Moving away from producing oil and gas in Canada is coming at a very high cost.
On one hand, it is slipping away because our federal leadership has embraced poorly conceived ideas that hydrocarbons are expendable while being oblivious to the ubiquitousness of their influence in creating Canadian prosperity.
On the other hand, our neighbour and biggest trading partner, the U.S. has out-maneuvered every nation globally with the power of lucrative subsidies and incentives like the 45Q and the Inflation Reduction Act. Layered on top of that, there are new and potent global competitors – emerging interests in both developed and developing countries – that are refusing to abandon affordable hydrocarbons and are grabbing increasing economic influence on our economy while they continue to increase their emissions.
There is a smart solution and that is keeping our oil and gas industry alive and attracting investment. One of the best discussions I have heard on this topic was between Jared Wynveen, Executive VP, McDaniel and Associates, and Brian Schmidt, President and CEO of Tamarack Valley Energy, back in January this year at the Indian Resource Council (IRC) conference in Toronto.
It was an uplifting discussion with Jared Wynveen, who runs McDaniel’s advisory group, delivering the news that American money is coming back into Canada’s Oil and Gas sector. It’s been relatively increasing since 2022. But he says we’re now in 2024, and that we are starting to see more and more of the capital that fled Canada in 2014 and 2015 come back into the market, albeit not at the levels we previously observed. They are not necessarily interested in small and mid-cap companies per se, but he says we are seeing an emergence of capital directed to some of the smaller companies that are trying to “get off the ground” so to speak. In addition, Canada is starting to see a bit of interest from overseas as well – perhaps not to the same degree as seen prior to 2015 but there is the start of a comeback. Wynveen pointed out that heavy oil is having a big resurgence now especially as the Clearwater ramps up due to improved technology for multilateral well designs; it currently produces 8% of the WCSB production. The Montney is still Canada’s premier play, producing 50% of the WCSB gas production. Looking at the play economics, remaining potential and the rate of return per well, he points out that the Montney is now showing a 100% to 200% rate of return per well. In addition, he says “Bitumen is a juggernaut. From an economic perspective, any small piece of the oil sands is big”.
Brian Schmidt addressed access to financing for oil and gas and the opportunity for reconciliation for First Nations and Metis. He also cautioned that the industry is under attack from many directions and wondered what kind of industry we will have 10 years from now. He questioned how different it would be and how we could participate in that transition.
“What policies can we push to maximize benefits for First Nations and Metis as we move forward – so we are talking about economic reconciliation? It would mean that we would have a solid, stable oil and gas industry that has embraced transition and is willing to be part of the solution,” Schmidt said. “If you look at the last year or two, there has been a sharp increase in the returns to the oil and gas sector – in around the 12 to 13% yield. This has been very good for our sector after coming out of COVID and contributing to our economy.”
Schmidt considered the rising reality of ESG and said it is no longer a material factor in investment decisions in terms of equity but it is a factor for debt. He pointed out that a lot of oilsands players came off their royalty holiday that helped pay for their construction and started contributing significantly in 2022. Just four large-cap companies paid $25 billion in royalties and taxes in ¾ of that year.
“So as much as our industry is under attack. It is a very necessary piece of the economy of Canada.”
Because oil and gas demand returned rapidly after the COVID-19 drop and reached even higher levels, Schmidt asserted that oil and gas is not a sunset business. Demand has never been higher and continues to grow globally. He sees opportunities, especially for First Nations in infrastructure ownership. Currently, financing comes with long-term sustained incomes and that is where Indigenous investment can have a role. It is critical to make sure oil and gas are included in a federal program that is similar to the Alberta Indigenous Opportunities Corporation (AIOC). To further encourage indigenous investment, the U.S. is working on Indigenous tax credits, for example, to hire Indigenous companies and build capacity. Currently, First Nations proponents like Stephen Buffalo, President of the IRC are working on an extension of the well abandonment program from 2020.
Brian Schmidt also sees a royalty trust opportunity for First Nations to directly own oil companies. Currently, it’s difficult to obtain financing due to the risk factor but with a royalty trust model, First Nation owners would have a financial advantage. After seeing the past success of the royalty trust model in Canada, perhaps there could be discussions to build a type of policy for First Nations. In referring to emissions reductions, Schmidt detailed several measures his company was employing but for Canada’s overall emissions plan advised: “Our (Canada’s) policies don’t work. You’re not doing that well on emissions and so I think we need to have a whole different way to go forward. It’s just that the carbon tax itself is not working and there has to be something else and that may be the Indigenous part of the solution.”
Maureen McCall is an energy professional who writes about issues affecting the energy industry