Big Questions for 2020
As we flip the calendar into the new year and a new decade, it’s a good time to pause and think about what the next 12 months and beyond may hold in store for the oil and gas industry. Here are some of the big questions that are front of mind as we start the new year.
Will oil prices go higher? Tensions between the United States and Iran have pushed the possibility of military action in the Persian Gulf much higher. That geopolitical uncertainty premium has pushed prices (WTI) solidly into the $60/B range. Continued conflict could take it higher, though how high would depend on the severity of any supply constraint from the region.
Is the US shale oil boom really over? Yes and no. Yes, if oil prices are weak. We’ve learned that the rigs go home under $55/B. Conversely, more American production can be expected if prices continue strengthening into the mid-$60s and above. Yet over the past several years the ‘boom’ was driven by cheap money from equity markets that financed rapid growth. Independent of oil price, the capital boom will likely remain a bust in 2020. Expect US oil production to still grow, but at a more modest pace than the past few years.
Is oil demand going to start peaking any time soon? Unlikely in the 2020s. Exiting 2019, the trends were not supportive of a structural demand peak. Global electric vehicle adoption rates had stalled, people continued to upsize their combustion vehicles, and the industrializing world is still pulling hard on new demand. Yet oil demand growth is vulnerable to two related factors more impactful than any carbon tax: An oil price spike in the event of Middle Eastern conflict with Iran, and a slowdown in the world economy.
What will OPEC+ do? The oil market continues to be well supplied into 2020, therefore OPEC+ members have little choice but to continue production restraint. The Cartel delivered some holiday cheer by extending and deepening their output cuts. As for future tactics, much will depend on the Iranian situation. Military tensions are yielding handsome prices, near $70/B internationally. For now, that takes pressure off more cuts, but publicly-traded Saudi Aramco will be watching carefully. The Kingdom’s oil company should be motivated to defend its share price by defending oil.
What are the implications of the recent COP25 meetings in Madrid? By the end of last year, a long list of countries, jurisdictions and companies made pledges to become carbon ‘net-zero’ by 2050. But the global emissions numbers show that pledges are far from action. Despite all the notional progress, COP25 proved that achieving consensus on united action remains challenging. GHG emissions will continue to rise, leading to more alarm and exasperation. This failure will increase pressure on companies to step in where governments are failing. Pressure on consumer behaviour will increase too.
What will happen with oil and gas equity markets? Last year was tough for equity prices, with some company names hitting multi decade lows. While the recent oil price surge has helped to lift share prices, many public companies are still priced below last January’s level – when oil price was under $50/B. Stronger commodity prices alone are not likely to bring back a surge of investors in 2020, companies must also prove that they can return money to investors on a sustained basis, and at the same time be ESG leaders that are resilient in a low carbon future.
What does Canadian climate change policy look like going forward? Justin Trudeau’s mandate letter to his Minister of Environment and Climate Change outlines new measures for achieving greater GHG emission reductions by 2030 and ‘net zero’ by 2050. Because upstream oil and gas production makes up about 25 percent of all Canadian emissions, the sector will remain a focal point. But instead of resisting the pressure, the industry is proactively reducing their emissions. In 2019, both Canadian Natural Resources and MEG Energy both announced their ambitions to become ‘net-zero’. Going forward, climate change action in Canada may be led from the least expected places.
Will we see an end to curtailment of oil production in Alberta and will differentials widen again? After the alarmingly large Canadian oil price differentials from the last quarter of 2018, normal and stable price differentials returned when the Alberta Government announced their oil curtailment policy last year. Curtailment has been extended to the end of 2020 and should be lifted as takeaway capacity expands. More space is being freed up on existing pipelines and crude-by-rail is growing. The completion of the Enbridge Line 3 Replacement project looks positive. All these factors should keep Canadian oil markets functioning well in 2020 and beyond.
Have Western Canada Natural Gas markets turned a corner? While most Canadian gas producers would like to forget the last few years of bargain basement prices, the future looks brighter. A new temporary policy on TC Energy’s regional gas gathering system should keep prices more steady this year. Going into the 2020s, moderating production combined with substantial new export capacity are also positive indicators for stronger and more stable natural gas prices.
Is 2020 going to be better than 2019? The year ahead looks better than last. Fiscally, more steady Canadian natural gas prices combined with a return of a geopolitical premium for oil should boost the Industry’s revenue and cash flow. Western Canadian export takeaway is improving and Canadian producers are increasing the focus on reducing carbon emissions.