In this week’s energy industry analysis, we take a look at the energy market implications of unrest in Kazakhstan, a strong outlook for Canada’s 2022 oil production and the continued importance of environmental, social and governance issues in the energy transition.
Turbulence in global markets
Unrest in Kazakhstan in recent weeks pushed up oil and uranium prices and holds implications for the global energy market, which was already grappling with turbulence from omicron-induced uncertainty and movements of global energy suppliers heading into 2022.
Kazakhstan is the world’s largest producer of uranium, accounting for 40% of the world’s production, and the largest supplier of nuclear fuel. The country also produces about 2% of the world’s oil. Amid the unrest, uranium prices surged by 8% over the past week, on top of a 50% jump during 2021.
Protests in Kazakhstan were initially sparked by soaring prices of liquefied petroleum gas, commonly used to power vehicles there, and then spread nationwide over broader socioeconomic and political issues. The protests led to internet blackouts and posed challenges in the logistics as well as transportation of workers and materials. By Jan. 11, order was largely restored following the deployment of Russian military troops.
Though uranium production is expected to go back to normal soon, this unrest presents further risks to the global energy markets. The threats to the global supply chain of uranium remain.
For the past few decades, Kazakhstan has presented itself as a stable and reliable supplier of energy, successfully attracting foreign investors, notably Canadian energy companies such as uranium producer Cameco and Calgary’s Condor Petroleum.
Whether or not the unrest is a one-off or will continue to pose a risk to U.S. and Canadian energy investors remain to be seen, but a wait-and-see approach, while closely monitoring the situation at home as well as abroad, might be favorable for those considering moving their investments elsewhere.
Canada’s 2022 oil industry outlook
It might be a happy new year for Canadian oil producers, as 2022 is expected to set production records. The International Energy Agency is forecasting that Canadian oil production will average 5.87 million barrels per day (bpd) in 2022, which would be the country’s highest level ever. Global oil demand is forecasted to increase by 3.3 million bpd this year to pre-pandemic levels of 99.5 million bpd, increasing demand for Canadian supply as the country is a significant net exporter of crude oil.
This week, Canada’s largest oil and gas producer, Calgary-based Canadian Natural Resources Limited, announced that it is planning to increase capital spending in 2022 to CA$4.3 billion, up from CA$3.5 billion in 2021. Suncor Energy Inc. also plans to raise capital spending to CA$4.7 billion, and Cenovus Energy Inc. has increased its 2022 capital expenditure to CA$3 billion.
Accordingly, the Canadian Association of Energy Contractors is forecasting that 6,457 oil and gas wells will be drilled this year, which is a 25% increase from 2021, and is expected to add 7,200 jobs year-over-year as a result. However, these new jobs may exacerbate the skilled labor shortage the oilfield services sector has been experiencing, with increased wages not being sufficient to attract a younger generation valuing greater work-life balance and flexibility.
Major producers are planning to drill again after largely practicing fiscal discipline in 2021 by focusing on debt repayment and increasing shareholder value through stock buybacks with the cash accumulated from rising oil prices. West Texas Intermediate oil prices surpassed US$80 per barrel this week, despite efforts to lower gasoline prices through Strategic Petroleum Reserve releases in the United States, and Canada is similarly expected to encounter rising gasoline prices in 2022. Following seasonal declines in January and February, gasoline prices are expected to rise in March and surpass 2021 levels as travel increases and oil prices are expected to remain high throughout the year.
Regulatory risks remain for the oil industry in Canada in the year ahead. After starting off 2021 with the revocation of the Keystone XL pipeline permit, cross-border tensions carry into 2022 with continued efforts by Michigan’s governor to shut down the Enbridge Line 5 pipeline. At home, Canada’s federal government is expected to release details of the Canadian Net-Zero Emissions Accountability Act, currently open for public submissions until Jan. 14, and may legislate additional limitations on oil producers.
Combined with the skilled labor shortage in the oil patch, these factors will serve as headwinds, but may not be enough to halt what should be a productive year for the industry in Canada.
Capital allocation and ESG technology lead the energy transition
In yet another sign that the energy transition and the importance of environmental, social and governance issues are here to stay, Reuters reported earlier this week that European oil majors have committed to returning over $54 billion to shareholders in 2022 alone while transitioning from traditional hydrocarbons to cleaner energy sources and practices over time.
As part of an effort to return capital to shareholders, European majors are divesting of certain hydrocarbon resources. This is a drastic shift in behavior for capital allocation compared to the last couple of decades, during which companies reinvested capital into large-scale oil and natural gas projects intended to replace hydrocarbon reserves produced each year. This practice ensured ongoing growth in supply to meet demand.
But the majors aren’t the only ones embracing the shift toward more sustainable energy sources. Lucid Energy Group—the largest privately held natural gas processor in the Permian Basin—announced plans earlier this week to develop the largest carbon capture and storage project in the Permian. The company’s announcement is huge news for a region historically plagued with takeaway constraints, and aligns with recent oilfield services company reports of a marked increase in activity related to carbon capture and storage wells and related technology.
But ESG issues and the energy transition are affecting the industry at a broader level than just the shift from fossil fuels to clean(er) fuel sources. Making operations more efficient and improving workplace safety also contributes to ESG goals. For instance, Nabors announced late last year that its fully automated land rig, the first of its kind globally, drilled its first well in the Permian without a single person on the rig floor. Automated drilling technology reduced drilling days and emissions, and has the potential to truly disrupt the market going forward.
As drilling technology advances, it will continue to be a critical factor in reducing the cost of resource extraction and will also increasingly enable cleaner, safer, and more efficient production—contributing to the sector’s ESG goals. With technology and automation comes more data, and a shifting risk profile. Management teams should evaluate the cost/benefit of various technologies, and ensure that they implement and maintain adequate security and controls as the industry’s energy transition continues.