The Canadian energy sector’s 2019 metamorphosis paves the way for a stronger and globally relevant industry, not only for 2020 but decades from now
It’s been a grind for the Canadian energy industry over the past six years since the bottom fell out of oil prices. Through those years, the industry has endured stress-inducing volatility in the markets and continued vilification by various segments of society. Although Western Canadian oil prices have improved somewhat since that shocker year of 2014, PwC analyst, Adam Crutchfield feels that 2019 has emerged as an especially difficult year, not only because of the ongoing uncertainty but because the sector remains stuck with egress capacity. Crutchfield, Partner, National Energy and Alberta Consulting Leader with PwC Canada, says the discouraging year is a result of the accumulation of a number of difficult years but that it should also be regarded as a significant turning point for the sector.
“In 2019, after so many years of down markets and commodity prices, our businesses in Alberta and Canada have had to make difficult changes to adapt that world, the one where commodity prices aren’t going up every year,” Crutchfield says. “They’ve readjusted to compete in the new environment by realizing they have to live with their means, i.e. cash flow. They’re living in a global market within the confines of commodity pricing that is globally determined. Because of that adaptation, I believe 2019 is the year of transformation of those companies into global players in a global market.” Crutchfield says that’s crucial because the equity markets have essentially been closed to Canadian energy companies since 2014 – 2015.Article Sponsored by:
"Even junior producers, such as Hillcrest Petroleum, are looking at ways of contributing to green or cleantech initiatives by leveraging the profitability of traditional oil and gas development. Every company needs to do its part in changing the public view of the energy industry", Don Currie CEO Hillcrest Petroleum.
In terms of global relevance, the crucial aspect is access to those global markets, i.e. pipelines and other delivery methods. While Crutchfield says he’ll leave a comment of actual shipment to other experts, he does feel strongly that developing those markets plays a central role in the future of the Canadian energy sector.
“We are a global player by the metrics, that is, production at scale, “he explains. “Most of our product goes to one customer and whether the product moves by pipeline south, or to the coast, as Canadians, we have to look at control of our overall supply changes. We have to understand what our customers are looking. We’re in a global market, so how do we become a global player? We do that by interacting and developing relationships. We need to get to know who our customers are and who the consumers are in those markets.”
A very crucial transition that took place in 2019, Crutchfield says, is the acknowledgment that to become, and remain, globally relevant, oil and gas businesses in Canada need to put their money where their mouths are when it comes environmental expectations from around the world. For many major global investors, relevancy is equated with how public companies actually put their environmental, social and governance (ESG) views into practice Announcements by several leading Canadian energy companies this past year suggest the oil and gas sector has come to terms with this expectation. Canadian Natural Resources Ltd, MEG Energy Corp., and Repsol SA all declared their intentions for aggressive net-zero emissions goals, while Cenovus Energy Inc. did the same earlier in January of 2020.
In 2019 the environmental concerns started lining up with global dollars, says Crutchfield and forward-looking companies declared they need to be known as greenest in the global market. He points out the 7,000 global investment institutions that have signed on to the “Principles for Responsible Investment” (PRI) which encourages investors to use responsible investment to enhance returns and better manage risks. The PRI originated in 2005 at the urging of then-United Nations Secretary, Kofi Annan. Current signatories to the PRI represent more than US$86 trillion in investor capital.
“What is significant with the net-zero announcements that we’ve seen over the past year is that Canadian companies aren’t just talking about the goals,” Crutchfield says. “What companies such as Repsol and Cenovus have done is made the financial commitment and expect to be held accountable. That’s a fundamental shift. This is an opportunity for Canadian businesses to take the lead globally by providing cleaner energy products. It can create a higher demand by replacing supplies from other parts of the world.”
Is investing the billions required to develop the technology to lower emissions economically viable? In an interview with ArcEnergy Research Institute, CNRL executive vice-chairman, Steve Laut, explained now that those huge upfront capital investments to develop oilsands production are largely behind those companies, their facilities become, essentially, manufacturing operations allowing production costs to fall substantially. Laut says, in 2009, operating costs for CNRL ran at about US$42 - $44 per barrel, while currently, mining, extraction, and upgrading to light, sweet oil costs about $15 per barrel. Laut feels the costs could be brought down even further to as much as $10 per barrel.
At the same time, CNRL’s intense emissions output has fallen to the average emissions of crude oil production in U.S. operations and, in some cases, lower. Laut also feels CNRL emissions will fall even lower, with the eventual goal of zero emissions. “I think it’s doable,” he said in the interview.
Crutchfield says despite the challenges facing the energy sector, he’s optimistic.
“Historically, the industry has always adapted,” he says. “Over the past several years, it’s also been adapting to this disruption, which will be the new normal. We can take advantage of the disruption. Maybe we can’t control it, but we can adapt successfully.”
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