Oil producers in Canada are not expected to increase their production anytime soon. They are taking a conservative stand in terms of investing in resources intended to increase their supply.
The invasion of Russia into Ukraine has pushed gas prices all over the world way above the ceiling. Because of this, gas has become a lucrative commodity. Rafi Tahmazian, a portfolio manager at Canoe Financial, shares that “they (Canadian oil companies) can sit with their feet up right now, with money flowing into their pockets, while hardly working.”
It would then seem to make sense for oil producers in Canada to increase their output. Doing so enables them to take advantage of the situation and maximize the profits that it could bring them. Apart from financial gains, it would also provide access to an uninterrupted supply of affordable gas for many of the citizens.
But that doesn’t seem to be the case in the country. Despite this seemingly profitable opportunity, oil producers in Canada are hesitant to invest in the growth of their output.
Ben Brunnen, the Vice President of Oil Sands at the Canadian Association of Petroleum Producers (CAPP), says, “the price spike for oil we are currently experiencing due to Russia’s invasion of Ukraine is unlikely to entice producers into changing their investment plans in the near term.”
Why are Oil Producers in Canada Cautious About Expanding?
The pains brought about by the oil price crisis in 2020 are still not forgotten to this day by the oil producers in Canada. In March of that year, an oil price war ensued between Saudi Arabia and Russia. This comes after not being able to agree on oil supply control. The beginning of the COVID-19 pandemic didn’t help either. Because of the restrictions on travel within and outside of countries across the world, the demand for oil decreased.
But just when you think the situation couldn’t get any worse, it does. Weeks after prices crashed, oil traders feared that the storage capacity would be insufficient. As a result, oil had negative prices by the time April of the same year came.
Due to this situation, oil producers in Canada had to decrease their output at that time. Similarly, they held back on investment plans because the external conditions were very unfavorable for them to pursue expansion.
Environmental Policies are to the Disadvantage of Oil Producers in Canada
At the COP26 summit held in Glasgow last year, Prime Minister Justin Trudeau promised to implement a cap on emissions produced by the country’s oil and natural gas industry. He said that “we’ll cap oil and gas sector emissions today and ensure they decrease tomorrow at a pace and scale needed to reach net-zero by 2050.”
Apart from the political hindrance, oil producers in Canada are also met with opposition from the general public. Many environmental groups are going against the construction of new projects that aim to extract fossil fuels.
Because of this, investing in massive oil sands projects might end up with oil producers in Canada incurring substantial financial losses. Both time and money, a whole lot of them, are needed to pursue expansion. However, the potential profit from these projects might not be enough to offset their financial investment.
Forecasts also show that demand for oil will decrease by the year 2050. As such, it would seem unreasonable to support expensive projects that are not expected to produce a sought-after commodity in the market.
In line with this, the two largest oil producers in Canada plan to remain conservative in the growth of their oil and gas output this year. Canadian Natural, the biggest oil producer, will only increase its output by 5%.
Tim McKay, the president of Canadian Natural, said that “these geopolitical situations, as fast as (price) goes up, as fast it can go down.” The volatility of oil prices keeps stakeholders on their toes. It requires them to effectively cope with these conditions so that they can minimize losses and maximize returns.
Oil Producers in Canada Have Other Priorities
Companies who make use of conventional extraction methods for oil production are also hesitant to invest more on drilling programs. Currently, paying off their debt that has accumulated because of the COVID-19 pandemic remains more important. At the same time, pressure from shareholders has swayed them away from spending too loosely on projects. Increasing the value of shares should come before incurring additional expenses.
A “Clear Commitment” from the Federal Government is Needed
Brunnen said that the government needs to provide explicit support to oil producers in Canada. Doing so would encourage companies to pour out investments into the construction of energy infrastructure that would be large enough to increase both oil and gas production and export capacity.
Jonathan Wright, the President and Chief Executive Officer of NuVista Energy Ltd, said, “there’s now a strong price signal for growth…but we’re still in a place where sentiment has not fully changed, where we would have full investor and political support.”
Oil producers in Canada are capable and supportive of strengthening their position in supplying energy not just to the country, but also to the rest of the world. The president and CEO of CAPP, Tim McMillan, said that “if we act on what we now know, we can build the infrastructure to make this a far more stable world.”
He believes that support from the government and other stakeholders will enable the country to improve its energy security. At the same time, Canada could increase its supply to the global market.
Some Argue that the Situation in Ukraine Will Not Increase the Demand for Oil
Environmentalists believe that those who want to promote oil production in Canada because of the invasion of Russia into Ukraine are mistaken. The situation would not lead to an increase in demand for and reliance on oil. Rather, the opposite is expected to happen.
Keith Stewart, a senior energy strategist with Greenpeace Canada, said that “I actually think this is going to accelerate the end of the age of oil.” It would encourage the EU to decrease their dependence on oil from Russia by putting more focus on renewable energy and electric vehicles.
He adds, “for the last 80 years, energy security has meant maintaining access to cheap oil by any means necessary, including war. But no country can block another country’s access to the wind and the sun.”
Whether the situation in Ukraine accelerates or decelerates oil production in Canada is yet to be determined. But Richard Norris, a fellow with the Canadian Global Affairs Institute, thinks that “we’re going to see increasing inflation driven by a lack of energy policy at a global level. That is the problem we’re going to come up against. And I think a lot of countries are going to start doing that math.”