Looking ahead at what’s next for Canada’s oil and gas industry

Energy Visions spotlight

Episode 3

In this podcast episode, we explore what the upcoming 2020 US presidential election and significant changes already underway in Europe could mean for the oil and gas industry here in Canada.

Looking ahead at what’s next for Canada’s oil and gas industry

In this episode, we bring together energy experts to discuss the potential business and geopolitical impacts of the US election. We also turn to Europe for a more detailed discussion on the significant changes already underway in the energy industry there and the disruptive forces accelerating change. What could the next six to eight months look like here in Canada from a domestic and foreign policy perspective? And with the potential changes ahead, how can Canadian companies find opportunity within the global market? Join us and learn more.

Adam: Welcome once again, to PwC Canada's Energy Vision Spotlight Podcast. I'm Adam Crutchfield, PwC Canada's National Energy Leader.

Since we re-imagined the program for this year, I've been personally looking forward to recording and sharing this final podcast, because it provides us all with a platform to bring some big ideas to a finer point and dive deeper into the world of energy with a panel of respected professionals. As we record this podcast just before Canadian Thanksgiving, we are faced with an interesting set of facts. The COVID-19 pandemic has significantly disrupted global life and global energy consumption. Climate change has continued to become a driver for significant net zero commitments from companies and governments around the world. And earlier this week, OPEC released their 2020 world energy outlook, where they predicted peak oil demand in late 2030s with future demand persistently below projections due to the lingering effects of COVID-19.

With the upcoming US presidential election taking place on November 3rd, 2020, the energy sector around the world watches with interest as Americans head to the polls.

Today, we're looking at what the US election could mean for the oil and gas industry here in Canada. We're also going to look to Europe for a more detailed discussion on the significant changes underway in the energy industry and the disruptive forces that are accelerating change. As always, our goal is to engage you with thought provoking content, provide access to global viewpoints, and show how, as an industry, we can move forward together.

Joining me today, we have Robert Johnson, Managing Director of Global Energy and Resources from Eurasia Group, who many will know and recognize from his work with us on Energy Visions over the past 10 years. I'm also happy to welcome PwC Europe's chief economist, Jan Willem Velthuijsen, and Dr. Olesya Hatop from PwC's Global Clients and Markets Industry team.

I will also mention that I know the US election is of interest to many and brings up competing viewpoints. The views expressed by RJ are his own and those of the Eurasia Group, and are not the views of PwC.

RJ, Jan Willem, Olesya, welcome to our podcast.

RJ: Thank you.

Jan Willem: Thank you.

Olesya: Thank you.

Adam: RJ, I want to start with you and we're going to start with the upcoming US election and I was hoping you could give all of our listeners a concise view of what each campaign is saying as it relates to energy from both a domestic and foreign policy perspective.

RJ: Absolutely, Adam. This has been a very hot topic for our clients. So I would say with Trump, if he's reelected, we would expect more of the same, a very strong focus on increasing oil and gas supply, on using US crude and LNG exports as a central aspect of US foreign policy, having energy-related sanctions and really seeing the energy transition as something that is mostly about US natural gas and nuclear as the best pathway to achieve lower greenhouse gas emissions.

Now, I think with Biden, of course, it would be a very different landscape and I would suggest maybe sort of two key takeaways from Biden. The first would really be his climate plan is certainly more aggressive than Obama, but perhaps less aggressive than Bernie Sanders and some of the others that ran against him for the democratic nomination.

And specifically, he's looking at carbon neutral electricity, but still including nuclear and natural gas with CCS, as opposed to 100% renewables, which others had favoured. He's also looking at economy wide carbon neutral by 2050, which is in line with the Paris Agreement, but not as aggressive as some of the others on the Democrat side. So that's the first point.

The second point is that Biden's plan is really much more so but demand than supply. And it's really yes, there's some focus on whether or not he would limit drilling on federally owned lands and waters, which is about 10% of US supply, but we don't see a fracking ban or a ban on US crude and LNG exports. Instead, the focus will be on demand and really a massive green stimulus somewhere around $2 trillion to really try to hyper boost the US electric vehicle program, wind, solar, energy efficiency, hydrogen, biofuels. That's probably the key elements of his programming. The idea that massive industrial stimulus will both create jobs and accelerate the energy transition.

So again, going much further than Obama did in 2009. So obviously, Adam, pretty clear differences between the two platforms.

Adam: And RJ, maybe just quickly on the foreign policy implications, I mean, we've seen the current administration. Maybe talk about how the Biden campaign sort of looks at foreign policy and energy.

RJ: Yeah. So I think it's, especially in the oil side, it's quite an important issue and I think the country that's most significant here is Iran. And as we know, Obama, when he was president, reached a deal with the Iranians in which they were allowed to increase their oil exports and lift sanctions from the US and others in exchange for a freeze on their uranium enrichment and nuclear activities. Trump exited that deal and put new secondary sanctions on Iran, which has kept Iran's oil production about a third of its previous levels.

