CDN NEWS | 
US NEWS 
Originally published October 26, 2020
By David Yager
The United States has always played an oversized role in the development, success and future of western Canada’s oil and gas industry. This dates back to Leduc when the Americans helped launch our modern oilpatch with capital, expertise, equipment and personnel. America also became our biggest customer.
The upcoming US election on November 3 will affect the Canadian oilpatch yet again. Two materially different presidential outcomes are assured, be it Donald Trump or Joe Biden. The impact will be significant. What happens in the US always is. The effects will not be evenly distributed. There will be winners and losers either way.
But unlike the 2016 US election, things will improve for Canada no matter who next occupies the Oval Office.
The campaigns of the Republicans under Donald Trump and the Democrats led by Joe Biden have been polarized and polarizing. It’s the political version of mutually assured destruction. Each side has convinced its core supporters that losing will be the end of America if not the planet.
Pro-oil climate skeptic Donald Trump is a known quantity. He is peculiar, self-absorbed and for many is very difficult to like, let alone admire. He does, however, have a default pro-business bias that is consistent and in regrettably short supply nowadays.
The US oil industry has done very well under Trump. Canada has suffered. While individual Canadian companies that have moved capital and equipment south have prospered, the same policies that made the US attractive are what made leaving Canada so compelling.
Despite the oil price collapse of late 2014, in the first three years under Trump the US oilpatch ignored soft commodity prices and grew significantly. When Trump was inaugurated on January 20, 2017, US oil production averaged about 8.9 million b/d. By 2020 it was over 13 million b/d, a 46% increase. Most of the growth in world oil demand in this period was satisfied by the light tight oil drilling frenzy in the shale producing regions of the US, primarily the Permian Basin.
Trump has been an outspoken supporter of oil and gas pipelines. He brought Keystone XL back from the dead and has supported it ever since. If re-elected, this pipeline might actually be built one day.
The main trouble with Trump is that his enthusiasm for the oil business has been focused on the wrong country.
Joe Biden has not been publicly supportive of the oilpatch and his positions vary from state to state. While he says he’s going to ban hydraulic fracturing to some audiences, he says something else in frac-dependent Pennsylvania. Biden has pledged to kill Keystone XL yet again. This doesn’t warm the hearts of Canadian oil producers.
After the last presidential debate on October 22, Joe Biden’s position on the future of the American oil industry was sufficiently negative that iconic trade magazine World Oil published an editorial titled, “Biden is a menace to sound energy policy and industry’s future.” The debate went like this.
Trump – “Would you close down the oil industry?”
Biden – “I would transition from the oil industry. Yes.”
Trump – “Oh, transition. That’s a big statement.”
Moderator – “Why would you do that?”
Biden – “Because the oil industry pollutes, significantly.”
Cornered the next day and worried about losing votes in hydrocarbon producing states, Biden backtracked claiming his main focus was fracturing on federal lands. But the American anti-fossil fuel vote is firmly parked with the Democrats and Biden needs this support. Biden has also embraced elements of the Green New Deal by pledging to invest another US$2 trillion on renewable energy and emission reduction programs.
After a great run under Trump, the American industry has every reason to be apprehensive. But from a Canadian perspective, the impact of this election warrants a deeper dive.
While Donald Trump is clearly a friend of the US oil and gas industry, for those trapped in Canada his policies have been for the most part negative. In 2017 Trump made significant changes to US tax policy which greatly improved the attractiveness of American oil and gas investment. The biggest were the ability to deduct all drilling expenses (including non-hardware spending like labor and chemicals) from taxable income in the year the funds were spent and lowering the corporate tax rate from 35% to 20%.
When Canada wanted to spur oil sands development in the 1990s, Ottawa and Alberta introduced similar policies and called more aggressive depreciation deductions “accelerated capital cost allowances”. It worked as planned and resulted in massive investments in following years.
Nowadays the greens and economically illiterate politicians call tax deductions for oil and gas investments “subsidies”.
