Strong market fundamentals and capital investment in Canada’s oil and gas sector suggest a positive outlook for 2023 and the medium term.
Investment in Canadian oil and gas production is projected to rise 11 per cent to CA$40 billion, according to the Canadian Association of Petroleum Producers (CAPP), with spending to surpass pre-pandemic levels for the first time since COVID-19 swept the world.
Capital investment in conventional oil and natural gas for 2023 is forecast to be CA$28.5 billion, while oil sands investment is expected to reach CA$11.5 billion.
CAPP Chief Executive Officer Lisa Baiton said it was a strong signal that the Canadian upstream oil and gas industry had started 2023 in a position of strength.
She said: “This industry has put tens of billions of dollars in capital investment into Canada, and has tens of billions more that they’d like to deploy.
“But a lot of that is dependent on regulatory certainty and Canadian competitiveness vis-à-vis other jurisdictions around the world.”
Baiton said the natural gas industry was also ramping up drilling plans in advance of LNG Canada completing phase one of its LNG export terminal, which is currently under construction with contractor JGC Fluor near Kitimat in British Columbia.
LNG Canada is a consortium led by Shell and includes Malaysia’s Petronas, PetroChina, Japan’s Mitsubishi Corporation, and South Korea’s Kogas.
The export terminal was almost 85 per cent complete at the start of July, according to the company’s chief executive Jason Klein, and remained on track to ship its first cargoes by 2025.
The last of the large construction modules from China were received earlier this year, which are part of the project’s first phase involving the construction of two liquefaction trains with a capacity of 14 million tonnes a year.
In a mid-year update, Klein said there were more than 6,500 individuals from British Columbia and other Canadian provinces employed at LNG Canada’s site in Kitimat.
He added: “That’s in addition to the thousands of people working on the nearly complete Coastal GasLink pipeline that will deliver natural gas to our facility for liquification and export.”
TC Energy’s 670-kilometre Coastal GasLink pipeline is more than 90 per cent complete and will have the capacity to transport 2.1 billion cubic feet of natural gas a day from Shell’s Groundbirch hub in British Columbia to the Kitimat site, in its first phase.
Groundbirch, located in the province’s northeast, comprises 500 producing gas wells and four gas plants.
Klein said in the update that LNG Canada had identified potential opportunities to further advance electrification at its export facility in Kitimat with a phase two expansion, aligned with an availability of sufficient reliable power.
He said: “We strongly encourage BC Hydro and the provincial government to find the pathways needed to unlock
the potential for additional electric power to a broad base of local stakeholders and initiatives, including LNG Canada’s phase two.
“While our phase two final investment decision must also take into account overall competitiveness, affordability, future GHG emissions, and, of course, timelines, our discussions with government have been encouraging.”
Stable market supports M&A
Industry group Enserva, previously known as Petroleum Services Association of Canada, has also said the 2023 outlook for Canada’s oil and gas industry was encouraging, with oil and gas prices for Canadian producers proving very strong in 2022 and at their highest point since 2008.
In its State of the Industry report, Enserva said while gas prices were expected to be subdued at the end of this year, 2024 private sector forecasts predicted a return to stronger prices.
Inflation and supply chain constraints – which have impacted the industry in the past few years – appeared to have peaked last year and have been receding since.
Enserva estimated the total number of wells drilled in Canada would increase by 12 per cent from 5,500 in 2022 to 6,180 in 2023.
Enserva President and Chief Executive Gurpreet Lail said the organisation was extremely pleased with the forecast and what that meant for the industry and its members.
Lail said: “Global oil and gas demand continues to increase and the Canadian industry will continue to be a meaningful and growing contributor to meet long-term energy needs, particularly in Western Canada.
The improved performance of energy markets this year will allow for more robust mergers and acquisitions (M&A) in the Canadian oil and gas sector, according to Andrew Botterill, National Oil, Gas and Chemicals Leader at Deloitte Canada.
Botterill said: “OPEC is making moves to stabilise oil prices around the $80-plus level (Brent and WTI crude per barrel) and we’ve seen strong cash flows.
“While energy companies have recently been happy to roll out value to shareholders in the form of dividends, I think we’re going to see some pressure to use those strong balance sheets to support dealmaking.”
Deloitte has forecast improving prices for Canadian oil and noted how the price differential between WTI crude and Western Canada Select has significantly narrowed, from more than US$30 per barrel last November to about US$15 per barrel in March 2023.
Western Canadian Select is a heavy sour blend of crude oil that is one of North America’s largest heavy crude oil streams, as well as its cheapest.
Botterill said key trends for 2023 presented a ‘far different picture’ than the Canadian market in 2022.
He explained that mergers and acquisitions (M&A) in the upstream oil and gas sector struggled last year as benchmark oil prices surged past US$100, the gap between buyer and seller valuations widened, and M&A spending slumped to 40 per cent lower than the previous five years’ average.
But, noting that energy players were still sensitive to recent volatility, Botterill said: “I think we’re going to see companies focused on high-value areas that fit in with the company’s longterm strategies and show synergies and cost efficiencies.
“I think companies are going to want resilient, strong portfolios, not just grow for the sake of growing.”
The Deloitte report outlined five new drivers of strategic M&A: securing energy value chains and trade, creating partnerships and strategic alliances in shale gas, the drive for operational excellence in productivity and cost efficiency, governance and compliance with clean energy goals, and gaining scale and commercialising low-carbon businesses.
Botterill added that the downstream sector was going to continue being an exciting part of the M&A picture, because a lot of the investment there will focus on decarbonisation.
He said: “It’s going to be about developing lower carbon fuels, biofuels, and sustainable aviation fuel.”
