A year ago I wrote on these pages, “The pre-COVID economic playbook will not survive in the post-pandemic world. Domestically produced resources will again be recognized as an asset, not a liability. Alberta is very well positioned to be a winner in Canada’s economic future.”
Why? Because “the entire energy transition concept from fossil fuels to renewables is a pre-COVID phenomenon, conceived and funded during a period of significant economic growth supported by government spending.”
My prediction is now fact. After seven years in the economic (oil and gas prices) and political (climate change before cost) wilderness, Alberta is back.
And it will get better as 2022 progresses.
The world is rotating so quickly that 12 months seems like eternity. Last year in February, WTI averaged US$59. This year it was over US$90 with the full impact of events in Europe unknown. Natural gas averaged C$3 in February of 2021. This year it was 50 per cent higher.
Oil and gas production revenue and cash flow estimates are huge. According to ARC Energy Research Institute on February 21, revenue from producing over eight million barrels of oil equivalent per day in 2021 hit an all-time record $154 billion, generating after-tax cashflow of $86 billion, another record.
This year looks even better. ARC figures revenue could reach $189 billion and cashflow $113 billion. Forecast cashflow is nearly double the best year in history, 2014.
But to have the impact it could or should have on the greater economy, producers must invest in new reserves and production. The reinvestment ratio last year – how much cash flow is spent on capital expenditures (CAPEX) – was only 34 per cent, the lowest in history.
That’s when Alberta’s economy really starts to smoke – when the industry is hiring people, buying equipment, contracting services, increasing production and building infrastructure.
While public estimates of 2022 CAPEX are greatly improved, the reinvestment ratio based on what the industry has announced in the first two months is still only 33 per cent.
How can this industry generate so much cash and reinvest so little? While increased production royalties and corporate taxes have helped the Alberta government forecast the first balanced budget in eight years, will more of that money go back in the ground and into the wallets of its citizens?
Ellen R. Wald Ph.D. is an oil analyst and author. On her webpage she calls herself a “Historian and Scholar of the Energy Industry and Western Involvement in the Middle East.” Wald writes for all the major media outlets including www.investing.com. On February 17, her article was titled: “Market Conundrum: With Oil Prices So High Why Is Exploration, Production So Low?”
There are four main reasons, and they are all relics of the of the recent past. Like 2021. They are not complicated, and reversible. Assuming, of course, that governments, regulators and investors agree with my analysis of a year ago – that the pre-COVID dog won’t hunt in the post-COVID world, and renewables as a reliable energy source are totally oversold.
Wald’s first point is ‘Regulatory Uncertainty’. It is number one and it should be. The U.S. and Canada have elected federal governments that won elections in 2020 and 2021 on strong commitments to tax, legislate and regulate the world’s largest combined oil and gas producing countries into a new era of reduced emissions and lower carbon energy sources.
If producers are not investing, that’s only because they have been told repeatedly for years that they are in the wrong business doing the wrong thing. In the U.S., a recent record sale of exploration rights in the Gulf of Mexico was overturned by an environmental court challenge. What should the industry do? Where can it go? Why invest in Canada or the U.S.?
The second is ‘Hesitancy from Financiers’. It seems like eons ago (although it was only November) that the industrious and ambitious former Bank of Canada head Mark Carney went to the COP 26 gathering in Glasgow with US$130 trillion in commitments from most of the western world’s largest banks and financial institutions to use their capital as leverage to help reduce emissions.
Called the Glasgow Financial Alliance for Net Zero, it included the big six Canadian banks, lenders which have made a bundle financing Canada’s oil and gas industry.
It has become a badge of honor to deny or restrict funding to the fossil fuel business. As a result, producers wonder if their future business model should be to operate without debt because of the pledges of their historic lenders. So they are paying down debt instead of creating jobs and producing more fuel.
More producers are announcing they are, or soon will be, debt free.