Trump’s tax reforms left Canada seriously squeezed by America and our own governments. Starting in 2015 Canada elected climate-friendly, fossil fuel unfriendly administrations in Alberta (NDP), Ottawa, BC and Quebec. While Trump cut taxes and ignored the Paris climate accord, Canada pledged major emissions reductions and introduced higher corporate taxes, carbon taxes, uncertain regulatory regimes, tanker bans, oil sands emission caps and government-sponsored pipeline obstruction.
Canada’s well-publicized capital exodus was assisted tremendously by Trump creating a safe and handy place to go. Combined with the punitive policy treatment E&P companies were receiving at the hands of Canadian governments, this chased a lot of capital from Canada to the US. Cross border operators had an understandable bias towards their American opportunities.
Trump added both public and legal support for pipelines and tried to remove obstacles to infrastructure development. Continued low interest rates kept capital markets robust. The flow of funds into light tight oil plays like the Permian Basin continued even though profits remained elusive for many without much higher oil prices. Too often, production didn’t generate enough free cash to finance reserve replacement.
The paradox of Trump’s policies is that he didn’t support the industry where it mattered the most – oil prices. Trump was publicly supportive of lower prices because this helped the US economy. Prior to the COVID mess, Trump publicly criticized OPEC for price manipulation when crude prices rose too high.
This was contradictory because it was OPEC’s supply management, or the lack of it, which either helped or hindered the US shale oil industry. Saudi Arabia declared more than once that it would abandon production ceilings to bring the US shale oil business to its knees.
While US production boomed, oil prices were supported because other producers were controlling supply. When OPEC+ agreed to put a floor under prices in late 2016 their reward was Donald Trump and a US drilling boom. More price support came from political chaos and/or embargoes affecting Iran, Venezuela, and Libya. This kept a lot of barrels off world markets.
Soft oil prices also hurt the Canadian industry. Crude would likely have been more valuable had the US not been leading the world in unbridled production growth.
When we complain about the long list of things that have hurt our industry in the past six years, the one that frequently doesn’t make the list but should, is Donald Trump. When CAPP and others talk about Canada losing “competitiveness”, Trump is a big part of the equation.
I am no apologist for the actions of certain Canadian governments and their vote-seeking, anti-oil bias. However, it is unlikely that they included in their master plans such a radical change in US tax policy. For the eight years from 2008 to 2016, Barack Obama had presided over the one-directional growth of America’s anti-fossil fuel movement. There is lots of opposition to pipelines and fossil fuels and support for carbon taxes and renewables in the US. This phenomenon is not unique to Canada.
Then along came Trump which changed everything. After his significant tax changes, to keep Canada competitive our governments would have had to undo much of their platforms and policies. But as we all know, governments do not make mistakes. Either they did not understand or did not care what the US policy changes would do to the Canadian industry. There is no reason they should be forgiven.
After all, it was Stephen Harper’s fault.
The Democrats under Barack Obama and Joe Biden weren’t as cruel to the oil industry as many believe. When the voting was concluded for the Democratic presidential nomination in June of 2008 Obama stated, “… this was the moment when the rise of the oceans began to slow and our planet began to heal…”
Then once in office the shale oil boom continued unfettered by Washington. When Barack Obama became president in January of 2009, the US produced only 5 million b/d. When he left office eight years later in January of 2017 it was up 78% to 8.9 million b/d even though oil prices had collapsed two years earlier. There was so much oil sloshing around that Obama’s government approved crude oil exports for the first time since the OPEC crisis of the early 1970s. Joe Biden, the anti-oil option on the November 3 ballot, was Vice-President for the entire eight years.
Barack Obama and the Democrats are disliked by the Canadian oil industry because Obama killed the Keystone XL pipeline in late 2015. There is general approval for Donald Trump because he resuscitated KXL and unlike too many Canadian politicians is a tireless booster of the oil industry.
But nearly four years later there is still no pipe. Thanks to ongoing legal challenges and delays from Nebraska and Montana and despite vocal support from the White House, KXL remains a pipe dream. Meanwhile, Minnesota had been concocting more ways to impede the Enbridge Line 3 replacement and expansion. Michigan is making things difficult for the continued operation and upgrade of Enbridge Line 5, the original link between Edmonton and Sarnia that dates back to the 1950s.
