Friday, September 30

Consumers, producers ride roller-coaster of energy instability


Chris Varcoe: For Alberta, the turbulence in commodity prices will contribute to a sharp turnaround in the province’s economic outlook

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If you want a glimpse into the shifting landscape facing global energy markets, consider just one deal that Vermilion Energy made last week.

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The intermediate-sized petroleum producer, active in Western Canada and a number of European countries, was able to hedge some of its natural gas — essentially lock in a future price — at eye-popping levels.

“We hedged at $95 Canadian (per million British thermal units) some gas today for the summer in Europe,” president Dion Hatcher said in an interview after the company released its fourth-quarter results on March 7.

“This is natural gas that you would, in Canada, consume at $4 to $5 — at $95 … When you think through what it means to pay $95 for that same molecule of gas, these are high prices in Europe.”

Indeed, they are.

The transaction is an extreme example of the sudden Tilt-a-Whirl ride facing oil and gas markets, producers and consumers today in a period of energy uncertainty and geopolitical tensions.

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Russia’s brutal invasion of Ukraine has prompted the United States and Canada to ban all oil and gas supplies from the country, while the United Kingdom aims to phase out Russian oil imports by year’s end.

European gas prices jumped to an all-time high early last week. Brent crude spiked to US$127 a barrel on March 8 after the US ban was announced, but closed Friday at US$112.67 a barrel.

A report last week by Rystad Energy said oil prices could spike to US$240 a barrel this summer in a “worst-case scenario” if western nations placed sanctions on Russian oil exports en masse, although that seems unlikely to happen.

For Alberta, which pumps out enough oil to make it about the world’s seventh-largest producer, the turbulence in commodity prices will contribute to a sharp turnaround in the province’s economic outlook.

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“Who knows, maybe it’ll be the last energy boom?” Premier Jason Kenney said last week.

But is this a short-term price spike caused by a geopolitical crisis or a broader reset that will cause countries to take concrete action to ensure their future security of supply?

Who knows, maybe it’ll be the last energy boom?

Jason Kenney

As Hatcher points out, natural gas prices in Europe have been climbing since last fall because of concerns about tight inventory levels and colder weather.

While oil prices have gyrated wildly this week, Brent crude initially pushed past US$90 a barrel back in late January as demand increased coming out of the pandemic, and a reluctance by OPEC+ to significantly open up the production taps.

In Alberta, higher oil prices will supercharge the cash flow levels of producers while generating more royalties for the province. It has also led to record prices facing drivers at the pumps and will contribute to higher inflation.

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A new forecast by the Royal Bank of Canada said Alberta will lead the country in economic growth this year, with GDP expected to jump by 5.8 per cent, which would be the province’s strongest annual expansion since 2011.

RBC Economics upped its price outlook for West Texas Intermediate crude to US$103 a barrel for the year, noting the geopolitical turmoil points to upside risk.

It also projects Alberta’s jobless rate will fall to 6.7 per cent this year — still above the Canadian average — but drop slightly below the national rate in 2023.

“Over the medium term, we are expecting to see a boom, driven by the higher commodity prices,” said RBC economist Carrie Freestone.

“It will be a positive for the province. Obviously, it will hurt consumers, but it will assist the oil producers.”

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Concerns about a global energy transition and climate considerations haven’t faded away, but many countries are examining how they can ensure affordable energy supplies in the short term — and this could have repercussions for Canada.

With the US ban on Russian oil and gas, Energy Minister Sonya Savage believes Alberta producers could export another 200,000 to 400,000 barrels per day south to help replace some of the shortfall.

Some Canadian petroleum producers have increased their spending plans modestly this year, particularly private firms and conventional oil and gas producers. On Thursday, Calgary-based Kelt Exploration bumped up its capital budget by 22 per cent.

However, many public firms are remaining cautious about spending more to lift production, opting instead to return more cash to shareholders.

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And today’s higher oil prices won’t likely draw more capital into the oilsands as many major international players have already left, said Robert Skinner, former director of policy at the International Energy Agency and now an executive fellow at the University of Calgary’s School of Public Policy.

“I don’t think you will see them putting their ships into reverse and coming back to Canada,” said Skinner, who helped multinationals Total and Statoil gain a foothold in the oilsands in the 1990s and 2000s.

“A boom happens when you have a lot of players who are enthusiastic … It is very difficult to see an international new entrant come into the oilsands.”

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At Vermilion, Hatcher said the company is not planning to increase its capital expenditures but will continue to pay down debt and reinstate its dividend.

Larger oilsands producers are also staying disciplined, focused on reducing operating costs and eyeing potential investments to reach net-zero emissions by 2050.

Cenovus Energy CEO Alex Pourbaix doesn’t expect higher prices to trigger a new phase of oilsands mega-projects, although companies will look at smaller investments that incrementally hike output, using existing infrastructure.

“I don’t think any of us ever have an investment thesis based on a view or expectation of really high oil prices,” Pourbaix said last week.

“These kinds of prices don’t tend to sustain for very long. I expect that in the coming months, we will be back to a much more reasonable price.”

Chris Varcoe is a Calgary Herald columnist.

[email protected]

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