constructive way.
Meanwhile, without any meaningful support from Ottawa, Canadian oil sands producers have formed their own consortium to achieve net zero emissions by 2050. Entitled “Oilsands Pathways to Net Zero,” the group consists of six companies: Imperial Oil Limited, Canadian Natural Resources Limited, Suncor Energy Inc., Meg Energy Corp., ConocoPhillips, and Cenovus Energy Inc. The group expects to spend C$70-75 billion over three phases, eliminating 68 megatons of oil sands emissions. The first phase is building a trunk line from Fort McMurray to Cold Lake, Alberta, to ship CO2 to sequestration facilities. The group also says it is meeting regularly with the provincial and federal governments to keep them apprised, seeking investment tax credits and other financial supports.
Prices/activity. The good news is that commodity prices are up—even natural gas—and results are very strong for most producers. As a result, drilling has taken a jump upward (Fig. 1), land sales have a pulse again, and spending plans have increased for 2022. The classic issues with Canada’s cyclical oil patch are back, of course: a lack of skilled labor, market access, and skittish markets. Additionally, supply chain issues, which are problematic across virtually every industry, have compounded things for oil and gas producers too.
There was modest recovery in 2021, but only in comparison to the disastrous 2020, where virtually every measure fell to unprecedented lows, due to Covid-related lockdowns that drastically reduced travel and global oil demand. If the Canadian industry can show continued growth this year, then a recovery back to pre-Covid activity may indeed be in place.
Market access remains a top-of-mind issue, as the TransMountain pipeline expansion faces a seemingly endless parade of challenges, cost overruns, and other delays, including Covid restrictions. The beleaguered project, which is owned by the Canadian federal government, is estimated to have a C$17 billion price tag, with its in-service date now delayed until 2023. Originally, the project had a C$7.4 billion estimated cost.
And although TC Energy’s Keystone XL project is officially dead after U.S. President Joe Biden reversed its approval, the saga is not over. In addition to TC’s legacy NAFTA claim launched last year—seeking more than C$15 billion in damages from the U.S.—the Alberta government also added its own claim in early February, seeking compensation for the $1.3 billion it invested in Keystone.
Capital spending. Amid the turmoil, Canadian producers’ spending plans have increased substantially in 2022. According to the Canadian Association of Petroleum Producers (CAPP), capital spending will increase by C$6 billion this year, up more than 20%, versus $26.9 billion in 2021. Of this, C$21.2 billion is ticketed for conventional oil and natural gas, and C$11.6 billion for Alberta’s oil sands. CAPP also notes that spending is still well below Canada’s record of $81 billion in 2014.
Individual spending plans for 2022 include Suncor, at C$4.7 billion, increasing slightly over its estimated 2021 expenditures of C$3.8-4.5 billion; CNRL, at C$4.35 billion, up almost 25% over 2021 spending of C$3.48 billion; Cenovus, at C$2.6-3.0 billion, compared to C$2.3-2.7 billion last year, and Imperial plans to spend C$1.4 billion, up 27% over C$1.1 billion in 2021.
M&A levels. Merger and acquisition activity was C$18.1 billion in 2021, according to Calgary-based Sayer Energy Advisors, down 9% from C$19.9 billion the year previous, although that number was almost entirely due to the Cenovus/Husky merger in late 2020. Over 40% of the total M&A in 2021 was from three transactions: ARC Resources Ltd. Acquiring Seven Generations Energy Ltd. for C$5.1 billion in February, Tourmaline Oil Corp. purchasing Black Swan Energy Ltd. for C$1.1 billion in June, and in November, Canadian Natural Resources Limited taking over Storm Resources Ltd. for just over C$1.0 billion.
Producers are also benefitting from the continued the low level of the Canadian dollar, which continues to hang around the US 78-cent mark this year versus the U.S. dollar. A low Canadian dollar provides a buffer for the export-driven oil and gas industry, which ships substantial volumes of oil and gas south to U.S. customers.
As expected, drilling numbers increased dramatically over the dismal numbers posted in 2020 in Canada. Drilling levels surged more than 56% in 2021, to 4,648, compared to just 2,978 wells drilled the year before, according to Daily Oil Bulletin records. Just over 65% of the wells targeted oil, and 27% targeted gas.
In Alberta, drilling increased just under 85%, to 2,659 wells drilled, compared to 1,439 the year before. In Saskatchewan, drilling was up almost 27%, with 1,359 wells drilled, versus 1,073 in 2020. British Columbia operators drilled 464 wells last year, up more than 26% from 367 in the previous year. And in Manitoba, drilling increased almost 88%, to 156 wells in 2021, compared to 83 in 2020.
For the year ahead, the Canadian Association of Energy Drilling Contractors is predicting that drilling will increase almost 27%, to 6,457 wells drilled, with a corresponding increase in employment levels and a modest bump in the rig fleet, to 489 from 481. Meanwhile, the Petroleum Services Association of Canada, typically more bearish, is calling for a total of 5,400, an increase of just over 16%. Both associations see global demand increasing, as the world continues to recover from Covid-19, although labor shortages remain a major issue for the drilling sector.
World Oil survey results are similar. The Canadian Association of Petroleum Producers is projecting drilling to increase about 16% to 5,400. Saskatchewan is very bullish on activity in 2022, predicting that over 2,000 wells will be drilled, an increase of 52%. British Columbia provided 2021 actuals, but not a forecast, and both Manitoba and the Alberta Energy Regulator failed to submit a survey.
After land sales were reduced or outright canceled in 2020, the numbers had nowhere to go but up in 2021. According to Daily Oil Bulletin records, industry increased spending by more than 230% to C$126.65 million, compared to $38.16 million in 2020. But that increase is deceptive, given that the industry set a record high of $5 billion in 2008, during the last activity boom.
In Alberta, spending came in at $113.58 million, an increase of over 280% over the 2020 total of $29.7 million, which was the lowest total ever collected annually in Alberta. British Columbia brought in $3.78 million last year, after collecting a meagre $57,000 before sales were halted in 2020.
Saskatchewan, which maintained its full land sale schedule throughout, garnered $9.1 million, up 11.9% over $8.1 million in 2020. Manitoba took in $191,660 in 2021, continuing the downward trend it’s seen over the past three years. In 2020, the province collected $293,303.
Although it’s positive to see recovery in land sales—a bellwether of future activity—the recovery last year was extremely modest. The dollars invested by the Canadian industry in 2022 will be far more indicative of how robust any recovery will be for the oil patch.
Robert Curran is a Calgary-based freelance writer.
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