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Why Canada’s Oilpatch Still Struggles As Oil Prices Rise: David Yager

These translations are done via Google Translate

By David Yager

Oilfield Services Executive Advisory – Energy Policy Analyst

It wasn’t an apology nor admission of wrongdoing. But it was certainly an about face for Steve Williams, the CEO of Suncor Energy Inc. On May 3 Williams was very explicit about why Suncor would not be investing in any new projects in Canada.

Calgary Herald columnist Chris Varcoe wrote, “…the company won’t make a final investment call without seeing progress on the sector’s competitiveness concerns…Williams noted a World Bank report recently ranked Canada 34th out of 35 developed countries in terms of the speed around granting permits for new construction projects”.

Williams said, “Big investment in the resource industry….is starting to move away from Canada. And that is partly because of taxation, partly to do with royalties, partly to do with the uncertainty – the length of time it takes to get through these regulatory hurdles – and the general belief in the investment community that Canada is not a great place to spend money”.

This is not what Williams espoused November 22, 2015 when he appeared on TV with Alberta Premier Notley and Canadian Natural Resources Ltd., Cenovus Energy Inc. and Royal Dutch Shell plc/Shell Canada Ltd. They were endorsing the NDP’s Climate Leadership Plan just in time for Notley and crew to walk tall at the upcoming global climate summit in Paris.

While the CEOs didn’t appear proud, neither they were embarrassed. In a joint news release Williams’ quote read, “Today we reach a milestone in ensuring Alberta’s valuable resource is accompanied by leading carbon policy. It’s time that Alberta is seen as a climate, energy and innovation leader.”

By publicly agreeing with the NDP – outspoken allies of the environmental movement – to accept higher carbon taxes and an oil sands emissions cap, big oil made a big pact with big green. Because the social license was surely in the mail; pipeline access assured. Look at us. We’re on the same team. Now if all you oil sands haters would just shut up and let us get on with the job of producing more carbon, everything will be fine.

Thirty months later it is obvious this unlikely alliance has failed. Suncor joins a growing chorus of concerned companies, business organizations and corporate leaders warning governments that Canada has committed economic self-immolation with taxes and regulations and, on the pipeline file, all but assured paralysis.

Vocal Business Backlash Over Competitiveness

The default behavior of big corporations, business trade organizations and senior executives is to work quietly behind the scenes to try to talk sense into politicians. However, things have gotten so awful the captains of industry are going public with growing concerns that Canada is, as former Bank of Canada Governor David Dodge recently told BNN, determined to “shoot ourselves in the foot”.

A tipping point was February 8 when Ottawa announced new regulations for pipeline approvals to replace the existing NEB process Justin Trudeau campaigned against in 2015. The Canadian Energy Pipeline Association (CEPA) responded, “From the outset, CEPA has stated that individual project reviews are not the appropriate place to resolve broad policy issues, such as climate change…It is absolutely critical that the regulatory reform initiatives…do not add to the significant obstacles already facing our energy industry”.

The next day former Finance Minister Joe Oliver was more forthright writing in the Financial Post, “It is a mixed bag, full of conflicting objectives and commitments to public trust, environmental protection, approval of ‘good’ projects, getting resources to market, public engagement and Aboriginal reconciliation. Unfortunately, it is more likely to heighten uncertainty, delays, cost and bureaucratic entanglement, even as it enhances the opportunity for opponents to scupper critical projects”.

In Ottawa the day before the February 27 federal budget, CAPP released its position on Canada’s declining competitiveness. “Rising government costs, the burden of inefficient regulations, and the lack of infrastructure to move Canadian energy to growing markets are all undermining investor confidence in Canada and negatively affecting the country’s ability to attract the capital needed to create jobs and national prosperity”.

Dave McKay, CEO of the Royal Bank of Canada, publicly said investment capital is flowing out of Canada to the United States in “real time”. Part of this was due to major U.S. tax reforms and regulatory streamlining initiated by pro-business President Donald Trump at the same time Canadian governments were going in the opposite direction. McKay said, “…we are seeing capital flow out of the country.”

