Amid the prognostications over what 2021 will bring for the Energy sector, here are some commonalities that we can expect to be watching, reading, and hearing about.
As Canada’s energy sector-oil, natural gas, electricity, renewables, etc- makes a “Pandemic pivot”, the Canadian Energy Research Institute is preparing their not-to-be-missed research plans.
CERI will be exploring some basic sector pivots such as: how low-cost natural gas means that new production needs to be linked to new markets. They’ll be researching the economic and technical solutions needed to ensure Canada’s electricity grids remain dependable. Discussions of the possibility and the competitiveness of a circular petrochemical plastics market are top of mind for CERI as well as the standard look ahead for LNG, Oilsands, and Conventional. My musings on reports and some research on 2021 trends are as follows.
U.S energy commentators see 2021 developing as a year of increased energy prices and demand but doubt that the year for oil producers will be easy. An economic bounce and vaccine success are generally expected, but some are predicting the same malaise that is afflicting the Canadian energy sector will afflict the U.S.– flight of capital combined with new, burdensome regulation from the Federal administration. There is optimism that oil prices will recover impressively in 2021, but many fear U.S companies may not profit accordingly.
While new more infectious or vaccine-resistant strains may complicate activities and affect energy demand recovery in Q1 and part of Q2, there is optimism for fossil fuel demand resurgence in Canada but there are concerns that COVID-19 may slow the adoption of clean energy technologies, even with government incentives in place.
IHS Markit predicted earlier this year that world oil demand would recover at a record pace and then plateau just below pre-COVID-19 levels. Daniel Yergin has been quoted saying oil demand will return to 2019 levels by the end of 2021, 2022. The Canadian Energy Centre reported that Canadian oil sands have a unique ability to respond quickly to demand changes and quotes RBN Energy analyst Martin King, that the industry is on its way with small expansions underway by companies like Canadian Natural Resources and Suncor Energy.
China is defying the COVID-19 demand trends with refining demand at record highs this fall. India’s demand is not far behind as their refiners are running at full capacity according to business reports and this demand is expected to continue in 2021. It’s relevant to the 2021 energy discussion to note that both countries are also looking to satisfy their growing demand for coal. According to globalenergymonitor.org, China, India and the developing world…
“overwhelmingly use fossil fuels because that is by far the lowest-cost way for them to get reliable energy. Unreliable solar and wind can’t come close. That’s why China and India have hundreds of new coal plants under construction. Combined, China and India have 288 new coal plants (over 300 GW of capacity as of late 2020) under construction or in the planning phase as of July 2020.”
With Pfizer-Biotech, Moderna and Oxford-AstraZeneca vaccines being developed, approved and shipped to several countries, we may see global oil demand surge higher than expected but consumption of transport fuels may increase more slowly according to the IEA.
If the previous multi-layered taxation of the National Energy Program in the 1980s taught us anything it is that multi-layered taxes- like the carbon tax combined with the clean fuel standard will affect the oil and gas industry dramatically. Like the NEP’s taxes, they could interact with market forces to negatively impact the Canadian economy and result in a recession instead of a recovery. The carbon tax can be viewed as discouraging to investors according to Alex Epstein, as investors anticipate the tax will increase dramatically. In a recent blog, he states,
“Most advocates of a “low” carbon tax when pressed say it should grow enormously – because they think fossil fuels should be eliminated. For example: in a recent debate – Robert Kennedy Jr. said gasoline should be at least $12/gallon. And even that wouldn’t reduce emissions nearly enough for him. Most advocates of a carbon tax also see them as a first step to give government unlimited power to restrict fossil fuel energy use.”
Some proponents of carbon taxes say a carbon tax is more efficient to steer people away from fossil fuels than restrictive policies like opposing pipelines, regulatory complexity, or renewable incentives. In practice, the policies opposing pipelines would continue in addition to a carbon tax. Activists will also continue activities in the U.S as well as Canada. We are already seeing infrastructure interference in the U.S with the recent arrest of two opponents of the Coastal Gaslink pipeline for attempts to derail rail cars on the BNSF rail line to prevent supplies from coming to Canada for the project.
The problem with the Carbon tax/Clean Fuel Standard tax scheme is the layering of taxes which can have disastrous effects-much like the NEP multi-layered taxes described below in this excerpt from a University of Alberta research article.
“The NEP program introduced several new taxes, rules, and regulations, such as the Petroleum Compensation Charge which was levied on domestic refiners…the Natural Gas and Gas Liquids Tax, the Petroleum and Gas Revenue Tax, the Canadian Ownership Charge…”
The article notes that funds from the Canadian Ownership Charge were supposed to go directly into the Canadian Ownership Account to be used specifically to increase Canadian public ownership of the Canadian oil and gas industry but adds,
“However, by 1984, the federal government broadened the uses of the account to assist in financing some of the other incentive programs introduced in the NEP.”
Can we expect a similar diversion of carbon tax funds to other programs?
Press reports always seem to highlight the ideology of the NEP, making it sound rather benign by saying it “sought to guarantee the supply and price of Canadian natural gas and oil and to increase Canadian ownership and control of the petroleum industry”, but the truth is it was also a cash grab- a multi-layered tax that intruded on the provincial rights to energy revenues.
The NEP initiated changes to the income tax system that penalized both Alberta and the oil industry. It curtailed the prosperity of one region (the West) in favor of another (Central Canada). It’s surprising how similar the approaches to both the NEP and the CFS have been when reading this excerpt from the U of A article mentioned above,
“There had been little or no consultation with the provinces and industry during the formulation of the NEP and because it was announced in the budget, it was shrouded in secrecy. “
In the U.S. and Canada, the oil patch is seeing a flight of capital in part because of future demand concerns. However, globally investors, and some banks, are tentative about investing in energy because they may fear a backlash from governments and the public over climate change concerns. In some cases, they are being politically correct in response to pop culture identifications and overly dramatic characterizations of the “existential challenge” of climate change or the identification of a “climate emergency”.
The U.S. shale oil revolution made the U.S. the largest global oil and gas producer. In the fall of 2018, the United States overtook both Russia and Saudi Arabia to regain its rank as the world’s largest oil producer, according to Daniel Yergin of IHS Markit and author of the book “The Prize” who writes, “By February 2020, the U.S. had reached the highest level of production ever, 13 million barrels per day, more than Saudi Arabia and Russia and on the way to tripling the level of 2008.” 2020 has changed things and the new Biden administration’s political focus threatens to change the sector’s role in spurring U.S. economic growth. They may once again look north to Canada for energy security.
While we’ve seen cutbacks in oil, we’ve discussed how the odds are in favor of demand returning as we are not yet a carbon-free economy. Advisors say it will take decades to phase out hydrocarbons. But are we setting the stage to shut down domestic production only to have it be supplied by other jurisdictions? Already the world’s largest public oil and gas companies have cut their 2020 capital spending programs by over $43.6 billion, which will reduce global supplies by millions of barrels in the coming years. Other countries seem poised to step up and provide that supply globally. Can we make the case that it is better to supply developing nations and Canada with Canadian oil?
Maureen McCall is an energy professional who writes on issues affecting the energy industry.