https://business.financialpost.com/commodities/energy/the-massive-disruption-about-to-descend-on-the-worlds-oil-industry-is-already-happening-here
[Unfortunately, the Canadian federal government - contrary to its 2009
international commitments and 2015 election campaign promises to
eliminate / reduce fossil fuel subsidies - is continuing to bet taxpayer
money on the early losers in a shrinking market.
images in online article]
The massive disruption about to descend on global oil is already
happening here
Peter Tertzakian: And that might be a good thing
January 24, 2019 12:06 PM EST
Canada’s oil and gas industry remains injured after the turmoil of 2018.
Pipelines, politics and prices pummelled the psyche of stakeholders. Now
the question is, “What will it take for companies to attract investors
again?”
If we use corporate financings as our thermometer, investor confidence
is below freezing. Going back 20 years, independent oil and gas
producers could count on an average $15 to $20 billion of new debt and
equity coming in every year, mostly from institutional investors. Last
year, the inflow was just over $1 billion.
From a stock market perspective, the S&P/TSX Oil and Gas Index has
fallen 42 per cent in a little over two years (since January 1st, 2017,
see Figure 1 below). It’s true: much of that is due to price discounts
in a pipeline-constrained region. Yet if that doesn’t scream identity
crisis in a carbon-constrained world, consider that a leading exchange
traded fund (ETF) for coal is up 23 per cent over the same time frame.
In Alberta oil country, the canonical refrain to the question of
restoring industry health and investor confidence, is “Build a damn
pipeline.”
That’s an obvious prescription, because investors pay for growth. There
is little incentive to put money at risk if the market for a product is
boxed in, especially by socio-political forces.
Yet, it’s not so simple. Would building a pipeline like Trans Mountain
or Keystone XL rejuvenate the market for oil and gas investing? Yes,
solving the market’s choke points, whether by pipe, rail or ox cart,
would go a long way. But flowing more barrels is not a sufficient
condition for being capital competitive.
Why? For the same reason that building a larger parking lot won’t
guarantee bringing more people into a shopping mall. We know from our
digital shopping carts that the entire premise of retail shopping —
what’s happening inside the mall — is being disrupted. Like any
commercial concern, oil and gas isn’t immune to disruption. Savvy
investors know that rocks and pipes are just as vulnerable to industrial
change as bricks and mortar.
That’s why the performance of U.S. oil and gas equity indices isn’t
overly healthy either. Access to capital is thin south of the border
too. Although American energy stocks are ahead of Canada’s TSX oil and
gas benchmark, the U.S. S&P 500 Oil and Gas Index is also in the red, by
17 per cent. Losing almost a fifth of your portfolio is nothing to brag
about when the broader markets are up around 18 per cent.
Like the entire energy complex, oil and gas is undergoing disruption and
transition. Sorting out the potential winners and losers are giving
Canadian investors pause, over and above pipeline issues.
For a growing number of money managers, proliferation of renewable
energy and electric cars are seen as challenges to long-term volume
growth. Meaningful reduction in oil demand is years away; however, the
psychology of envisioning obsolescence — compounded by the pressures of
environmental issues like climate change — will continue to subdue
investor interest in all jurisdictions.
But the bigger forces of change are within the global industry.
Deflationary pressures of new technology are radically restructuring the
nature of the business. How do you make money? New barrels can be
brought to market faster and at half the cost compared to five years
ago. In part, pipeline constraints are a symptom of these disruptions,
not the sole cause.
Investors are watching the plight of those that won’t be able to cut it
under lower, long-term prices. More than that, they’re looking out for
the winners; companies that can consistently produce better (less carbon
intense) products at lower cost under the duress of all forces of
change, not just lack of market access.
Viewed from the lens of industrial disruption, Canadian companies are
taking tough medicine, being stress-tested under lower commodity prices,
stricter regulations, tighter capital markets, social pressures and
politics. These forces of change, to varying degree, are becoming
chronic everywhere, not just here.
Other oil producing jurisdictions outside North America have yet to wake
up to new, disruptive operating realities. It’s hard to wrap minds
around the following notion: Canadian companies are adapting to lower
prices and regulatory issues ahead of others around the world.
None of this is pleasant. Disruption never is. But dealing with extremes
breeds innovation and long-term investor returns in a world where
industrial tumult is unrelenting. The formula is simple: Strong,
adaptable and proven winners attract investment.
For Canada, more take-away capacity for oil and gas is a necessary
prescription to win as a jurisdiction. For companies within, the
prescription is to consistently make money with better products amid
industrial disruption.