So at a time when the oil market is still somewhat imbalanced and we have pretty weak demand and high spur capacity, the prospect of Biden winning the election and going back to Obama's deal and lifting the sanctions on Iran could be negative for oil prices in 2021, 2022.

So that one we see as the big change. Otherwise, I think between Trump and Biden policies towards China would remain quite hawkish, certainly some uncertainty there for oil demand, but he would try to engage more with China on climate. And then I think policies towards countries like Russia and Venezuela would mostly stay the same. So I would really focus on Iran and climate as the two big areas of difference.

Adam: So I mean, that gives us interesting markers to watch as the election unfolds. Jan-Willem, I just wanted to stretch out a little bit further now and take us to Europe and everybody in Canada and around the world has been watching with great interest around what's been happening in Europe as it relates to energy. But maybe if you can give our Canadian listeners some insight into what's happening on the ground, what's changed, what's continuing to change and what's driving the movement.

Jan Willem: Yeah. Well, Adam, I think what you have to realize is that Europeans find themselves extremely dependent on energy, we used to be able to produce some energy ourselves from hydrocarbons. We had the North sea, we had good relationships with Norway that found more and more, of course, they were part of the European zone. And we didn't have any trouble getting our energy, but now we are slightly more concerned. I think you could describe it like that, of, okay, where is our energy coming from?

We are a wealthy affluent continent, still 500 million people earning, well, relatively high incomes compared to the world average and we're quite energy intensive still. We have manufacturing. We do drive a lot. We travel a lot. So this combined has raised worries how we could continue to service ourselves in energy and combined with that is the concern of climate change. That is probably more profound than in many other parts of the world.

And we had the elections a year ago. We had our elections a year ago, European elections, and I think the European commission got a very clear green mandate a year ago that led to the European commission to write what you must've heard of the Green Deal, European Union Green Deal, which is quite a thing at the moment.

So I think Europe, you could describe mostly as yes, we take decarbonization very seriously for a couple of reasons. One, being we're so dependent on hydrocarbons. We're the only continent with nothing left in ground almost and we are concerned about the climate.

Adam: So, Jan-Willem, that's really interesting. Take us through a little bit of the conversation around what companies are doing to adapt to this now. So we've obviously seen the announcements from the bigger players around the world, but maybe just make the link between some of the large players, maybe the medium size or smaller players in Europe, and then maybe a little bit more context around that European Green Deal and what it really means.

Jan Willem: So what we see on the, well, on the spectrum of players, you have the big oil, of course, or the total BP and Shell in Europe. Well, Europe, they're global players obviously, but what you see each of them doing is being very explicit in engaging and going on a migration from pure oil hydrocarbons to more gas, in the case of Shell, to even beyond that and think about how can we be a sustainable business long-term, producing also non-hydrocarbons based energy, so renewables.

So each of them, with a different way of setting up this own business that is gradually getting more and more into renewable. So you see them heavily investing in everything that they can find and building up a decent portfolio.

And then you have the younger, small ones for this. So for instance, solar companies popping up. So servicing households and smaller businesses with solar solutions, but also the bigger ones that you see all kinds of interesting joint ventures emerging between, for instance, the Grids company, a storage company, and an industry, a manufacturing industry, but to look for new business models that lead to de-carbonization.  Ultimately what you also see is a keen interest of the financial services industry. So you see from the institutionals to the classical banks and the new financial operators, financial parties. You see them interested in making money, but also investing some of their assets in that.

Adam: RJ, as you listen to that and the conversations that you have with governments and companies around the world, how is the rest of the world looking at Europe? And maybe if you can, link it back to how the rest of the world might be looking at Canada versus Europe, given this shift.

RJ: Well, I think the main question, Adam, is to what extent will Canada opt to go for its own Green New Deal? Echoing many of the things that Jan Willem was talking about, in terms of the different policy steps, and financial innovations, technology innovations that Europe is undertaking. I think it's pretty clear that, based on the throne speech from the prime minister, Canada will be targeting a green recovery, and that sectors like batteries, and electric vehicles, and renewable energy will be a priority. And some of the European-type policies will likely be critical for Canada as well. And I think the federal government definitely wants to emphasize the sustainable finance strategy that Europe has used to mobilize private sector capital, the banks, asset managers, the insurance companies and others, to try to provide additional support, to really mobilizing what Canada's energy industry and governments can do in terms of the energy transition.