Business Council of Canada and former Liberal Finance Minister John Manley said competitiveness was absent from the recent federal budget. “We’re always in this difficult competition to attract capital and to retain investment – and it’s not to be taken lightly because investment can move quickly”.

On April 5 CEPA CEO Chris Bloomer criticized Ottawa’s plan to overhaul the NEB. He said in an interview, “It is difficult to imagine that a new major pipeline could be built in Canada under the Impact Assessment Act, much less attract energy investment to Canada. We also remain concerned that, beyond the climate change test, the proposed changes in Bill C-69 (the enabling legislation) do not provide the certainty that our industry needs. If Canada is perceived as a place where these risks are too high the capital will go elsewhere”.

By late April major companies were joining the chorus. At its AGM Imperial Oil Ltd. CEO Rich Kruger expressed concerns about how changes to Canada’s taxation and regulatory processes were making it difficult for his company – a fixture in Canada’s oil business for 138 years – to justify new major investments as project approval delays were becoming unworkable. “I have lived and worked in a lot of places, and four and half years to get a project that has strong economics, pace-setting environmental performance, is inordinately long.”

At TransCanada Corp.’s annual meeting CEO Russ Girling said, “I can’t think of a better opportunity for this nation than Energy East. Unfortunately, the hurdles to get to the finish line were insurmountable and watching what’s happening right now, on the West Coast, it’s hard to imagine how we could resurrect that project.” TransCanada is instead expanding in the U.S. and Mexico.

On April 29 a National Post columnist wrote about the “slow bleeding” of corporate Canada as companies look elsewhere. A Vancouver-based CEO said, “The level of foreign investment has never been so low and continues to fall off a cliff. There is real, genuine, honest, non-partisan concern that Canada is completely out of touch with the real world”.

Jack Mintz, the respected tax expert and economist at the University of Calgary, added, “It’s the slow bleeding of Canada. It’s one of the biggest changes in the past two decades”.

The behavior of the Trudeau administration and the team he has in key positions has also caught the attention of his own party. The Liberals have always had a strong connection to Bay Street and the financial community but apparently the current government doesn’t listen to them either.

The Hill Times wrote on March 14, “The Liberals’ drop in the polls is party a sign of poor judgement and a lack of experience of the PM’s advisors”. Two days later The Toronto Star headline read, “Justin Trudeau is alienating an unlikely group: loyal Liberals”.

With These People In Charge, What Could Possibly Go Wrong?

In 2015 an NDP government under Premier Rachel Notley was elected in Alberta. Later that year Justin Trudeau’s Liberals formed government in Ottawa. In 2017 John Horgan’s NDP won the B.C. election with a minority government and is currently propped up by the Green Party and leader Andrew Weaver. The Liberals have running Ontario for 15 years and under the direction of leader Kathleen Wynne since 2013.

If corporate Canada believes these governments and their leaders are taking Canada in entirely the wrong direction, a review of the history the key players explains the problem, particularly for the oil industry. These people are setting policy, and most are or have been at the forefront of the anti-carbon movement.

Based on public information, none have worked in resource industries, agriculture, manufacturing, finance, large corporations, international business, capital markets or any of the other key economic drivers which made Canada wealthy enough to focus on non-economic social and public policy issues.

In the rest of the world the vast majority is preoccupied with food, clothing, water, shelter and safety.

The closest most have gotten to participating in the private sector is practicing law (small business because many lawyers are incorporated). One was a consultant between government bureaucrat jobs and another worked for a company selling renewable energy.

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But as a group they have extensive experience with government, labor unions, public advocacy of exclusively non-commercial causes, and environmental lobbying and protectionism. One can safely conclude they are all convinced carbon fuels are a major cause of climate change and therefore a threat to the future of the world. Believers all.

Justin Trudeau, Prime Minister –  Born wealthy, he spent 10 years in universities in Montreal and Vancouver in a variety of faculties. He worked as a part-time then full-time teacher in Vancouver before moving into federal politics in 2008. Trudeau starred in some CBC documentaries and became an advocate for several worthy causes. He became Liberal party leader in 2013 and Prime Minister in 2015. The issues he speaks most passionately about – domestically and abroad – are social justice and gender parity. Demonstrating the influence of a sitting Prime Minister, Canada has attempted to insert these issues into a new NAFTA agreement under negotiation with the U.S.

