By Bruce Lantz
Pity the Las Vegas bookmaker who tries to set the odds for success of North America’s oil and gas sector in 2022.
A variety of factors have made the industry’s future, even in the short term, almost impossible to predict with any degree of certainty. That’s exacerbated by the aggressiveness and dire warnings from the environmental movement, supported in large part by dictates from United States President Joe Biden and Canadian Prime Minister Justin Trudeau, made largely without paying attention to their widespread ramifications.
Despite all that, industry leaders have a more positive view.
Deloitte’s 2022 Oil and Gas Industry Outlook notes that the industry rebounded strongly in 2021, with oil prices reaching their highest level in six years, above $80 per barrel after lows of around $40-$60/bbl. Many companies are looking to reinvent themselves by practicing capital discipline, focusing on financial health, committing to climate change and transforming business models, the survey found, and nearly two-thirds of oil and gas executives saying they’re “highly positive” about strategic changes made by their organizations.
“The journey of transformation has just begun for the industry and simply managing or riding oil price cycles aren’t options anymore,” Deloitte’s report says. Instead, they say, over the next 12-18 months industry strategists should streamline and optimize their resource portfolios; embrace and develop smart goals for the energy transition; attract, train and retain employees in a tight labor market; and, come to terms with additional environmental, social and governance (ESG) requirements.
The study says that oil and gas companies are now showing more discipline with production and capital guidance, despite the current high prices. And those prices are allowing companies to fund their net-zero commitments with investments in more risky and expensive green energy solutions, such as carbon capture, utilization and storage. Furthermore, ESG is playing a larger role in M&A transactions, and with oilfield service sector spending expected to remain about 25% below 2019 levels until 2025, business models are shifting to enable a new energy era.
There’s no question that change is in the wind. The Canadian Energy Regulator (CER) in their report Energy Supply and Demand Projections to 2050, predicts that fossil fuel use will drop 62% in the next 30 years if Canada and the world continue the current pace of increasing action to reduce greenhouse gas emissions. The CER also predicts that Canadians will reduce the overall energy consumption by 21 per cent in the same period and that electricity will play a more significant role in satisfying energy needs, a 45% increase.
“Global and Canadian efforts to reduce GHG emissions will be a critical factor in how our energy systems evolve in the long term,” said CER chief economist Darren Christie in the report. “Advances in clean technology and evolving government policies will be the difference-makers.”
Despite such predictions, fossil fuels will remain a factor in 2050. The CER report says Canadian crude oil production levels in 2050 will be “only slightly below” today’s levels, due to the long-lived natural of oil sands facilities and their relatively low operating costs. Likewise, projections reveal that the pipeline system out of Western Canada will be operating at near-capacity into the 2030s. “Achieving net-zero will likely require greater long-term change,” the report says.
Despite what environmentalists and some political leaders espouse, we can expect only moderate growth in Canadian energy use in the next three decades due to the lack of additional climate action beyond current policies, CER says, with resulting higher crude oil and natural gas production and less electrification. Higher oil and natural gas prices, greater LNG export demand and a lack of additional domestic climate policies will drive up future oil and natural gas production. To meet net-zero electricity demands the 10 provinces must meet their electricity demands in diverse way — hydro, nuclear, fossil fuels with carbon capture and storage, wind, solar, hydrogen and biomass with carbon capture and storage.
The Canadian Association of Energy Contractors (CAOEC) President and CEO Mark Scholz says that after a “troubling” 2020, last year was “a year of optimism” for the energy sector.
“After the historic lows we endured (in 2020), 2021 served as a beacon of hope for our sector,” he said in a news release, citing rebounding energy demand with subsequent energy shortages across Europe and Asia stressing the need for increased export capacity. “Now, more than ever before, the world needs Canada’s best-in-class energy.”
Scholz said labor challenges throughout the industry will continue but he’s optimistic that in the long term the demand for Canadian energy resources will continue and expand into the alternative energy sector as companies lend their expertise in drilling for geothermal, hydrogen, lithium and helium. The industry in Canada employs more than 282,000 people and supports more than 55,500 jobs, and with the existing opportunities for growth, “we will need hard-working women and men to help make the net-zero emissions vision a reality,” he said, adding that even with labor shortage the CAOEC is forecasting an increase in rig activity in 2022, with an estimated 210 active rigs in Q1, 90 active rigs in Q2, 155 active rigs in Q3 and 180 active rigs in Q4, with an active well count of about 6,400 in Canada.
“After the last few years we’ve had, it would’ve been easy to give up. And believe me, I know some were forced to make the difficult decision to move on from our energy sector. However, there are many of us who are still here, and we can’t give up now.”
He said the industry was encouraged when the Enbridge Line 3 pipeline came into service last fall, marking the first major Canadian oil pipeline expansion to be completed in six years. Now they are hopeful that other projects, such as the Trans Mountain Expansion, Coastal Gaslink, Alberta’s NGTL system expansion and LNG Canada will be completed in the years to come.
The U.S. outlook is also generally bullish, with experts predicting oil will hover between $75-$80 a barrel for the first half of the year and optimists predicting $100-$200 per barrel if short-term demand outstrips inventories and future production.
“Industry has weathered the worst 24 months in its history, which began with a manufactured price collapse orchestrated by OPEC+ designed to crush U.S. shale producers, which was then followed by the global demand collapse due to the. . . . pandemic,” U.S. Oil and Gas Association President Tim Stewart told Resource World Magazine.
“Industry weathered that only to be hit on the back end by the Biden Administration’s aggressive anti-industry policies. It has been a rough two years for this industry but smart money knows never to bet against us.”
Stewart said the industry has been hampered by everything from workforce challenges to supply chair issues to Wall Street activists who want to deny all oil and gas investment, coupled with an administration hostile to exploration and production of “the basic energy source that Americans rely on for virtually everything”.
While the USOGA foresees more consolidation among industry players and constraints on capital investment that will hurt smaller players to take on the most risk on the E&P side, stocks have proven resilient and many companies are meeting Wall Street’s demand for improved returns.
Stewart says to watch out for three “flations” that could impact the industry:
“Bidenflation— The negative impact that aggressive regulatory overreach has on supply and reinvestments into energy infrastructure domestically. The markets and consumer prices currently reflect poorly thought out policies and mixed messages the Administration sends almost weekly. We are seeing the costs associated with doubling down on Green New Deal policies here in the U.S. even before the policies are enacted, and this has pushed many American families to the edge of what I call energy poverty. These costs will continue to impact disproportionately moderate- and low-income families and small businesses. Bidenflation is a precursor to a much larger longer-term problem called:
“Greenflation, which is just now emerging in Europe and will have much longer and far-reaching impacts on commodities and consumers. Aggressively funding ESG and green energy projects are just starting to show the impacts on other commodity prices. Coupled with the constraint of funding necessary investment in fossil infrastructure and production, and the insufficient production capacity of renewable energies as well as the shortage of manufacturing materials, there will be a very long and painful transition time where energy bills will be rising for consumers, transportation, manufacturers and agricultural sectors. It’s going to get ugly.
“Then there is the third ‘flation’, which I call:
“Putinflation — ie. What will (Russian President Vladimir) Putin do and how will that impact energy prices globally? Two years ago, when the Saudi production went offline due to drone strikes, it barely dented the global markets, thanks to record-setting U.S. production at the time. That is no longer the case, thanks to the Biden administration. Russian expansionism could have a significant impact on energy prices that the U.S. will not be able to absorb under this new administration’s policies.”
So what’s the 2022 outlook? It’s anyone’s guess.