But as far as traditional oil and gas goes, I think that's where there's a little bit more uncertainty, which is where will Alberta's traditional oil and gas sector fit into this green economy? As Jan Willem mentioned, that's not as much of an issue for Europe, because Europe doesn't have as much domestic oil and gas production within the EU 27 anymore. Whereas, Canada, of course, still is the number four oil producer, and a top gas producer as well. So I think that's where the policy landscape in Ottawa is a little bit more murky.

I think there will be an effort to try to engage with Western Canada on bringing oil and gas towards carbon neutrality. But I think the regulatory pathways to achieve that goal, and the timing for achieving that goal is where there could be some friction between Alberta and Ottawa in particular.

So I would say that, to answer your question, some of the ideas from the EU Green New Deal, and Sustainable Finance Taxonomy, translate well to Canada, and others will take a lot more adjustment, given our status as a leading oil and gas producer.

Adam: Well, and I think this gives us a really interesting chance to think about how the implications in Europe might apply to Canada.

Olesya, one of the things that we have to look at, I think, is the range of organizations that operate in the market. And RJ, you brought us back to Alberta, which is important. It's not all big companies. We have a lot of medium size and smaller companies that operate here in the energy industry. And they're having to operate within a lot of frameworks, ESG being one of those frameworks.

And Olesya, I know what's been happening in Europe around ESG has been happening for a number of years, and it's a lot more mature, the conversation is more mature. Talk to us about how European companies are managing this shift in this movement. And talk to us about some of the smaller companies, and how they're adapting to the changes that are being brought on by ESG.

Olesya: Sure, Adam. For quite several years, the EU has been engaged to work around establishing a green transition framework, and so now we have here the Green Deal, that basically encourages investors to embed the ESG factors in their asset allocation process. And this approach has already been taken on board in the large cap sector, where many companies have put in place measures to ensure better dialogue with, what I would call the broader financial ecosystems. They are talking to stock exchanges, investors, NGOs, regulators, rating agencies, and others.

For small and medium enterprises, on the other hand, I think it's a difficult, but yet essential, transition. So this type of companies are, I would say the backbone of the EU economy. Just looking at where I am based, here in Germany alone, we have around 1,200 municipal utilities, what we call Stadtwerke. And overall, small and mid companies, compared to majors and super majors in the energy sector, tend to be more varied in terms of their market capitalization, so from several hundred thousand to several billion euros. And as a consequence, their access to available resources is also very different.

So what we see here in Europe, I would say is these companies in the sector somewhat are discouraged by the methodological complexity and the cost of transition to business models that is based on ESG considerations. And the risk is, as I see it, that in the absence of proportionate actions, these companies could be eliminated in coming years from the asset allocation strategies. And the current COVID-19 situation is only intensifying the pressure on mid caps.

On the other hand, what helps here, I think that smaller companies are historically closer to the end consumer, and engaged into community initiatives. So if you look across E, S and G, I think they're very engaged into social aspects of ESG frameworks, which gives them certain commercial advantage.

And the success of sustainability agenda depends on how EU would be able to explain to small and mid cap companies, how they can profit from taking on board the ESG criteria. And long term, there may be benefits for this segment of companies in adapting their business models to the new framework, but I think in the current situation, taking the long view may be difficult for some smaller businesses, because they are trying to keep its head above water, if you may say, and especially in this context of the ongoing crisis. But as I said, it's an essential transition. And I think companies should really watch this space, be it small, mid, or large.

Adam: Well, it gives us an interesting opportunity, I think, to look at that. And RJ, looking around the world, this has to be a concern for countries governments who are moving in this direction of the transition. Any comments on how others are looking at this when it comes to, what I would describe as the backbone of most economies, which is those small and medium businesses?

RJ: Yeah. I think the question of access to capital, that have been highlighted here are quite important. And I think there's interesting opportunity here to look at the role of the tech sector potentially, and the role of venture capital.

This is an interesting area where non-traditional source of capital are becoming more available for at least the small and medium firms that have an innovation platform and are looking to scale. And that's something that, maybe trying to bring more of that Silicon Valley type model that we've seen obviously being so critical in other sectors like ICT, bringing more of that into energy might be a key way to incubate and scale some of these breakthrough low carbon technologies.

Adam: So Olesya, when you hear that, and just linking it back to the points you made around what's happening in Europe, are you starting to see some of those changes in terms of the investment mix, and how companies are accessing capital to make the transition?

Olesya: Sure. And I think it's not only access to capital, but broadly redefining the value of the company. So ESG performance of energy companies can play twofold. Yeah, it could redefine their value as a positively or negatively, and there are a number of value drivers here. So I think companies, by applying ESG framework could strengthen the stakeholder's appreciation.

They can also benefit economically. In the energy sector, there's a pretty clear link where increasing productivity and reduced costs are key economic benefits resulting from, let's say resource efficiency, waste management, water or energy consumption reduction.

