A national disgrace

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By Guest Blogger Ryan Lewenza

Last week we saw yet another foreign oil and gas company throw in the towel on Canada with US-based Devon Energy announcing that they are auctioning off their Alberta oil sands project. This is just one more foreign energy company to scream uncle and close up shop here in Canada. As captured below this list is long and it includes oil giants like Royal Dutch, ConocoPhillips, and Marathon to name just a few that have grown exasperated with our terrible pipeline policies, our broken regulatory system and our all-talk-no-action governments.

In total we’ve seen foreign oil companies pull out over $46 billion from our energy sector over the last few years. Why is this happening, when will our leaders realize their own culpability in this pathetic state of affairs and when will the government change course and look to fix this broken system? This week I don’t pull any punches on a topic that I think is critically important for our country.

Foreign Sales of Canadian Oil Assets

Source: CBC, BNN, Oilprice.com * based on mid-point of estimated value

Let’s start first with the big picture. Global oil consumption has grown by nearly 70% (1.4% annually) since 1980 and last year hit a new all-time record high of 100 million barrels/day (b/d). Even with Tesla selling 500,000 cars per year and improving fuel efficiency, this trend of rising global oil consumption is unlikely to end any time soon.

The top five oil producing counties are the US at 15.6 mln b/d, Saudi Arabia at 12.1 mln, Russia at 11.2 mln, Canada at 4.9 mln and China at 4.8 mln.

While Canada is fourth in oil production (pretty darn good for a country of 36 mln people), we’re third in the world with proven oil reserves at 10% of total world reserves, behind Venezuela at 18% and Saudi Arabia at 16%.

Global oil demand is unlikely to slow and there are few countries that can quickly ramp up production to meet this rising demand. Essentially, oil has to come from somewhere to meet this demand, so given that we have bunch of it, why shouldn’t we be the ones to benefit and profit from this incredible asset?

Looking at Canada, our oil production has increased by over 200% since 1980 from 1.5 mln b/d to 4.9 mln b/d (this includes oil and other petroleum liquids). Now this is where it gets silly. Over this period there have been only two major new pipelines built – TransCanada’s Keystone pipeline and Enbridge’s Line 67. Sure there have been some smaller ones or extensions put in, but we have not built a major new pipeline in years. Heck, the existing Trans Mountain pipeline was completed back in 1953!

So, as world demand for oil continues unabated, and Canada’s production continues to rise, where are the much needed new pipelines to move this stuff, especially to countries other than the US, where 99% of our oil exports go?

I believe the combination of our terrible pipeline policies, our outdated regulatory approval process, our overly stringent regulatory environment, and the Fed’s carbon tax policies have all coalesced to provide a perfect storm to our energy sector. You don’t have to take my word for it, just listen to the foreign energy companies that are leaving en masse.

Below is a chart showing that foreign investment in Canada has declined materially since 2015 when it hit $85 billion to just $38 billion in 2018. This marked the lowest foreign investment since 2010 and is in large part due to those huge energy divestments from foreign companies listed above.

Foreign Investment on the Decline

Source: Bloomberg, Turner Investments

Another important reason for the exodus of foreign energy investment is the massive price discount of our oil to global benchmarks like WTI. Below is a great chart that calculates just how much this discount has cost us. It’s complicated so it needs some explaining. First I calculated the monthly difference in our oil price (WCS) to US oil prices (WTI). This has averaged $18 per barrel since 2008. Now our oil has a higher sulfur content making it more expensive to refine. Based on this, our Raymond James energy analyst estimates that our oil price should trade at a discount of $8 per barrel versus the average discount of $18 since 2008 and $12 currently.

Subtracting this from the monthly discount and multiplying it by the amount of oil that trades at WCS prices, I calculate a cumulative cost since 2008 of $54 billion dollars!

That’s the amount that we just gave away due to our dysfunctional system and our inability to build a new pipeline to address this completely unnecessary discount.

Cumulative Revenue Loss Due to Price Discount

Source: Bloomberg, Turner Investments

To be clear, I am not some “drill baby drill” person. I believe in global warming and that we need to try to minimize the environmental impact of our oil production and consumption. And this is one of the reasons why I believe in adding new pipeline capacity because through this we will be able to sell more oil at higher prices, which will lead to higher revenues and taxes. This tax revenue can then be used to invest in renewables like wind, solar and hydropower.

I believe strongly that technology will play an important role in minimizing carbon emissions and combating climate change, but we need the money to invest in these burgeoning areas. The money can come from smart oil & gas exploration, which includes having sufficient pipeline capacity.

In my opinion, Canada is squandering one of the greatest assets in the world due to inept policies, feckless leadership and a complete lack of long-term vision. The world is responding with foreign company after company heading to the exits. When will we wake up and fix this clearly broken system?

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Vice President, Private Client Group, of Raymond James Ltd.