Evaluating Canadian E&P risk from the sidelines

George Kovacic's picture
George Kovacic, President, Croscorp International Ltd.
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When Justin Trudeau’s first government was elected in 2015, international oil companies (IOCs) were eager to learn what it meant for Canadian hydrocarbon exploration and production (E&P). Some already had skin in the game while others had selected Canada as a core target market and were evaluating the impact the new government would have on the oil and gas industry. Many expected campaign promises that would negatively impact resource development would be dismissed or watered down when post-election cooler heads prevail. Overall, interest was high and clients were enquiring about post-election E&P risk in Canada.

Fast forward to the beginning of 2020 and Trudeau’s second term. Many IOCs now yawn when Canada is mentioned. Some that had skin in the game have exited while others that were evaluating Canadian opportunities have long since dismissed them. It has become difficult to find IOCs for whom Canada remains a core target market. For many, Canada’s inability to build a new pipeline or an LNG terminal during the first term of Trudeau’s government has cemented Canada’s place in the bottom of their non-core heap. Significant discounts on Canadian oil and gas are now considered the norm. Risks associated with obtaining approval and building export infrastructure are considered high. The result - investors have taken their money elsewhere. For many IOCs Canadian above-ground risk is deemed too high.

Despite the bleak outlook for the Canadian E&P sector, opportunities may still exist on the near horizon. Success or failure of three key projects will be important harbingers of Canada’s E&P risk going forward. The Trans Mountain pipeline expansion is an approved and under-construction project which will twin the current pipeline and increase its nominal capacity from 300,000 barrels to 890,000 barrels per day. This C$12.6 billion project will provide additional tidewater access and should help reduce discounts on Canadian crude.   The Coastal GasLink pipeline is another approved and under-construction project that would supply the under-construction C$40 billion LNG Canada project with natural gas from northeastern BC. This C$2.8 billion project, coupled with the LNG Canada project, would be Canada’s first LNG export route and should help reduce discounts on Canadian natural gas. This project will also help illustrate what role First Nations play in resource development projects. While both previously mentioned projects are under construction judging from recent developments it is becoming increasingly uncertain that the political will exists to see the projects completed. The third project is the proposed Frontier oil sands mine. This C$20.6 billion project will show if new oil sands mines can obtain approval in Canada.  

Many future investment decisions will be based on the outcomes of these three projects. The indicators that emerge will allow IOCs to rank Canada’s above-ground risk and determine when is the correct time to evaluate E&P opportunities in Canada. Right now wait, sit back and watch.

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