The latest oil price rally seems to have sparked the interest not just of private equity firms after years of crowding the ESG space but of other investors, too. With oil prices in three-digit territory, producers are raking in cash, and more and more people want in. What's their best bet?
According to one Canadian fund manager, the local oil industry is the best pick. It's geopolitical-risk-free, Eric Nuttall says, and it is not as capital-intensive as U.S. shale. To add one more point to Nuttall's, Canadian heavy crude is in great demand as Russia and Venezuela, two other major sources of heavy crude, are both under U.S. sanctions.
The sanctions have yet to bite, according to Nuttall. The International Energy Agency warned that Russian oil exports—normally about 7.5 million barrels daily of crude and oil products—are about to plunge by about 3 million bpd in the coming weeks because of the sanctions. According to Nuttall, OPEC will not be able to replace these lost barrels. Prices have higher to go.
"OPEC has not been reinvesting. We'll see the exhaustion of OPEC spare capacity in six months," Nuttall told Forbes' Christopher Helman last week. The U.S. shale patch is struggling with labor and material shortages. According to Nuttall, "shale will be lucky to replace its production."
In this context, Canadian producers, according to him, shine. MEG Energy, for instance, can maintain its current production of 100,000 bpd without additional spending on exploration for more than three decades and make profits even if oil slides to $50 per barrel, Nuttall told Forbes. ARC Resources, Cenovus Energy, and Pipestone Energy are also among the fund manager's picks.
This is not to say that Canadian oil is without its problems. The energy policies of the federal government in recent years have made substantial production growth challenging in that the regulatory load for the industry has increased, as has pressure to reduce emissions, of which Canada's oil industry is the biggest producer in the country.
Indeed, until the pandemic, Canadian rig operators were moving south of the border because there was little demand for their services at home. Now they seem to be coming back, as what is to all effects and purposes a global oil shortage, pushed prices high enough to embolden the Canadian oil industry to expand.
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The federal government, meanwhile, has signaled a change in attitude towards the oil industry. Amid the U.S. ban on Russian oil and product imports and Europe's continuing—and deepening-energy crunch, Ottawa is willing to help.
Acknowledging the pipeline shortage that has plagued the Canadian oil industry for years now, Natural Resources Minister Jonathan Wilkinson last month said that "the ability to fully utilize that, at this point in time to help to stabilize global energy markets, and to assist our friends and allies in Europe is definitely something that we are looking at."
He did note, however, that emission reduction targets remain a priority, despite Ottawa's willingness to help. "Canada is very open to discussion about how we can help, but help in a manner that is consistent with long-term climate objectives," he said in March.
It is this conflict between the federal government's climate ambitions and the reality of energy demand around the world that has been at the root of difficulties for the Canadian oil industry. Environmentalist opposition to pipelines led to the shortage, and emission reduction plans led to the abundance of red tape that oil investors need to overcome to benefit from the country's abundance of oil.
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Canadian oil producers are probably safer to invest in than Aramco or U.S. shale drillers, most recently threatened by a windfall tax, despite these challenges. Over the long term, however, with all the climate ambitions of the government and likely any successive governments, Canadian oil may not be as appealing.
By Charles Kennedy for Oilprice.com
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