Editor’s note: This is an excerpt from the 2024 Top Operators Report, brought to you by KPMG in Canada & geoLOGIC systems ltd. Download a free copy of the full report here.

The wait is over for Canadian oil and gas operators.

The 590,000-bbl/d Trans Mountain Pipeline Expansion (TMX) is delivering oil to U.S. West Coast and Asian markets.

LNG Canada is rushing towards completion, with its 2.1 bcf/d of export capacity targeting Asian markets expected onstream in early 2025.

Operators now have the increased export capacity and market access needed to narrow pricing differentials and hopefully grow earnings and cash flow and invest further in production/reserves growth.

“The timing couldn’t be better,” said Shane Doig, Energy and Natural Resources Leader, KPMG in Canada. “We’re getting increased access for both molecules when countries around the globe are looking for energy security or to diversify supply.”

KPMG in Canada's Shane Doig

Global demand for oil and particularly gas is also increasing as the world recognizes the energy transition may take longer than expected.

The new egress builds on operator efforts to expand and diversify markets over the last decade, Doig said. With a lack of direct export infrastructure, rather than being price takers selling at the wellhead operators developed new markets and worked diligently to be price makers.

“Canadian operators have had to be creative to maximize the value of a barrel,” he said. “They asked how do we get better barrels and capture every meaningful nickel and quarter per barrel. They spent the time to maximize the value of every hydrocarbon molecule.”

As a result, oil producers can send production to traditional Canadian and U.S. Midwest markets, to the Gulf Coast to be refined or loaded onto tankers for export, on rail almost anywhere in North America, and now increased and new export off the West Coast.

“Integrated oilsands operators now have a lot of optionality with what to do with their barrels with their physical integration or through contracts.”

Natural gas producers have diversified into higher value markets throughout North America while awaiting LNG exports off the West Coast. Large producers have also signed LNG export deals off the Gulf Coast in the U.S. to tap into global markets.

“They didn’t wait. They did the best deals they could to get access to other markets, whether through physical or financial arrangements.”

This North American market integration is as important as West Coast LNG exports for gas producers and Doig expects it to continue.

Gas operators have also seen market access for natural gas liquids (NGLs) improve through new midstream infrastructure, export facilities and petrochemical expansion.

The addition of TMX and LNG Canada builds on these marketing efforts and should improve pricing and enable more production growth.

How long the good times last will depend on how fast the new capacity fills, said Doig.

Capital expenditures and production steadily climbing to meet new egress

The almost 70 Canadian-based operators in this year’s Top Operators cohort reported increased capital spending, excluding M&A, of almost 18 per cent in 2023 over 2022.

While service cost inflation is a part of this increase, upfront spending on longer cycle projects also increased. This includes spending on in-situ oilsands development and on infrastructure for full-field gas development projects.

Industry consolidation has put productive capacity into fewer but well capitalized operators able to invest in large scale growth projects. Canada’s top operators have seen production climb 7.5 per cent in 2023 over 2022.

“Every large project that goes sends a signal we can get things done — not without hiccups — but done.

Various projects seem to be moving more swiftly, like additional West Coast LNG facilities.”

First Nation participation is critical to meeting future infrastructure needs, said Doig. “First Nation participation is critical, the right thing, and part of the path to reconciliation.”

The federal government’s $5 billion program to help First Nations buy equity stakes in projects should help advance new builds. The federal program is modelled on the Alberta Indigenous Opportunity Corporation that has successfully funded Indigenous equity ownership in pipeline and processing infrastructure.

“These programs are absolutely essential. Access to capital upfront so they can invest in a meaningful equity stake is key.”

Liquids production to remain focus in near term

The added export capacity hasn’t altered operating fundamentals, but in some cases, it has added another layer of complexity, Doig said.

On the natural gas front the rush of new LNG export terminals being constructed is globalizing gas as a commodity, putting Canadian supply in competition with basins around the world. Having a low-cost structure is imperative.

“Gas projects now have to compete on a global scale. We have to compete to sell gas and it has to be affordable and available.”

Gas prices and price volatility continue to be an issue. After reaching an average price of over $5/GJ in 2022, gas prices declined by almost half in 2023 and have been mired below $1/GJ in Canada for most of 2024.

“I’m optimistic with gas that West Coast LNG gets us to stable pricing,” he said. “I’m bullish longer term. We have a lot of gas reserves, it can be far less expensive to extract, we just need a price we can believe in. Seventy cents per gigajoule makes it hard.”

Meanwhile, oil and condensate prices have remained stronger. As a result, Doig expects operators to continue targeting liquids-rich areas and oil plays as dry gas wells remain economically challenged.

“Liquids and oil production will drive activity with gas almost a byproduct at current pricing.”

The startup of the TMX has increased demand for condensate to dilute bitumen to make it pipeline ready, he added.

“It’s driving an oil and liquids focus with gas sometimes feeling like a molecule you have to deal with. That can change with LNG, but the downside is we have lots of gas. North America has robust reserves that are quick to get on production and potentially oversupply the market.”

Decarbonization and ESG remain priorities

Geopolitical uncertainty is creating more of a balance between energy affordability, security, and environmental expectations, but Doig said decarbonization will continue to be a top priority.

An example of this is a potential boom in natural gas demand for data centres needed for the explosive growth of AI.

“These data centres are being built by or associated with companies with stringent net zero ambitions,” he explained. If natural gas is going to be used to power these facilities carbon capture and storage will need to be added.

“Will gas with CCUS be green enough? It’s an interesting dilemma.”

Other ESG related issues will also persist, Doig added.

Upstream First Nations and Indigenous relations continue to be advanced with operators balancing corporate objectives and economic reconciliation.

“There have been and will continue to be speed bumps, but industry is getting better at working in partnership with First Nations communities, listening, learning, and advancing the rate of project development.”

The Blueberry River First Nations agreement in northeast B.C that dominated the news in 2023 is working, he said. But it is only one model of reconciliation and, “models that work for one nation don’t always work for the next.”

“There are differences between the nations and what individual nations need or expect. It will continue to require creativity and communications, but as we have more examples of positive working relationships and economic models it puts us in a better starting place.”

Operators are also facing more physical upstream risks, including wildfires and water shortages, the last few years, Doig said.

“Physical risks have changed. We used to worry it would get too cold in February. We’re now faced with broader and more severe physical risks across the value chain.”

“Industry is very good at crisis management, but it needs to be expanded,” he added. “What happens when a major piece of infrastructure they are connected to goes down? Are they prepared for a world where big things happen more regularly?” With last year’s fires, and the ongoing fires in 2024, I think everyone has learned about the increasing risk.”

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