In this week’s energy industry analysis, we take a look at U.S. liquefied natural gas exports, oil and gas market conditions and a 2023 outlook for Canada’s energy sector.
U.S. liquefied natural gas exports on the rise
Amid the global energy crisis spurred by the Russia/Ukraine war, liquified natural gas (LNG) has become a lifeline source of energy for Europe. When Russia’s pipeline gas exports to the European Union came to a halt, the demand for LNG imports escalated quickly, and the United States is rising to the challenge. In fact, the United States tied Qatar as the world’s top exporter of liquified natural gas in 2022, according to Bloomberg.
This is a huge step for the United States, considering the country only began exporting LNG in 2016. From 2019 to the end of 2022, the United States increased its LNG export amounts by nearly 200%.
The most recently completed U.S. LNG project, Calcasieu Pass LNG, was put in service ahead of schedule in August 2022, making it the seventh U.S. LNG export facility. Three projects currently underway—Golden Pass LNG, Plaquemines LNG, and Corpus Christi Stage III—are expected to increase U.S. LNG export capacity by a combined 5.7 billion cubic feet per day by 2025, according to the Energy Information Administration.
However, the LNG export game is an expensive one, and the key to remaining competitive in the space is investment. While the United States has invested billions in liquefaction facilities, sustained investment in export capacity will be necessary to remain an LNG leader. As Europe moves away from reliance on Russia for its natural gas needs, it will be more important than ever that the United States continues to ramp up its capacity in order to meet increased demand.
Oil and gas market conditions in the new year
In the new year, the highly complex and volatile oil and gas markets are absorbing and adjusting to multiple conflicting supply and demand factors. Both Brent crude and West Texas Intermediate recorded cumulative price declines of greater than 9% on Jan. 3 and 4, according to Refinitiv Eikon data, marking the biggest two-day losses at the start of a year since 1991.
A recent Federal Reserve Bank of Dallas survey of about 200 oil and gas firms located or headquartered in the Eleventh District—Texas, southern New Mexico and northern Louisiana—found that activity continued to increase through the fourth quarter of 2022, though at a slower pace than the previous quarter. The same was true for oil and natural gas production volumes.
While costs across the value chain are still rising, they are rising at a more moderate pace than the steep increases we saw over the last couple of years. This cost environment, along with strong labor indicators, paints a very positive picture for oil and gas production, but also contributes to supply increases and stockpiles.
Additionally, the recent deep freezes in the United States resulted in several unexpected refinery outages, with Texas shutting down approximately 40% of its refining capacity at the peak of the outages. The East Coast was in a similar position. These refining shutdowns were another contributor to increases in crude oil stockpiles.
While supply is robust, the demand picture is not as positive, leading to an imbalance. As we wrote last month, manufacturing has continued to slow. Manufacturing contraction in the United States and China results in demand destruction, furthering the supply and demand imbalance.
Another significant piece of the puzzle is the recent abrupt lifting of COVID-19 restrictions in China. The market is pricing in the near-term demand destruction as infections make their way through the country, dampening people’s mobility and industrial production. As infections start to wane, most anticipate that demand will rebound, though the timing is uncertain.
As the world continues to grapple with an economic slowdown and geopolitical unrest, the oil and gas market will respond accordingly, pricing in risks and opportunities. While prices took a hit last week, there are several analysts predicting an energy crunch and higher oil prices later this year.
2023 outlook for Canada’s energy industry
Several unpredictable factors led to record-high energy prices in 2022, including the lifting of global pandemic restrictions, and sanctions on Russia that caused supply shortfalls. Forecasting an outlook for the industry in 2023 may prove equally challenging with the threat of a looming recession, but there are several things we can anticipate for the year ahead.
Canadian oil and gas companies produced record volumes last year, resulting in record profits, and indications are that high production will continue into 2023. Capital budgets and production guidance already released by companies suggest that capital spending will increase by approximately 5% year-over-year, with large amounts of debt repaid in 2022 leaving more cash flow available this year if commodity prices remain high.
We expect global demand and prices to remain strong on average through 2023 as China reopens its economy, Russia continues to contribute to a supply deficit, and central banks ease up on interest rates in the latter half of the year.
With production higher, two major projects to transport oil and gas to market may finally reach completion this year, enabling Canadian producers to obtain better pricing. The Trans Mountain Pipeline expansion, a twinning of the existing pipeline connecting Alberta to the West Coast, is approximately 75% complete and expected to be finished this year, after receiving federal approval in 2016. Additionally, the Coastal GasLink pipeline, which will transport natural gas production to Canada’s West Coast for future export, is approximately 80% complete and is expected to be finished this year after receiving provincial approval in 2014.
Also in the year ahead, companies and governments alike will face increased pressure to spend profits on carbon capture, utilization and storage (CCUS) investment. This includes provincial governments, as Alberta is expecting a CA$12.3 billion surplus primarily from increased oil and gas royalties. Canadian Prime Minister Justin Trudeau is urging as much, stating in his first media interview of 2023 that Alberta needs to spend its surplus on CCUS investment to reduce emissions.
Alberta is Canada’s largest producer of oil and gas; the province is also home to 78% of Canada’s 205 active drills as of the first week of 2023, according to the Canadian Association of Energy Contractors. Alberta’s government has committed CA$1.8 billion to CCUS so far, but will be called on to escalate investment in 2023, despite federal CCUS incentives lagging tax credits included in the U.S. Inflation Reduction Act.
Reducing emissions will be a focus this year, with several federal policies due to be finalized in 2023, including the contentious cap on oil and gas sector emissions. This is likely to be a pivotal year in terms of getting on track to reach 2030 emission reduction targets, and we expect the government will strengthen carbon pricing policies in 2023.
We anticipate positive developments in the transition to renewable energy, with completion of Canada’s largest solar project, the Travers Solar Project in southern Alberta, expected this year. An agreement on the Atlantic Loop, a CA$5 billion project to deliver hydroelectricity from Quebec and replace coal in Atlantic provinces, is also expected to be finalized in the coming months.
Notably missing from Canada’s 2023 plans is LNG. As discussed above, the United States will rise this year to be a global powerhouse in LNG exports to supply Europe and the rest of the world, but Canada’s first export terminal is still not expected to come online until 2025; LNG support has not been a priority for the federal government.
Canadian middle market energy companies can expect 2023 to retain the high demand and pricing experienced last year, but they should prepare to be at a competitive disadvantage to their U.S. counterparts until Canada’s federal government improves its regulatory policy on items such as export investment, CCUS incentives and share buyback taxation.