In this week’s energy industry analysis, we take a look at the release of more oil from U.S. strategic reserves, the swing in natural gas prices amid tensions between Ukraine and Russia, and an anticipated spike in oil and gas investment in Canada.
Efforts continue to boost oil supply
The U.S. government is releasing more oil from its Strategic Petroleum Reserve in an effort to boost the availability of supply and bring prices down.
Last week, the U.S. Department of Energy announced that it had agreed to release 400,000 barrels of oil from the Strategic Petroleum Reserve to a subsidiary of Total Energies. And this week, the agency said it will release 13.4 million barrels to Shell Trading US Co., Trafigura Trading LLC, Phillips 66 Co., Macquarie Commodities Trading SA, Chevron Corp., ExxonMobil Oil Corp., and BP Products North America Inc.
This week’s announcement marks the second largest exchange from the SPR ever. Note the decrease in price starting in November of last year in the chart below.
OPEC+ members are also sticking to their committed planned production increases, with an expected modest increase of 400,000 barrels a day for March to be ratified next week. The scheduled increases are according to an agreement made last July.
While the plan is to increase oil production, actual volumes have been falling short. OPEC+ data indicates that only two-thirds of planned increases were realized last month. Shortfalls are generally because of capacity constraints, lack of investment and civil unrest. OPEC+’s inability to meet production quotas leads to market concerns regarding supply, which is supportive of higher prices.
What’s more is that “analysts are expecting oil demand to return to pre-pandemic levels this year and for crude prices to reach $100 a barrel this summer,” according to the Wall Street Journal. Morgan Stanley, Goldman Sachs and Bank of America are all calling for raised prices amid increasing demand and inadequate supplies. Many expect supply constraints to persist because of lack of investment amid the investor calls for greater financial discipline and returns to shareholders. Management teams should continue to watch the supply and demand balance, especially as it relates to unexpected supply and demand interruptions.
Natural gas prices swing amid Ukraine tension
Monthly imports of gas across European countries are on track to reach unprecedented levels in a scramble to secure supply amid fears of a Russian invasion of Ukraine.
Over the past couple of weeks, Russian troops entered Belarus to approach Ukraine’s border, raising alarms in the global commodity markets, especially those in Europe.
More than a third of Europe’s natural gas is supplied by Russia. Since 2015, demand for natural gas from Europe has only grown while domestic production dwindled. This winter, Europe has already been in an energy crisis as prices of natural gas, commonly used for heating, increased by five times from just a year prior.
Russia’s natural gas is transported to Western Europe through Ukraine. An invasion of Ukraine would cause major disruptions to the gas supply and push prices even higher than they are now. Already, prices have fluctuated wildly this week as uncertainty mounted.
European countries are looking to secure supplies of liquefied natural gas from the United States. However, with world production and exports of natural gas already nearing capacity, it is unclear whether that need will be met, and serious shortages for the rest of winter and spring are possible.
Because the United States and Canada are natural gas exporters, the impact of the conflict on North American markets is more muted. For now, the wild fluctuations in prices stem mainly from market fears, and disruptions in the flow of natural gas through Ukraine remain unlikely because no party would stand to benefit from such events.
Canada oil and gas investment expected to spike
The Canadian Association of Petroleum Producers announced last week that it is expecting a 22% increase in oil and gas investment in the country this year, up from CA$26.9 billion in 2021 to CA$32.8 billion in 2022. Conventional oil and gas investment is forecasted to increase by 17% to CA$21.2 billion, while oil sands capital growth is expected to increase by 33% to CA$11.6 billion.
Three quarters of the investment is anticipated to be in Alberta, with the province expected to see upstream investment of CA$24.5 billion in 2022. This aligns with forecasts for the country to hit record oil production levels this year, but overshadows the fact that Canada is continuing to lose global investment to other jurisdictions.
Wood Mackenzie is forecasting that upstream oil and natural gas spending will reach CA$525 billion globally in 2022, resulting in a 6% market share for Canada. In 2014, Canada attracted more than 10% of global investment, with CA$81 billion spent on oil and gas production in the country. The 4% loss of global market share equates to tens of billions of dollars lost to other jurisdictions such as Russia, North Africa, and the Middle East.
Regulatory red tape is the primary factor for global investors choosing to shift their investment dollars to other oil-producing countries where there is less uncertainty, despite Canada’s being the world’s fourth-largest oil producer and fifth-largest natural gas producer. For example, companies have made attempts to get 16 liquefied natural gas facilities to pass through regulatory requirements in Canada over the past several years, and only one has been successful, with LNG Canada expected to come online in 2025. This is as demand for LNG is at all-time highs globally.
Earlier this month, the International Energy Agency completed its first review of Canada’s energy policies since 2015 and recommended that the country reduce its emissions in order to continue being a global supplier of oil and natural gas for the foreseeable future. Last week, the federal government announced the creation of the Energy Transition Centre in Calgary, committing funding toward growing the clean technology sector in Alberta.
Sonya Savage, the province’s energy minister, stated that carbon capture, utilization and storage (CCUS) is her number one priority, with the Alberta government providing CA$30 million to accelerate CCUS projects earlier this month. The IEA ranked CCUS as one of the top three most critical decarbonization technologies after reviewing approximately 800 different solutions.
In the IEA’s report on the transition to clean energy, it states that a typical electric car requires six times the mineral inputs of a conventional car, and that to reach the goals of the Paris Agreement, clean energy technologies will require four times the amount of minerals currently being mined by 2040. The report also notes that it takes 16.5 years on average to get a new mine into production.
Given the challenges the transition to net zero will likely face, the optimal path to success for Canada will be to relax regulatory red tape on oil and gas projects and encourage global investment in the country, which can be used to boost government funding for clean technologies such as CCUS. Global oil demand is expected to remain above pre-pandemic levels of 100 million barrels per day until at least 2040; supplying the world with responsibly produced oil and gas should be Canada’s objective.