By Bruce Lantz
Ravaged by falling prices and demand and a worldwide pandemic plus regulatory uncertainty and asset write-downs, industry improvements aren’t likely until at least mid-2021, Ben Brunnen, vice-president, fiscal and economic policy for the Canadian Association of Petroleum Producers (CAPP), said in an interview with Resource World.
“We’ve seen the stabilization of prices since April but we’re nowhere near recovery,” he said, adding that current levels can’t sustain new investment and demand could still decrease substantially — bad news for Canada’s industry, which has seen 135,000 direct and indirect jobs lost — and more expected in 2021 — while investment dropped 35%.
“It will be a volatile and uncertain environment for the next 4-6 months.”
That’s echoed by Bryan Benoit, Grant Thornton International’s U.S. national managing partner, energy. “Turbulence has resulted from oil and gas price wars and the Covid-19 pandemic and it is a fact, recovery in oil and gas prices have tracked closely to ups and downs in the reopening of economies and around the world,” he said. “However, stability in oil and gas markets will most likely not occur until Q2 2021 and we may not see oil prices return to pre-pandemic levels until 2022.”
A lot is at stake. A recent Canadian IPSOS poll saw 44% say economic recovery should be government’s first priority while 64% said oil and natural gas must be part of that recovery. Another 55% believe supporting jobs in this industry is more important than ever. That’s understandable, since oil and gas exports generated over C$112 billion in 2019 — about 19% of total export revenues — and the industry normally supports half a million jobs, contributing more than $8 billion annually to government revenues across the country.
A Statistics Canada report showed capital spending in the oil and gas sector fell 54% in the quarter ended June 30 while 2020 oil production was expected to average 4.38 million barrels per day, down 6.6%.
“Economic recovery is top-of-mind for Canadians, and we are encouraged to see the support across the country for a strong oil and gas industry,” said CAPP president and CEO Tim McMillan in a news release. “Government policy must be considered in the context of a strong economic recovery plan. It’s time to signal to the international community that Canada is a good place to do business and market our strengths to attract investment back to our industries.”
Apparently reacting to environmental opponents, the release noted that the oil and gas sector is Canada’s largest investor in “clean technology” and environmental protection, spending about $3.5 billion annually. But Ottawa wants to reduce the carbon intensity of liquid fuel by 30 million tonnes by 2030, which may force suppliers to make greater use of biofuels and buy carbon credits, while terminals will need to be reworked to incorporate more renewable feedstocks and gas stations revamped to sell cleaner fuel.
Thanks to factors such as demand declines, restructuring that includes smaller firms selling out to larger companies, and mitigation and risks brought on by the pandemic, players in the oil and gas industry have had to scale back and until things return to normal, exploration will be at a standstill, Brunnen said. The expected increase in gasoline sales as pandemic restrictions are lifted has not materialized and the end of the summer driving season has shown little boost to the market. Equally, air travel has stalled due to the virus and airlines are struggling, Brunnen said.
“There’s still some capex proceeding because companies will continue to replace their declining volumes and some have obligations to fill,” he said, “but generally speaking there’s not much happening in terms of investing. It’s not a priority at this time.”
In the U.S., said Benoit, the government has never established a long-term strategic energy plan. Now might be the time to do so, he said, and there may be some stimulus to industries greatly affected by the pandemic. A new policy might incentivize energy transition, including but not limited to preventing oil and gas prices from falling below thresholds detrimental to making a profit and/or simultaneously disadvantaging the renewables sector. But he said to prepare for the worst.
“A more likely than not worst-case scenario is the industry does not recover beyond the production and price levels we are at now, and we may already have seen the highs. It is possible the worst-case scenario has already occurred in oil and gas or is unfolding now.”
While there may be a temporary spike in oil prices, Benoit said, the general outlook is lower with industry growth expected to be in the low single-digit percentages even though natural gas could reach 25-30%. He also cited a “very exciting” outlook for LNG, although he said the required investment is substantial. Expect streamlined operations and mergers, which will drive improved margins and balance sheets, and greater ability to sustain business cycles.
“Demand must return to higher levels,” Benoit said, citing expectations of $45-$50 a barrel, but drilling could take 3-5 years to reach pre-pandemic levels, and “that may be optimistic”.
Even if E&P returns as expected by mid-2021, the key is reaching industry viability in the long term, said Brunnen. “We need to attract investment, we need to send the right signals, and we need the federal and provincial governments on the same page regarding attracting investment,” he said, noting that Norway has changed its industry tax structure to prompt growth “but Canada hasn’t kept pace”.
But the world is flexible and despite the current “skittish environment” progress is being made, said Brunnen. “Economies are starting to reopen and governments are figuring out how to respond. We need long-term solutions. Society will adjust, markets will adjust by mid-2021 and there will be better confidence. Companies will get comfortable investing.”