A new report from the Swedish-funded Stockholm Environment Institute is hoping to steer energy policy makers in Canada away from supporting new oil and gas developments.
The report looks at the risks associated with new oil and gas developments in Canada. Its long-term supply and demand analysis is especially helpful—many industry leaders, economists, and market analysts are still trying to understand the five W’s of the market collapse from March and other effects from COVID-19.
However, one crucial element that seems to be missing from the SEI report is the fact that energy demand, and by association energy prices, are on track to keep growing for decades to come.
Break-Even Prices Remain Favorable
The report first jumps into the nitty-gritty, long-term economics of the industry. Surprisingly enough, the analysis finds that a large majority of Canada’s existing oil and natural gas projects will be profitable well beyond 2030.
Looking at the chart below, producers left of 105 million barrels of oil per day will remain competitive in the market, based on their cost of production being lower than $85 per barrel. As you can see, most of the anticipated and existing development in Canada (shown in blue) fall under this category.
The report even mentions that the industry will be able to recover sunken costs:
“Indeed, according to fossil fuel companies and oil industry analysts, most existing Canadian oil resources have break-even costs below this price, meaning that they can cover their ongoing operations and maintenance costs, if not necessarily pay back investors for the prior, “sunk” capital costs.”
However, the report’s main argument suggests that new oil and gas development remains economically unfavorable. The report puts forth that not-yet-producing oil fields would require higher oil prices in order to become profitable, suggesting a break-even price of over $80 per barrel.
This $80 figure seems to be out-of-touch with recent statements by chief executives. Earlier this month, Dan Eberhart, chief executive of Canary Drilling Services spoke with Business Insider, explaining that he expects per barrel prices for some North American producers to reach up to the $80 breakeven within the next couple of months:
“When US production numbers come out, we are going to find out the US producers have cut more production than they needed to so there is going to be a mini supply shock for the US oil market. I see a case for West Texas Intermediate to approach $70 a barrel this fall.”
While these anticipated spikes in price reflect current global production trends, the North American energy industry remains resilient in operational efficiency. Making short-term cutbacks on exploration costs is just one way many energy companies have adjusted to respond to setbacks from March and April.
The Policy Variable
A major assumption about the energy industry is that costs associated with mitigating greenhouse gas (GHG) emissions remain stagnant, putting a wrench in the overall profitability of the industry. This is false.
In the United States, for example, the Internal Revenue Service issued new guidance to help energy developers take advantage of tax credits that make carbon capture technologies more economically feasible. By providing tax credits, the U.S. federal government was able to offset the costs associated with implementing these technologies, while also helping to drive down GHG emissions.
Peter Mandelstam, chief operating officer for Enchant Energy Corp., said the guidance is crucial for mitigating the costs that the industry must incur:
“It’s the make-or-break financial element. The Enchant project [New Mexico-based] only works if the tax credit is in place.”
In the report’s discussion section, there lacks a clear acknowledgement of the role that the Canadian government can play in being a proactive agent in addressing potential risks to the industry at-large. While existing developments continue to show profitability in the long-term, small, but crucial policy changes now can have substantial affects on the margins of profitability of the industry.
Canada has been shown to have a strategic advantage in production, with lower emissions. Navius Research found that Canada could actually reduce global emissions by exporting our lower emissions products and replacing those from higher emitters.
The bottom line is whether it’s Canadian produced or not, private companies and OPEC+ are going to continue developing to meet that demand. And, within their capacity, private Western energy companies will continue to innovate and create efficiencies to make energy commodities affordable and safe for the environment. Canada is able to forge its path forward of whether it is going to participate in the energy economy or sit back a watch. Canada can, and if it chooses will be the #1 supplier of energy worldwide. Canada produces oil and gas with the highest standards, and according to a recent Bank of Montreal Capital Markets report, it is the country with the highest ESG ratings of all major oil and gas producers. We are not going to save the planet by keeping our resources in the ground. What we need now are Canada’s leaders to start looking out for its national interest, and to leave reports like this one from the Stockholm Environment Institute at the door.