Gerald Butts, Principal Secretary to the Prime Minister – Butts and Trudeau became friends in university. Butts has been at Trudeau’s side for his entire political career. After working for federal Liberal cabinet ministers, in 1999 Butts became a policy director in the Government of Ontario and later Principal Secretary to Premier Dalton McGuinty. He is widely credited for helping shape Ontario’s major environmental initiative to phase-out coal and subsidize renewables. In 2008 he became CEO of the World Wildlife Fund Canada. He has been at Trudeau’s side since 2012.

Catherine McKenna, Federal Minister of the Environment and Climate Change. McKenna has a law degree and studied International Relations at the London School of Economics. As a lawyer she specialized in human rights and social justice in Canada and Indonesia. Her first run at politics was as a Liberal in the 2015 election. When she won she quickly became a high-profile cabinet minister despite having zero experience in government or national public policy.

Marlo Raynolds, Chief of Staff to Catherine McKenna – Raynolds is a 1999 engineering graduate who earned a second degree in 2003. He spent the next seven years at the Pembina Institute focused on emissions and climate change. He spent three years at a renewable energy companies selling wind, solar and hydro power. He ran unsuccessfully as a Liberal candidate in the 2015 federal election but found himself in Ottawa a month later in a senior role in McKenna’s department. Zero experience in government.

Zoe Caron, Chief Of Staff to Federal Energy Minister Jim Carr – A career environmentalist, Caron replaced long-time Calgary oil and gas lobbyist and advocate Janet Annesley in 2017 (formerly at Shell and CAPP, Annesley now works at Husky Energy). Caron has been involved with the World Wildlife Fund, the Sierra Club and Clean Energy Canada. She was an advisor to Alberta’s NDP on moving the economy from carbon fuel and into renewables. With Green Party leader Elizabeth May she co-authored a book titled, Global Warming for Dummies.

Kathleen Wynne, Premier of Ontario – Wynne became premier in 2013 and won the 2014 election for the Liberals. She earned three university degrees in education and social sciences then gained notoriety through multiple community action and municipal activities in Toronto. She became an MLA in 2003 and held several positions within the government, none economic. Under her leadership Ontario’s deficit has skyrocketed to the point it now possesses the largest subnational (not a country) public debt in the world. Because of the high cost of subsidies to the renewables that replaced coal, Ontario has legislated lower electricity prices to shield consumers. But the auditor general has accused the Wynne administration of hiding billion in debt “off balance sheet” in a pre-election bid to make the books look better.

Rachel Notley, Premier of Alberta – Notley was born into politics through her father, former Alberta NDP leader Grant Notley. She became a lawyer then got involved with the federal NDP. She worked for the Alberta Union of Public Employees before moving to Vancouver in 1994 and became active with the with the B.C. labor movement. Returning home, Notley became labor relations officer for the United Nurses of Alberta. She was elected as an NDP MLA in 2008 and again in 2012. She became NDP leader in 2014 and Premier in 2015.

Shannon Phillips, Alberta Minister of Environment and Parks and Minster Responsible for the Status of Women – Phillips is an economic policy analyst who worked for the Alberta Federation of Labor and local volunteer organizations in Lethbridge. A Macleans article in 2016 described her as a, “tenacious social democrat with roots in activism, feminism, and organized labor”. Elected for the first time as an MLA in 2015, she had previously worked as a communications aid to the small NDP caucus during the Ralph Klein years.

John Horgan, Premier of British Columbia – Born in Victoria, Horgan attended university in Ontario and Australia. He worked for NDP MPs in Ottawa and in 1991 returned to B.C. to begin his career in provincial politics working with the NDP government in multiple capacities for various departments, ministers and later NDP Premier Dan Miller. After the NDP were replaced by the Liberals in 2001 he ran a small consulting company then won his first seat as an NDP MLA in 2005. He became party leader in 2014 and Premier in 2017.

