As we continue toward global oil supply and demand balance with the impacts of the pandemic beginning to slowly fade, there is a renewed focus on ESG and carbon policy by both industry and government.
ESG and carbon policy may drive up North American energy production costs
In response to the need to strengthen Environmental, Social and Governance (ESG) practices, energy companies in North America are re-evaluating the way they operate to attract investment. In addition to the ESG movement, countries continue to push for taxation on carbon, further inflating the underlying cost of production for North American E&P operations.
This may lead to North American production declines
With changes to operating structures and increased spending to achieve better ESG ratings and carbon policy ambitions, production from North American plays is increasingly costly. Certain portions of oil production in North America that would otherwise be developed economically are likely to become unviable due to these increased costs. The resulting effects include slower production growth or even production declines and increased North American commodity prices.
Potential unintended consequences
With increased costs and the resulting slow-down in production growth anticipated in North America, other producer nations with less stringent carbon policy and lower ESG standards stand to gain market share. Global demand growth is not anticipated to slow at the same rate as in North America, so market share will shift away from North America towards production that is able to meet this continued demand at lower prices. This shift has the potential to result in a more significant proportion of global oil production coming from producers in areas with poorer environmental and social track records.
With these potential impacts and many others, conversations around carbon policy and ESG consideration have far-reaching implications. The energy industry is a global operation and our Canadian policies need to be cognizant of this fact. While Canadian operators lead the world in technology and strong ESG policy, we must be prepared to hold international operators to the same standards so we don’t “offshore” the global emissions without actually addressing them.
GLJ’s April Price Forecast
At GLJ we anticipate a continued societal push towards ESG consideration and carbon policy to continue to evolve and impact the energy landscape. With these issues in mind alongside our continuing market fundaments research, we have released our latest evaluator price forecast effective April 1.