And I think also another very important aspect is around attracting talent of tomorrow, because through ESG frameworks are increasing consciousness, particularly with millennials about sustaining or value leads to strong desire to work for companies that do good. And that's really on the agenda of the energy companies right now.

So as I already said, I think it's very important for companies to watch the space and find the balance between value creation and value erosion, because this balance is really shifting. And be proactive and clear about where this journey takes them, because companies need to be really active and take the lead in setting the standards and not falling behind. And I would say this whole ESG agenda is right now, as we speak, is moving from voluntary to mandatory world, so all energy companies would follow, be in Europe or any other part of the world.

Adam: And maybe let's use this opportunity to bring this back to Canada, Canadian energy, Canadian oil and gas, and just talk about the perception of Canada in the global market. I think pre-COVID, the rise in populism was already well underway. As we're working through the COVID-19 pandemic, a lot of countries are looking more inward than ever before, but I remain interested in how other countries see Canada when it comes to the provision of energy and the contribution of Canadian energy to other countries' energy security.

So let's take this opportunity again then Jan Willem to talk about Europe. And you go back to the comment you made about, there's nothing left in the ground and energy security remains really important. So, how is Europe looking to Canada as a potential provider of energy?

Jan Willem: Well, Adam, I think in Europe, the view of Canada is always very friendly among all the potential suppliers. Partner you could rely on, we have this new trade agreement. In that respect, it's great to have Canada as one of the options. Having said that, I don't hear RJ mentioning Europe as one of the future options, perhaps. So, we may be a bit at the wrong geographical place for Canadian oil at the moment.

But to fulfill the need in the long run, Canada is definitely an option. But I think, as I said, the focus of Europe and the business opportunities in Europe are mostly, well you have to be ESG compliant, at least, for all the reasons that Olesya talks about. So yeah, it's not easy, I think, for Canada to break into European markets and make, well, a lot of customers or money there.

Now having said that, I think it is a great learning ground when at the moment, you see these convergences between different industries and the innovations and the learning with the new systems of cooperation between different companies. So, for any Canadian company that has a solution in the renewables space, there's plenty of room. You see a lot of influx at the moment from Korea and Japan investing in energy in Europe, because they want to be part of the new play.

Adam: Interesting view, Jan Willem, and I think the comment you made about geographic positioning is also very interesting. And as we get to the end of the podcast, I just wanted to thank RJ again, Willem, Olesya, for taking time out of your day, your afternoon and evening, in two cases, to share your views with our Energy Visions audience. And we really look forward to chatting with you all again. So thank you very much for being with today.

Olesya: Thanks for having us.

RJ: Thank you, Adam.

Jan-Willem: Our pleasure.

Adam: For all of our listeners, thank you for tuning into our Energy Vision Spotlight podcast. As Canadian oil and gas companies navigate the next six to eight months, there remains challenges, but also significant opportunities. The Canadian energy industry has always had to adjust to changes in the global energy landscape. Because of this, I think we built a culture of resilience and innovation that has allowed our Canadian industry to adjust course and adapt.

And we will adapt once more as our entire industry rapidly enters a post-COVID world, driven by significant global forces of asymmetry disruption, age, polarization, and trust.

If you're interested in hearing our perspectives post-election, we invite you to join us on November 12th for our national webinar. We'll be discussing the US presidential election 2020 results and what this means for Canadian oil and gas moving forward, including policies, regulations, and much more.

And I encourage you, if you haven't already done so, to explore the articles and podcasts from our Energy Visions 2020 Program. For more details, please visit our website at pwc.com/ca/energyvisions.

Finally, I need to mention this podcast has been produced by PricewaterhouseCoopers LLP, and is for informational purposes only. Contents discussed are for general guidance on matters of interest and should not be taken as professional, legal, business or investment advice. Thank you for listening.

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Featuring

Adam Crutchfield, National Energy Leader, PwC Canada

Adam Crutchfield, National Energy Leader, PwC Canada
Tel: +1 403 509 7397
Email

Dr. Olesya Hatop, Energy Utilities & Resources Global Industry Executive, PwC Global

Dr. Olesya Hatop, Energy Utilities & Resources Global Industry Executive, PwC Global

Dr. Jan Willem Velthuijsen, Chief Economist, PwC Europe

Dr. Jan Willem Velthuijsen, Chief Economist, PwC Europe

Robert Johnston, Managing Director of Global Energy and Resources, Eurasia Group

Robert Johnston, Managing Director of Global Energy and Resources, Eurasia Group

Contact us

Adam Crutchfield

Adam Crutchfield

Partner, National Energy and Alberta Consulting Leader, PwC Canada

Tel: +1 403 509 7397

Reynold Tetzlaff

Reynold Tetzlaff

Alberta Region Managing Partner, PwC Canada

Tel: +1 403 509 7520

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