Canada: Risks And Challenges Facing Canada's Oil And Gas Industry: Price Volatility And The Certainty Of Uncertainty

Last Updated: November 9 2016
Article by Alicia Quesnel

Predictions about economic recovery in global resources markets are plentiful - unfortunately, they are not particularly consistent. The only certainty about when and how recovery will occur and what recovery will look like is that it is uncertain. Hourly speculations about the factors that affect commodity prices (or speculations about the factors themselves) are fuelling a price volatility that is increasingly divorced from the underlying fundamentals. Right now commodity prices are less about the economic fundamentals of supply and demand and more about addressing financial' market requirements, geopolitical concerns and the climate change imperative. The impact of all of this on Canada's energy sector has been profound, far reaching and unprecedented. What the industry looked like in 2014 is not what the industry looks like today, nor what the industry will look like tomorrow. The changes are many and varied and this article examines three of them: firstly, the flight of resource capital from Canada, secondly, the redefinition of the junior resources sector, and finally, the closing of the current window of opportunity to become a player in global LNG markets.

Investment capital takes flight

Investment dollars in Canada's energy sector are moving south. Canadian products are constrained by a lack of access to markets outside Canada. The US, once our customer, is now our largest competitor. Obtaining approval of new energy infrastructure projects in Canada, particularly pipelines, has become increasingly difficult; with the result being that access to more lucrative global and international markets is constrained. Until such access becomes available, Canadian products will continue to be subject to a discount on already low global and North American commodity prices.

In the meantime, investors and companies looking for growth in the energy sector have started to reallocate their investment capital from Canada's energy sector into international markets. Encana Corporation started looking south in 2014 with its US$3.lbn Eagle Ford acquisition, and since that time, its acquisition of additional US natural resources assets and its disposition of significant Canadian resources assets. And it hasn't looked back. In August 2015, Canada Pension Plan Investment Board, a significant investor in Canada's energy sector, acquired US based Antares Capital for US$12bn. In September 2015, Emera Inc., an energy and services company headquartered in Halifax, Nova Scotia, acquired TECO Energy, a US energy related company, for approximately US$lO.4bn, reducing its Canadian assets to only 23 percent of its portfolio. In February 2016, Fortis Inc, a leader in the electric and gas utility business, acquired ITC Holdings Corp., a US based energy infrastructure company, for approximately $US Il.3bn in furtherance of its stated objectives to possess significant growth assets. In March 2016, Trans Canada Corporation completed its acquisition of Columbia Pipeline Group for approximately $US13bn acquiring (rather than constructing) additional pipeline assets to grow its business. Finally, in September 20 16, Canadian based Enbridge Inc. and US based Spectra Energy Corp. agreed to combine in a US$28bn stock deal to create the largest energy infrastructure company in North America fulfilling Enbridge's stated objective of diversifying and expanding its sources of growth beyond 2019.

By contrast, big deals in Canada, other than Suncor Energy Inc.'s acquisition of additional oil sands assets from two of its joint venture partners in the Syncrude oil sands project, have been few and far between.

Intermediate is the new junior

In prior years, Canada depended on its vibrant junior oil & gas sector to accelerate recovery from down markets. All that was needed was readily available capital from banks and a capable and experienced management team. In today's environment, that no longer works. Players in the junior sector have been disproportionately affected by the low-price commodity environment. Cash flow from operations is often insufficient to meet operating expenses and drilling programmes have been significantly cut back. Reserve values and reserves are both decreasing - not only as a result of lower commodity prices but also as a result of lack of investment. Canadian banks are suffering losses and looking at ways to reduce their exposure to the energy sector. At the end of each quarter, junior and intermediate exploration and production companies are seeing a reduction in the borrowing bases for their reserve based lending facilities, further exacerbating their financial woes. Since reserve based lending is the most critical source of capital for junior exploration and production companies, the inability to finance operations from that source of debt capital has had a significant impact on the junior sector. The cost to 'start small' is just too high. And the 'reward', at least for North American private equity investment in the junior oil & gas sector in Canada, is just too small

In this environment, most junior players do not have the financial ability to participate in the current unconventional resources growth plays in western Canada, like the Montney shale. These plays are capital intensive and drilling programmes are technologically complicated and challenging. New industry realities mean that 'juniors' will need to be bigger, stronger and more financially sound if they want to attract funding from the sources of capital that are available to them.

Closing the blinds on LNG in Canada – almost

One of the biggest missed opportunities for Canada is the development of a globally competitive liquefied natural gas (LNG) industry along British Columbia's west coast. This is as much a result of the global resource meltdown as the inability of Canadian companies to obtain regulatory approval of large scale infrastructure projects. In 2014 there were more than 20 proposed LNG projects for up to 250 mtpa of LNG capacity being proposed along British Columbia's west coast. By the end of 2014 and throughout 2015, several projects were deferred or cancelled. Two promising large scale projects were set to make a final investment decision in 2016 - Shell Canada sponsored 'LNG Canada', a joint venture with China National Petroleum Corporation, Mitsubishi Corporation and Korea Gas Corporation for up to a four train 24 mtpa LNG project; and the Petronas led 'Pacific Northwest LNG Project' , a joint venture among Progress Energy Ltd., a wholly-owned subsidiary of Petronas, Sinopec, JAPEX, Indian Oil Corporation and Petroleum Brunei for up to an 18 mtpa LNG project.

The LNG Canada project was the farthest project along in terms of regulatory approvals. However, in February 2016 LNG Canada announced that it would delay a final investment decision until the end of 2016 to ensure that the project was economically viable in the current environment. In July 2016, Shell announced that the final investment decision planned for the end of 2016 would be deferred to an indeterminate future date.

The Pacific Northwest LNG project is the last remaining large scale LNG project that has yet to be deferred or cancelled. The proponents made a conditional final investment decision in 2015 pending receipt of federal environmental approval. After several regulatory delays, the project received federal environmental approval of its project on 28 September 2016. However, despite the earlier conditional final investment decision, the future development of this project is uncertain. There are 190 conditions attached to the federal environmental approval, including the first ever maximum cap on C02 emissions. Petronas has stated that in light of the 190 conditions and the current economic climate, it will review the project to determine whether it remains economically feasible before it makes a final investment determination.

The global energy industry generally, and the Canadian energy industry in particular, has seen very significant structural and cyclical changes in a very short period of time. Unfortunately, the long-term implications will only truly be understood in hindsight

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions