Canadian upstream oil and gas investment increased only 15% compared to 41% in the U.S.: Report
Calgary – From 2016 to 2018, capital investment in Canada’s upstream oil and gas industry (essentially, exploration and production) increased 15% compared to 41% in the U.S. over the same period, finds a new study released Tuesday by the Fraser Institute.
“Part of the explanation for the diverging fortunes is that in the U.S., they’re building pipelines, reducing and streamlining regulations, and reforming taxes to be more competitive while Canada is doing the opposite,” said Steven Globerman, senior fellow at the Fraser Institute and author of the report tilted Investment in the Canadian and U.S. Oil and Gas Sectors: A Tale of Diverging Fortunes.
Moreover, the percentage of oil and gas capital investment in Canada as a share of total capital investment has plummeted, from 28% in 2014 to 13.9% in 2018.
“Clearly, the U.S. has become much more attractive for energy investment and Americans are reaping the economic benefits,” Globerman said.
“Unless we see dramatic policy change in Ottawa and in key provinces, we can expect this shift in capital from Canada’s energy sector to the U.S. to continue.”
The oil and gas industry is critically important to Canada’s economy. It accounts for almost 8% of Canada’s GDP, as well as for a significant share of the tax revenue collected by governments. The oil and gas sector is particularly important to the provincial economies of Alberta and Saskatchewan. It accounts for almost 30% of Alberta’s GDP and slightly over 23% of Saskatchewan’s GDP. As such, the economic health of the oil and gas sector is a direct contributor to employment and economic activity in Western Canada and an indirect contributor to the rest of the domestic economy through links to industries that supply inputs to the sector, as well as use the outputs of the sector.
The upstream segment of the oil and gas sector encompasses exploration and production of crude oil and natural gas. It is the single largest segment of the oil and gas sector, which also includes midstream gathering and pipeline facilities and downstream refineries. The oil sands account for almost two-thirds of Canada’s oil production. Since activity in the mid and downstream sectors will ultimately reflect the production of crude oil and natural gas in the upstream sector, the willingness of companies to explore for and produce oil and gas in Western Canada dictates the pace of economic activity throughout the industry’s total supply chain.
A sharp drop in the world price of crude oil in 2015 and 2016 hurt the profitability of upstream oil and gas companies in both Canada and the U.S. However, while economic activity in the U.S. upstream segment increased substantially with a modest recovery in crude oil prices in 2017 and 2018, investment in Canada’s upstream segment as a share of total capital expenditures in Canada declined consistently from 2014 through 2018. While total capital expenditures in Canada declined post-2014, the decline in capital expenditures for oil and gas extraction was even more pronounced. Thus, while capital expenditures for oil and gas extraction accounted for approximately 28% of total Canadian industrial capital expenditures in 2014, oil and gas extraction accounted for only 14% in 2018.
Investment analysts and portfolio managers have recently warned that investment in the oil and gas sector is moving increasingly to the U.S. and away from Canada, and that they are reluctant to invest their clients’ savings in Canadian oil and gas companies. An unfavorable business environment for oil and gas exploration and production in Canada is cited as the reason, particularly compared to the business environment in the U.S. A number of Canadian oil and gas companies have also reallocated their exploration budgets away from Western Canada to the more profitable shale oil producing regions of the U.S.
In the absence of changes to Canadian government policies affecting the sector, relatively low prices for Western Canada crude oil as well as depressed profitability of Canadian oil and gas companies are likely to continue. As a consequence, the ongoing shift in the location preferences of North American oil and gas companies towards the U.S. might well intensify with drastic consequences for the fiscal health of the Alberta and Saskatchewan governments.
While limited pipeline capacity is the major factor depressing the price of Canadian heavy crude oil, more favorable tax and regulatory environments in the U.S. compared to Canada are also contributing to the diversion of upstream oil and gas investments from Canada to the U.S. By way of illustration, whereas capital expenditures in the upstream segment were around 41% higher for the U.S. when comparing 2018 to 2016, they were only about 15% higher in Canada. An investment manager in the U.K. recently wrote a letter to Prime Minister Trudeau saying that it was hard for her to watch a vibrant Canadian oil and gas industry being strangled by regulation, carbon taxes, and the inability of producers to get their products to world markets. Recent investment patterns in the North American oil and gas sector support this sentiment.
The Fraser Institute is an independent Canadian public policy research and educational organization with offices in Vancouver, Calgary, Toronto, and Montreal and ties to a global network of think-tanks in 87 countries. Its mission is to improve the quality of life for Canadians, their families and future generations by studying, measuring and broadly communicating the effects of government policies, entrepreneurship and choice on their well-being. To protect the Institute’s independence, it does not accept grants from governments or contracts for research. Visit www.fraserinstitute.org.