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Financial Risks in the Oil and Gas Industry

Trans Canada Keystone Oil Pipeline
File:Trans Canada Keystone Oil Pipeline
File:Trans Canada Keystone Oil Pipeline by shannonpatrick17 from Swanton, Nebraska, U.S.A., CC BY 2.0 https://creativecommons.org/licenses/by/2.0, via Wikimedia Commons

Financial risks in the oil and gas industry are growing due to rapidly changing political, social, environmental, and economic factors.

In the summer of 2008, oil was trading at $140 per barrel. It went into negative territory in the spring of 2020, and is back in the $90 range as of late 2022. Energy companies have been riding the roller coaster for a long time, but the world is changing fast, there are many pieces in play, and the industry may be more vulnerable than it has ever been.

The risk management company Reciprocity sees unique risks for oil & gas companies:

[T]hey are a critical infrastructure sector with little room for error and they operate in complex environments, which means plenty of risks that demand attention.

Top Risks Faced by Oil and Gas Companies, Reciprocity

Reciprocity identifies the following risks:

  • Cyber attacks attempting extortion, disruption of operations, theft of intellectual property, or loss of employees’ personal data
  • Financial risks resulting from the volatile nature of commodity prices
  • Supply and demand shocks, especially given the long lead time of investing time and capital before a big project reaches its commissioning stage
  • Environmental risks from GHG emissions, climate change, oil spills, methane leakage, and dealing with solid and hazardous wastes
  • Safety risks due to long hours, difficult working conditions and complex machinery. When this machinery breaks down, can not only endanger staff but also neighbouring communities

CLIMATE, ENERGY AND ALBERTA’S FUTURE

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Shrinking Workforce

The oil and gas industry could once count on a steady influx of new talent, but the labour market is shifting against it. The consulting firm KPMG describes the situation this way:

The oil and gas industry has faced a talent shortage for years due to an aging workforce, limited new/young talent entering the industry, and growing competition for talent with the technology industry.

Top risks facing the oil and gas industry in 2022 – and what you can do about it, KPMG

According to research done by Abacus Data for Edmonton-based Iron & Earth, over two-thirds of Canadian fossil fuel workers are interested in jobs in a net-zero economy. The same report found that 62 per cent of the workers surveyed in Alberta agree with the need to tackle climate change.

High Production Costs

Production costs are also rising, making the business ever more precarious.

A world oil price in the range of $55 to $60 per barrel is less than the cost of Russian Arctic oil production, European and Brazilian biofuel production, US and Canadian shale and tight oil production, and Brazilian presalt oil production. Sustained price levels below the cost of production can deter exploration and production and shift production potential for years to come.

Cost of Oil Production by Country, data analytics firm Knoema

The cheap stuff is gone. Companies are resorting to drilling half a mile deep in the Gulf of Mexico. Here in Alberta, for in situ facilities, semi-solid bitumen requires massive steam injection before it can be forced to the surface and refined through a multistage process.

While acknowledging that established oil sands operations are well placed to manage low global prices of oil, the International Institute for Sustainable Development (IISD) said in spring 2021 that:

Alberta’s oil sector has been an economic workhorse for decades, but its long-term market outlook is bleak. By the end of this decade, a combination of technological change, climate action, market forces, and geopolitics will drive a long-term decline in the sector, meaning its contribution to Alberta’s future prosperity will be nothing like what it was in the past.

In Search of Prosperity: The role of oil in the future of Alberta and Canada, PDF iconInternational Institute for Sustainable Development

Rapid Shift to Electric Vehicles

In 2019, well before Covid-19 put so many developments on pause, Canada had about 100 electric buses, the U.S. about 300, Europe about 8,000, while China had 421, 000.

With major cities around the world facing pressure to reduce noise and air pollution, will they choose diesel buses, the old standard? Likely not. The Indian city of Delhi alone is planning for 8,000 electric buses by 2025. Chile has ordered over 1,000. And Colombia is aiming for the top spot in Latin America, with almost 1,600 electric buses running in 2022.

Considering the broader EV market, four years ago electric vehicles were 2 per cent of global sales. In August 2022 they were 15 per cent, and in Norway, they are already dominant.

Eight cities in California’s Napa and Sonoma counties have banned the construction of new gasoline stations. Will they be the last? Perhaps not; Los Angeles is considering the same. And in a related development, the Los Angeles City Council voted unanimously last week to ban new oil and gas wells and phase out existing ones over 20 years.

Replacing Coal and Gas with Renewable Energy Sources

Cities, states, provinces, and even countries have been implementing bans on natural gas infrastructure for new homes and buildings. This movement for cleaner energy sources has faced opposition — dozens of U.S. states have preempted cities from passing these bans. The number continues to grow, however, with Victoria, BC, becoming the newest Canadian addition.

Putin’s war on Ukraine, causing widespread high prices and supply uncertainty, has tipped some utilities and governments away from plans to replace coal with gas-fired power, accelerating a shift instead from coal to renewables. KPMG again sums it up:

In some parts of the world, energy transformation and energy security are seen as being synonymous rather than disruptive.

Regina Mayor, Global Head of Clients & Markets, KPMG International

The International Monetary Fund estimates benefits from this shift will far outweigh costs and bring a net social gain in the tens of trillions of dollars.

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Future Outlook

The International Energy Agency, tallying these trends driven by concerns of health, climate, and energy security, recently released their World Energy Outlook 2022. For the first time ever, none of their scenarios see continued, long-term growth for any fossil fuel, including natural gas. At COP 27 in Egypt and in the Economist, Dr. Fatih Birol, Executive Director of the IEA, has been direct: the energy crisis is accelerating the energy transition in all countries.

There are risks that oil and gas firms have known about and managed for decades. The recognition of climate risks, however, has only escalated in recent years.

Climate protests grow (half a million people in Montreal, 6 million worldwide, and a response from Alberta’s conservative Premier that we have a “moral obligation to play our part”). Over 1,800 climate-change related lawsuits have been filed. At least 20 have been filed specifically against fossil fuel companies by cities and states in the U.S. alone.

These lawsuits cover a wide range: securities fraud, nuisance, negligence and tort, all arising from allegations that the world’s largest oil and gas companies knew about the impacts of greenhouse gas emissions on the climate as early as the 1970s, and yet actively delayed action to reduce emissions.

And, while it’s not in the courts, the newest investigation into Canada’s fossil fuel industry is coming from the Competition Bureau of Canada, diving deep into allegations by the Canadian Association of Physicians for the Environment that the Canadian Gas Association’s advertising of natural gas amounts to greenwashing.

The bottom line? There are a lot of big risks for fossil fuel companies doing business in 2022. The climate risks have spurred a divestment movement of 1,552 institutions (and growing) that have pulled $40.5 trillion out of fossil fuels. Risky business, indeed.

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