Canadian oil and gas producers are awash with cash for the first time in years, thanks to crude prices that have returned to multi-year highs after crashing at the start of the pandemic.
Revenues are expected to reach record highs this year if oil prices remain high, following a long period of spending restraint and industry-wide spending restraint.
The sting of a sharp downturn in the spring of 2020 is now largely in the rearview mirror, as industry leaders find themselves in the enviable position of deciding what to do with the cash pouring into corporate coffers. .
According to Brian Schmidt, CEO of Tamarack Valley Energy, when oil prices begin to soar after a downturn, a predictable pattern occurs in Alberta: tons of new start-ups, skyrocketing land prices and companies that increase their production.
This year, however, despite revenues and oil prices hitting multi-year highs, the Calgary-based oil executive hasn’t witnessed that.
“I’ve never seen this kind of response to increased demand before – ever,” Schmidt said.
While spending plans are on the rise this year, they won’t come close to the levels seen earlier in the past decade. Instead, companies remain focused on the lessons of a few difficult years: fiscal discipline.
It’s a message coming from shareholders demanding healthy returns, but also as calls grow for cleaner energy sources.
The situation has many people wondering what businesses will do with their excess revenue and how they should invest it.
Despite the warnings on how global fossil fuel consumption is fueling climate change, oil demand is expected to continue to rebound in 2022.
A BMO Capital Markets report released this month says global oil demand “will continue to grow for the foreseeable future and will soon reach record highs.”
The report says demand could increase by 4.6 million barrels per day this year, eventually exceeding 100 million barrels per day. Additionally, he expects West Texas Intermediate crude oil – the North American benchmark – to trade between US$70 and US$80 a barrel in 2022.
This week, oil is trading above US$85 a barrel.
At that kind of price, the Canadian sector could see all-time highs in revenue and cash flow in 2022, according to Calgary’s ARC Energy Research Institute.
“The Canadian industry has just had a very good year when it comes to financial metrics,” said Jackie Forrest, the company’s general manager. “The industry is doing pretty well now.”
WATCH | How the mood in the oil sector has improved with rising oil prices:
What to do with the money?
Analysts, investors, politicians and climate-focused groups are now watching what companies will do with the money, especially to see if they will use it to:
- Increase expenses to increase production.
- Increase spending to reduce emissions.
- Pay off the debt.
- Increase dividends and share buybacks.
In recent years, investors have pursued big spending plans, instead putting increased pressure on the oil sector to make a profit and return that money to shareholders.
Some also want companies to follow a plan to tackle greenhouse gas emissions, whether by investing in green technologies or turning to mitigation tools.
In BMO’s recent report, he said the North American oil and gas group is in its strongest financial position in years and he believes most of the money will be returned to shareholders.
Canadian Natural Resources, Suncor Energy, Cenovus Energy and Imperial Oil have all raised their expectations for capital spending and oil production for this year. But companies are choose to spend on stock buybacks, dividends and extracting more barrels from existing assets, instead of undertaking major new expansion projects.
Ed Whittingham, an energy policy consultant and former executive director of green energy think tank Pembina Institute, hopes the increased revenue will help fund retooling efforts to shift producers from high-carbon energy. carbon. carbon to low carbon energy.
He underscores this point by referencing an old bumper sticker seen around Alberta: “Please God let there be another oil boom. I promise not to mess it up next time.
“What I would say with this latest boom is that if we don’t squander it all on dividends, that could be a good thing, net-net, for climate action,” said Whittingham, who is also co. – host of a podcast titled energy against climate.
Transitioning from high-carbon to low-carbon energy is difficult, he said, whether you’re talking about a company, a province or a country — and you have need strong balance sheets to achieve this.
“Let’s not give up on the urgency that we need to take this capital, in these strong balance sheets that we have, and start investing in the transition that we need to make,” Whittingham said.
Over the past year, several oil sands producers have committed to reaching net zero emissions by 2050, bringing them into line with what the federal government has promised.
Analyst Kevin Birn said each company will have its own approach and react in its own way, but today’s high oil prices offer the flexibility to pursue multiple options at once, even with a focus on the shareholder returns. .
“I think they’re going to spend more money because they’re going to have to deal with the downsizing of the past few years and the inflationary pressures from supply chain disruptions,” Birn of IHS Markit said. based in Calgary.
Birn expects producers to respond to higher prices and aim to increase upstream activity to varying degrees, but “they’re also going to be looking at decarbonization – and that’s different for every company and the assets that they’re working on.” ‘they hold,’ he said.
Those efforts could focus on methane measurement and containment, electrification and carbon capture and storage in larger, more industrial operations, he said.
Oilfield fortunes began to recover last year, although that did not trigger a spending spree.
According to Statistics Canada, oil and gas capital expenditures in the first three quarters of 2021 totaled $8.5 billion, still 32% lower than the same period in 2019, which was pre-pandemic.
True Canadian Energy, a Nisku, Alberta-based company that manufactures equipment and provides services to industry, has seen its business grow as prices have climbed.
Co-owner Ryan Williams said he’s not necessarily hoping for another boom, but he’d like the kind of steady growth that keeps investments strong, people employed and businesses afloat.
“Oil prices have been held above $60 for some time, so this is all leading to more activity and more services, so we continue to look for areas where we can expand as well,” he said. -he declares.
Predicting the future of energy markets is a difficult task at the best of times, and even more so during the pandemic.
Oil prices briefly dipped a few weeks ago when the Omicron variant first appeared and its impact was largely unknown, underscoring continued market volatility.
For Tamarack Valley Energy’s Schmidt, he feels pretty good about the current state of the oilfield. His company introduces a dividend for shareholders, pays down debt and actively makes acquisitions.
Still, he doesn’t know what the future holds for him beyond this year, given the pressures the sector faces. The fossil fuel industry is under increasing scrutiny globally – by regulators, the public and banks – as countries attempt to tackle climate change by switching to low-emission energy sources of carbon.
It’s scary, he says, because you don’t know what’s around the corner.
“I could walk down the street and I could probably have a dozen different opinions on this,” he said. “It’s exciting and terrifying at the same time.”