The third was ‘Environmental Positions’. Last summer Quebec blocked the Energy Saguenay LNG export project ostensibly to reduce global emissions. Too many still believe it is acceptable, even righteous, to vandalize pipeline projects as was recently demonstrated at Coastal GasLink.
After Russia invaded Ukraine and exposed serious challenges with affordable and secure oil and gas supplies globally, international U.S. climate change envoy John Kerry worried publicly that the current preoccupation on fuel and food would increase emissions.
He won’t do that again.
National Post columnist Conrad Black wrote on February 26, “…John Kerry…complained that the military subjugation of the autonomous nation of Ukraine was a distraction from the existential crisis of climate change. The existential crisis isn’t posed by the climate, but people like him.”
Wald’s last issue was ‘Share Prices.’ She wrote, “Oil companies are demonstrating a preference for short-term, high share prices.” Producers have put the present before the future and are increasing dividends instead of increasing CAPEX. This is what they have been repeatedly told their shareholders want. Until recently, producers that announced higher spending on replacing production and expanding reserves had been punished on the public capital markets.
But all of the reasons explaining producer behavior predate current conditions. As oil and gas prices rise, the same western governments that were at the forefront of putting climate votes before energy security are pivoting at an amazing rate. The reversal in tone and priorities is remarkable.
The world has awakened to the fact that whatever we should do in terms of lower-carbon energy sources, not having access to energy or having it priced beyond affordability is much worse.
How will that manifest itself?
Let’s review Wald’s main points.
Regulatory Uncertainty will diminish. Governments will understand that blocking new supplies of oil and gas and the infrastructure to move it around to help moderate prices is no longer the vote-getter that it has been. Voters are now roaring globally about higher costs for everything, and politicians ignore them at their peril.
Hesitancy from Financiers will diminish as they follow the money. This will be greatly assisted by the disappearance of other places to park capital and achieve safe and satisfactory returns.
For the first two months of 2022, of the 10 main economic sectors in the S&P Composite Index, only Energy was in the black, up 23 per cent year-to-date. The other nine including Financials, Real Estate, Information Technology, Utilities and Consumer Discretionary were underwater, four experiencing double-digit declines.
Environmental Positions will decline. As the world deals with real problems ranging from military conflict to inflation rates, headline stories of how coastal cities will soon be submerged if we don’t immediately commit everything to Net Zero by 2050 will disappear.
In its February 2022 IPSOS survey “What Worries the World,” climate change ranked tenth, registering as an issue among only 14 per cent of respondents. But 63 per cent believed their governments were on the wrong track in addressing with their priorities.
As for Share Prices, there’s so much cash flow that producers could increase CAPEX and maintain or increase dividends. In fact, profits are rising so quickly that they have already become a political target. It is easy to see how politicians might look at the huge prosperity in the ’patch and conclude that if producers don’t spend their massive cash flow on increasing supply and reducing consumer prices, the government will grab it instead.
In Canada, deficits and inflation are rising. Higher interest rates are assured. The best antidote is more jobs generating significant private sector economic activity. For governments, rising employment equates to higher taxes and lower support social support costs. Oilpatch jobs are great because they pay well.
The federal government does not have the financial flexibility to decree where employment growth should be permitted or continue to support or expand social programs that withhold greater participation in the private sector workforce.
What does this mean? That by the fourth quarter of 2022 you won’t know the place. The supply chain challenges the industry must overcome to do more – everything from people to pipe – will take time. But oilpatch CAPEX will rise as society’s priorities change and the year progresses.
Since I was right early 2021 that things would change for the better of Alberta, I am confident in predicting that things will get even better yet as 2022 unfolds.
David Yager is a Calgary oil service executive, energy policy analyst, writer and author. He is president and CEO of Winterhawk Well Abandonment Ltd., a methane emission reduction technology company. His 2019 book From Miracle to Menace – Alberta, A Carbon Story is available at www.miracletomenace.ca.