This pipeline opposition is not from California or New York, states with a long history of environmental causes. Three of the four states blocking Canadian pipelines supported Trump in 2016. Only Minnesota backed Hillary Clinton.
In mid-October investment bank Goldman Sachs released a report that indicated a Biden win would be good for oil prices. A research note read, “We do not expect the upcoming US elections to derail our bullish forecasts for oil and price prices, with a Blue Wave (Democrat win) likely to be in fact a positive catalyst. Headwinds to US oil and gas production would rise further under a Joe Biden administration, even if the candidate has struck a centrist tone.”
This means that intensive US drilling will no longer cap world oil prices. Activity will be impaired by restricted access to federal lands, more competition from subsidized renewable energy, higher taxes and tighter regulations on drilling and methane emissions.
The headwinds to US oil production growth began blowing long before the COVID-19 disaster. Investors began to demand higher returns and improved cash flow from their shale oil investments in 2019 and started reducing financial support. Forced to operate on cash flow from existing production, spending declined.
According to the Baker Hughes rotary rig count, US drilling plateaued at 1,083 in late 2018 then declined steadily for the next 14 months. In February 2020, the month before the major pandemic shutdowns, the average number of active rigs had fallen to 790, a 27% decline from the late 2018 peak.
Much of the new production developed in the past 12 years suffers from high decline rates and requires steady drilling to sustain. US oil output peaked at 13.05 million b/d in March of this year. The report from the Energy Information Administration for the week ended October 16 showed production at 10.525 million b/d, a 2.525 million b/d decline. Some oil was shut in as uneconomic but high decline rates are the biggest challenge.
If Donald Trump wins it will be business as usual in Canada. Which is not great but certainly improving. On October 23 there were 99 active rigs in Canada which is getting better. US drilling is also recovering, back up to 287. This puts Canada at 34% of American activity. While this is only a snapshot, for the past decade Canada’s active rigs has never averaged more than 25% of US levels on an annual basis. More normal numbers are 20% or less.
As oil and gas investors look at financial performance instead of politics, more are concluding Canadian equities are undervalued relative to US operators.
KXL will plod along and may actually be completed. And maybe it won’t. US shale oil drilling will not return to previous levels even in oil prices rise significantly. The geology is not as rewarding as many had hoped and quantum advancements in drilling and completion technologies to further reduce F&D costs are not obvious.
If Joe Biden wins, his first major issue will be the legitimacy of the vote and lingering questions over alleged foreign influence. In the same way that Trump’s election was never considered legitimate in 2016 and it dogged him for four years, a Biden victory will get the same treatment. If not worse because the political system has that much more practice and experience.
This means the grand promises of the campaign will face a reality check. Once in office, it is not intuitive that the new Biden administration will quickly reduce employment anywhere until the economy digs out from under COVID-19. As soon as prices warrant, US producers will do what they must to deal with their internal decline rates to sustain the existence of their companies. Which means more drilling.
US production won’t take off again like it has in the past, but producers will figure out how to arrest the decline rates and business will return to something approaching normal. Activity will be much better than today but nowhere near the lofty levels of the past.
For Canada, the focus will return to geology and cash flow. Canada rocks, literally and figuratively. Operators in the much-vilified oil sands are enjoying their very low decline rates and the benefits of years of cost reductions and penny pinching. Natural gas, the rump of the business for years, has gone from zero to hero with higher prices. LNG Canada soldiers on, as does the Trans Mountain pipeline.
Investors dislike uncertainty and a new Biden administration will offer lots of that. While Canada’s political warts are numerous, with major infrastructure projects proceeding, our country may finally be easier to understand than the US.
The oilpatch won’t be great again as long as the Liberals are in office. Too much damage to investor confidence, too many future impediments to cash flow like the promised Canadian Fuel Standard.
But unlike the surprise Trump win of four years ago, the November 3 US election is not going to deliver the major disruption that took place in 2016 no matter who wins.
A great challenge for today’s industry is continuing uncertainty on multiple fronts from COVID to Ottawa to ESG.
The US election will be one less thing to worry about.
David Yager is an oil service executive, energy policy analyst, oil writer and author of From Miracle to Menace – Alberta, A Carbon Story. More at www.miracletomenace.ca
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