The past year has seen oil & gas stocks flourish amid a Goldilocks environment. Oil demand is robust and OPEC+ has been successful in constraining the supply while green energy has not managed to fill the gap. Investment capital is expected back despite the growing trend of environmental considerations in investing and financing, say industry watchers.
For the time being, oil prices remain near recent highs following an abandoned July 5 OPEC+ meeting. The cartel, formed by the 14-member Organization of the Petroleum Exporting Countries (OPEC) and 10 additional oil-exporting countries, failed to strike a deal to manage production cuts beyond April 2022. The U.S. oil benchmark West Texas Intermediate (WTI) hit its highest level since 2014, briefly topping US$76 a barrel after the meeting’s abandonment before starting to decline on July 7.
Oilsands investment had been considerably lower since the heady days of 2014 when WTI last topped US$100 a barrel, but the Canadian Association of Petroleum Producers (CAPP) is forecasting a 14 percent increase in upstream natural oil and gas investment in 2021.
“Oil price stability creates more reliability and certainty for our sector’s operation, which leads to the anticipation of an increase in capital investment,” Mark Pinney, CAPP’s manager of market economics, told The Epoch Times.
Pinney said capital spending in the oil & gas sector is expected to be around $3.36 billion higher this year, reaching $27.3 billion, compared to an estimated total investment of $24 billion in 2020.
Pinney called it a “stabilizing of the industry.”
‘Road to Recovery’
The price of WTI is up over 50 percent in the first half of 2021 alone, and oil companies’ share prices are surging.
The Toronto Stock Exchange (TSX) capped energy sector has returned 54 percent in 2021 up to June 30, whereas it’s been a money loser for investors over the past three, five, and ten years.
In contrast, the TSX renewable energy and clean technology sector has lost 6.6 percent this year up to June 30 while showing solid returns for the three-, five-, and ten-year time frames.
“Right now, we believe the [oil and gas] industry is at the start of a long road to recovery,” Pinney said.
As OPEC+ curtailed supply, U.S. crude production remained muted as well.
BMO senior economist Art Woo in a June 25 note suggested three factors holding back U.S. supply—U.S. President Joe Biden’s climate change policies, the acceleration in environmental, social, and governance (ESG) investment considerations, and industry discipline in capital spending due to ongoing shareholder demands.
Rising use of ESG criteria has limited the amount of financing for oil & gas companies, and Biden’s climate change push—which includes stricter regulations and removal of various subsidies—is raising the cost of extraction and investment uncertainty for the industry, Woo said.
According to the TSX’s Market Intelligence Group, clean tech & renewable energy companies have raised about six times ($2.65 billion) the amount of equity capital through the TSX and TSX Venture exchanges than have oil & gas companies ($444 million) in 2021 up to May 31. However, the total market value of oil & gas companies on those two exchanges remains more than twice that of clean tech & renewable energy companies as of May 31.
For Canada’s oilsands, Rafi Tahmazian, senior portfolio manager at Canoe Financial, told BNN Bloomberg on July 5 that he sees investment returning as producers become cleaner and more efficient.
“There’s a realization that you can’t just turn off your desire to use energy without turning off the actual need to use energy,” he said. “We may not want to use it, but we’re using it like crazy.”
Tahmazian said this dynamic is going to benefit Canadian energy and the economy over the next few years.
Of paramount importance to Canadian oil producers is having the difference between WTI and Western Canada Select (WCS) remain in a narrow range. As WTI has climbed, so too has WCS, with the difference currently hovering between US$10 and US$15 a barrel. If the spread gets higher, Canadian producers will suffer as they sell their product at a greater discount to the United States.
Pinney says that Canadian producers have been relying more on rail transportation in 2021 than in 2020, and that the completion of the Line 3 and TMX pipeline expansions will improve market access over the long run, which will help ensure producers get closer to the full market value for their resources.
The wildcard for the industry is how the OPEC+ impasse unfolds. One scenario the cartel would like to avoid, analysts say, is its collapse due to the clash between the United Arab Emirates and Saudi Arabia. This could result in another price war like in April 2020 between the Saudis and Russians, which resulted in oil prices plunging.