Welcome to the energy transition: New report shows collapse of Alberta capital markets for oil/gas public companies.

Unlikely allies: climate activist Greta Thunberg and investment manager Larry Fink.

Wholeheartedly embracing the energy transition and climate risk is the only rational response for Canadian oil/gas/pipeline sector, Alberta government

Back in October, I wrote a column suggesting that Greta Thunberg and the climate movement would make raising capital more difficult for Canadian oil and gas companies. What happened? Two things. One, I was ridiculed by “economic conservatives” – Professor Melanee Thomas’s term – for my argument. Two, raising capital is becoming even more difficult for Canadian oil and gas companies.

Source: Oil and Gas Review, December 2019, ASC.

Capital has been hard to come by for Canadian hydrocarbon producers for a few years now. The December Oil and Gas Review from the Alberta Securities Commission suggests just how hard: public company “reporting issuers” raised $12 billion through prospectuses in 2016, the depths of the oil price downturn, but just $1 billion in 2018.


Capital markets recovered slightly in 2019, but were nothing to brag about, though that didn’t stop the Canadian Association of Petroleum Producers (CAPP) from crowing about an expected tiny rebound in 2020 oil and gas investment.

“We are very happy to see an increase in capital investment expected for 2020,” CAPP CEO Tim McMillan said in a statement Friday, noting that capex is expected to grow from $35 billion in 2019 to $37 billion.

Source: Twitter.

CAPP attributed the modest six per cent growth to Alberta government policies, such as the corporate tax reduction from 12 per cent to 11 percent, as well as the decision to allow producers to ship more crude by rail under the production curtailment.

Critics like economist Andrew Leach pointed out that oil patch investment was higher throughout Rachel Notley’s NDP government.

As an aside, I don’t recall a single CAPP press release or statement praising Notley energy or climate policies from 2015 to 2019, though there were many critical ones. But, sure, let’s pretend that CAPP remains a non-partisan policy and lobby organization and not an arm of Jason Kenney’s UCP government.

Source: Oil and Gas Review, December 2019, ASC.

The ASC report included another very important bit of information: the number of junior sector (less than 10,000 barrels per day of production) issuers plummeted from 210 into 2014 to just 89 in 2019. It is fair to say that oil and gas juniors, once the backbone of the Alberta oil patch, are probably on their last legs. Many have not been able to repair their balance sheets after the downturn ended in 2017.  Pipeline space is hard to come by for small companies that can’t afford “take or pay” contracts like the seniors, forcing them to sell at spot prices. And gas-weighted juniors are suffering mightly after years of low prices and pipeline bottlenecks in the NGTL system.

What does any of this have to do with Greta Thunberg? The Swedish teenager is putting climate change risk on the international public agenda in a very big way, with serious implications for the oil patch.

Awareness of climate risk isn’t new. Investors, regulators, large – the Alberta “seniors” – oil and gas companies, insurance providers, and many more business and government players have been wrestling with the economic risks posed by climate change for the past five or 10 years. And climate scientists, environmental groups, and my media colleagues have been ratcheting up public discourse about global warming for decades.

In 2019, millions of people joined Greta Thunberg demanding climate action. For the first time Canadians made climate change a defining issue at the polls. Polaris/Eyevine photo.

Now, one tiny high school student has become a global symbol of the climate crisis and that has accelerated awareness of, and action on, climate risk.

For instance, the world’s largest investor announced a few weeks ago that climate change will be “at the center of our investment approach. Where Blackrock, Inc. leads, the finance industry follows.

Larry Fink, CEO of the firm with $7 trillion under management, wrote corporate executives and clients outlining the changes. “The evidence on climate risk is compelling investors to reassess core assumptions about modern finance,” he said, adding that investors are increasingly “recognizing that climate risk is investment risk.”

“I like that line,” says Glen Hodgson, economist and CD Howe Fellow, told Energi Media. “That’s really a signal that they’re taking a long view and they’re going to do a deep dive analysis on whether firms are taking climate change seriously.”

Larry Fink, CEO, Blackrock, Inc.

Here’s Fink’s zinger: “In the near future – and sooner than most anticipate – there will be a significant reallocation of capital.” If you’re a Canadian junior producer, Fink’s letter is not good news.

Dan Tsubouchi, chief market strategist for Calgary-based SAF Group, calls Fink’s letter a “game changer.” In his weekly research note, Tsubouchi writes that ” we will likely look back in a few years to see it marked a point at which there was an acceleration of capital (debt and equity) with an ESG (environment, social, governance) approach.”

Blackrock’s move is “negative to future oil/gas capital flows and long term asset values. Simply, there is less capital (equity and debt) being allocated and that trend will accelerate. The biggest investor in the world tells the world, they are moving away from fossil fuels. It may not happen overnight (other than thermal coal), but they tell you they are accelerating their efforts here.

There’s a lesson here for the Alberta-based hydrocarbon industry: as of 2020, the energy transition is in first or second gear and there are already significant impacts upon Canadian oil and gas producers. Imagine what will happen as the transition accelerates through the higher gears and hits top speed, likely during the 2030s. Economies not already adapting are going to be left behind.

Governments, industries, and their supporters who do not explicitly acknowledge and embrace the energy transition and the climate crisis are not prepared to adapt. They will be left behind and investors will among the first to abandon them.

I’m looking at you, Alberta.

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