In Canada’s Oilpatch, Minimal Drilling Despite High Prices

Although companies and provincial royalties are poised to break records, high oil prices have inspired only moderate enthusiasm in Canada’s oilpatch, and new drilling will be minimal.

ARC Energy Research Institute estimates that for the Edmonton Par oil benchmark, the average price of a barrel will be $122.64 this year—nearly twice the average price of $62.42 in 2017. Yet, although over 7,000 wells were drilled that year, only just over 6,000 are expected to be drilled in 2022.

Kevin Birn, a North America crude oil market analyst for S&P Global Commodity Insights, says enthusiasm in the energy sector is subdued.

“Things are better, but it’s almost like no one’s excited either. … The booms of the past are gone in comparison to the prices we’re seeing and the activity. It’s just not there,” Birn said in an interview.

“It’s a moderated, responsible pace of growth. There is also headwinds here. There’s inflationary pressure that’s going to drive the cost of drilling up as well, which reduces the attractiveness of doing that.”

In the early part of the decade through 2016, energy companies spent more on drilling and exploration than they made in profits, and Birn says that can’t last forever.

“The conversations between the investors and the companies became such that you need to focus on capital discipline, capital efficiency, driving down debt, improving your margins, and returning that value to me as your investor,” he said.

“You’re seeing share buybacks and tax dividends and special dividends and discretionary buybacks, and you’re seeing them being rewarded, frankly.”

ARC expects oil and gas companies to earn a record $242.1 billion in revenue in 2022. General and administrative costs along with payment of royalties and taxes will still leave $146.8 billion cash flow. With capital expenditures expected to be $42.2 billion, the industry will still make more than $100 billion this calendar year.

However, that money may not be worth what it used to be.

“The labour market is tight. People got laid off, and they went off to do something else to feed their families, right? The equipment they had, some of that got transferred across the border because the activity was better,” Birn said.

Disincentives

Richard Masson, chair of the World Petroleum Council-Canada, says there is “pretty epic” money in the oilpatch now, but the drive to reach net-zero by 2050 has undermined investment dollars and the willingness of people to keep careers in the sector.

“A lot of people feel like they’ve been burned by this industry before. It’s such a cyclical industry,” Masson told The Epoch Times.

He said the narrative that oil doesn’t have a long-term future “has gained a lot of ground in the last while, and so people who’ve gone into other industries, it’s not so easy for them to say, ‘Well, maybe I’ll go back and bet on the future of oil.’”

“I think oil has a long-term future because I just don’t think the transition [to alternatives] is going to happen easily,” he adds. “But for people who are betting their living on it, this narrative makes a difference.”

Masson says because most oil production is not coming from new wells, Alberta is earning its maximum royalty of 40 percent on most oil production. Alberta royalties from oil and gas are expected to be $24 billion this year, crushing the former record of $14.35 billion in 2005–06. Saskatchewan expects $867.5 million from its royalties for the 2022–23 fiscal year. B.C. is moving to a new oil and gas royalty regime that will tax producers at around the same rates as Alberta, and it estimates that the new system will boost revenue for the province by $200 million a year.

Despite the value of oil and gas to public coffers, Masson says the federal government has created uncertainty with its regulatory process, which has further undermined investment.

“Even under the old system, getting new activity permitted was very difficult, so it would take two or three years for an oilsands project to get a permit. Or pipelines—we know what happened with Northern Gateway and Energy East. Those things took years and then died anyways,” he said.

“The new [Impact] Assessment Act, Bill C-69, we don’t even know how that works because nobody’s really tried it with a new project yet. Now we have a bunch of uncertainty because the new process hasn’t been tested, which is going to make it probably even worse than it would have been.”

Masson says energy efficiency has flatlined domestic demand and investors are wary of increasing oil production without a reasonable chance they can export it abroad. Billions of dollars were lost to investors due to the cancellation of Northern Gateway, Energy East, and Keystone XL, and companies might not try again without taxpayers backing them up.

“Building an oil pipeline now in North America would appear to be one of the riskiest things a company could ever do. It’s very likely that if anybody wanted to build a pipeline, it would have to take a government guarantee [on] a return right off the top,” he said.

“The track record is so poor on government approvals and on cost that I can’t imagine a company wanting to take that on.”