Andrew Weaver, Green Party Leader British Columbia – Weaver is a career academic and is described as a “climate scientist”. A professor at the University of Victoria, as President of the Faculty Association Horgan served as chief negotiator for contract negotiations from 2003 to 2006. He is a prolific writer of some 200 papers and was a lead author for the United Nations Intergovernmental Panel on Climate Change. Weaver was the editor of the Journal of Climate from 2005 to 2009. He was elected as Green Party MLA in Victoria in 2012, acclaimed party leader in 2015, and was re-elected in 2017.

A generous assessment of the foregoing politicians is they simply lack experience in matters of business and finance and will hopefully figure things out before they make it worse.

A cynical assessment is they are using taxpayers’ money to fund a crusade to save the world because they are smarter than everybody else. The public will eventually figure this out and thank them.

Meanwhile In The Real World…

A common thread among the aforementioned politicians and their key advisors is the belief Canada must significantly reduce fossil fuel production and consumption.

But due to ever-rising oil prices, investment and production in the U.S. – not blessed with Canada’s anti-carbon political leadership or policies – is rocking.

Canada also is enjoying the benefits of higher crude prices. ARC Energy Research Institute’s May 7 report indicates the value of production this year is now estimated at $122 billion – the highest since 2014 and greater than every year from 2009 to 2012 – with free cash for reinvestment at $57.6 billion, more than double that of 2016. After-tax cash flow is the highest in 10 years except for 2014. This is despite the lowest natural gas prices in a decade.

But the extra cash is not being spent in Canada. ARC figures the reinvestment ratio (spending over cash flow) will only be .74, the lowest figure reported since 2009. Conventional capital investment estimates remain below 2017 and oil sands investment is the lowest since 2009. The number of wells drilled will be no higher than last year.

Globally, oil demand will continue to grow for the next 22 years. The International Energy Agency estimated in late 2017 world demand will increase about 18.3 million b/d from 2016 through to 2040. Future growth areas will be petrochemicals and non-vehicular transportation. Electric vehicles and renewables will reduce oil used for power generation and automobiles, but overall oil demand will continue to grow.

According to BP’s 2018 Energy Outlook to 2040, natural gas consumption, another source of carbon, will also grow significantly. While growth in coal demand may not increase, total coal consumption is unlikely to decline. BP warns that unless much stronger actions are undertaken globally to reduce carbon emissions, the reductions contemplated in Paris in 2015 will never be met.

In summary, no matter what the tall foreheads running governments in Ottawa, Ontario, Alberta and B.C. come up with to hobble Canada’s oil and gas industry and fight the good fight against climate change – regardless of the economic cost – on a global basis this will have no impact whatsoever.

Besides OPEC, the largest single source of new oil and gas to meet demand growth in the next 22 years will be the U.S. The IEA chart above shows production increasing from about 24 million boe/d in 2015 to over 31 million boe/d in 2040, almost a 1/3 increase. It will come primarily from shale oil and shale gas. The U.S. will continue to export more oil and LNG to the world.

While Canadian oil sands production is anticipated to grow and obviously the reserves for oil and LNG exports are identified, it is hard to imagine a quantum shift soon from what Canada is currently doing to what it could do without major government obstacles.

Approving the building of one major project like Kinder Morgan Trans Mountain or Shell LNG Canada at Kitimat would most certainly change investor perception, domestically and internationally. As would some acknowledgement from Ottawa, Toronto, Edmonton or Victoria that perhaps the onslaught of regulations, court challenges, taxes, obstruction and a public policy determination to phase out fossil fuels as soon as possible is damaging the economy…and the people these politicians are ostensibly determined to save.

But until something changes, Canada’s oil patch will not be participating like it could or should in the oil industry’s global recovery and continued growth.

About David Yager – Yager Management Ltd.

Based in Calgary, Alberta, Canada, David Yager is a former oilfield services executive and the principal of Yager Management Ltd. Yager Management provides management consultancy services to the oilfield services industry in a number of areas including M&A, Strategic Planning, Restructuring and Marketing. He has been writing about the upstream oil and gas industry and energy policy and issues since 1979.

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David Yager can be reached at Ph: 403.850.6088 Email: [email protected]

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