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How might team Trump impact Canadian oil and gas?

The media doesn’t take Trump that seriously but does take him literally, whereas his followers take him very seriously but rarely that literally. This begs the question: which of the new Trump administration’s energy policies should Canada take seriously, which ones literally, and what should we all anticipate?

 

This is more of a challenge than it should be because his policy positions have not been stated with much clarity to begin with, and they have changed throughout the course of the election.

 

This post will be less about digital and more about oil and gas market developments. Stay with it, though. It’s still interesting.

 

Trump and the climate

 

Let’s begin with climate policy. While Obama has followed a broadly green agenda, Trump’s position is less clear.

 

In his Twitter feed, the President-elect has stated that climate change is a hoax perpetrated by the Chinese, for some unexplained reason. Despite China’s assertion that the original climate change agenda was in fact launched by the first Bush administration (a Republican!), Trump has vowed to roll back many of the policy choices of the past eight years that are aimed at climate remediation, and to dismantle or overhaul the EPA. Targets include EPA rules related to methane emissions and CO2 regulation, US commitments to the Paris Climate Accord, the Clean Power Plan which requires coal power plants to reduce emissions, anti coal mining rules, standards for automotive fuel consumption, and so forth.

 

I expect that US coal mining will see its regulatory burden reduced (which translates into some cost relief) which will help coal producers recover from recent price pressures. Increased coal production could translate into more coal-fired power generation in the domestic market which may put some pressure on domestic gas markets, but with new US LNG export infrastructure coming on line, US gas will likely find alternative markets. Coal-fired power plants may still convert to gas power generation or renewables for economic reasons, or because of the age of the coal plants, or from ongoing pressure from shareholders and capital markets.

 

Have you noticed that the big green bananas have stepped up their funding appeals? Greenpeace, Sierra Club and the Environmental Defense Fund are reported to have had boost in contributions to oppose the Republican agenda. One is calling on the outgoing Administration to quickly sign into law any outstanding climate based regulations.

 

With a Republican controlled House, Senate and Presidency, the environmental lobby (whose head offices are largely located in elitist liberal locations like San Francisco and Washington) is going to get a rough ride in Washington. This will help accelerate infrastructure approvals which will give lift to the US midstream sector and continued development of US shale resources.

 

Trump and energy development

 

In speeches, the President-elect has voiced deep opposition to continued US reliance on imported oil from nations hostile to the US or who are benefiting from US military support without commensurate compensation. While the US government does not directly control crude oil imports, it can set trade policies that can make sourcing from some nations more difficult (sanctions) although it would very challenging to ban crude imports entirely because of how the market is structured (US coastal refineries purchase tidal crude, for example).

 

Who would oppose interference in crude markets? Not the large integrated oil companies who prefer freer oil markets; they benefit from crude sourcing flexibility. Perhaps the US independent producers who are largely domestic, and are prone to accusing OPEC of dumping oil to manipulate price. Independents would benefit from a reduction in competition from international sources, particularly the low cost high quality Middle Eastern suppliers, because it could help boost prices.

 

The incoming Administration has also maintained throughout the campaign that it favors less regulation over energy markets. Subsidies on renewables interfere with markets and distort investments. They could be removed and the market would then determine whether renewables are truly cost competitive without pricing support (a good question). The stock market certainly thinks that deregulation of coal is coming. Stock prices for benchmark US coal producers moved sharply higher as a result of the election. Restrictions on land access for oil and gas exploration (particularly on US federal lands) are likely to be lifted which may open up new supply sources.

 

Although US oil and gas companies have become more efficient because of low energy prices, it’s not clear that new energy development projects will be economic considering today’s commodity prices. Brown field developments and infill projects will likely be favoured.

 

Trump and energy-related trade

 

On energy trade, the new administration’s campaign position has been very pro energy development, and by extension, pro energy trade. Trump wants better trading terms, reflecting his world view that the nation is saddled with too many poor trade deals. The incoming administration has signaled that it would repeal or renegotiate NAFTA, and approve the Keystone Pipeline project with different commercial considerations. Republican control of FERC (who recently blocked an LNG application), could result in more US LNG projects getting to market.

In other announcements, however, the President-elect has declared some nations as unfair traders and threatens retaliatory actions (China is accused of being a currency manipulator to keep US manufacturing uncompetitive). He has accused some Middle Eastern nations (Saudi Arabia in particular) of artificially inflating oil prices, while the US government has from time to time entertained accusations that OPEC dumps oil. It’s unclear how the new administration might view oil and gas imports from Canada which routinely trade at a considerable discount to US domestic prices (and are therefore also susceptible to dumping claims).

 

During the election, the President-elect proposed creation of an America desk in the Department of Commerce whose role would be to protect the interests of American workers and companies in the US. This proposal is aimed at providing a mechanism for US industry to challenge imports on fairness principles. It’s not clear that this measure would be aimed at the oil and gas industry in the first instance, but would still provide a threat to cross border trade.

In the main, domestic energy development and trade in energy projects are good for jobs and the economy, and reduce US dependence on foreign suppliers. They help sustain the Republican narrative that the US can step back from its financially draining role in funding wars that ostensibly are about oil market security it no longer needs.

 

Trump’s timing

 

There are several thousand Republican appointees in a dozen key agencies that will be instrumental in effecting the Trump agenda. These include leaders at the Department of State (for cross border energy trade), Bureau of Land Management (for land access, particularly federal lands currently off limits for exploration and production), Department of the Interior (for resource development), the EPA (for regulations of emissions, water use, ozone), FERC (for infrastructure approvals), the Department of Energy (for investment planning), the Supreme Court (for adjudicating in a conservative fashion).

 

The incoming administration has only a short period of time to get its transition team and plans in place, and to start assigning key leaders and administrators to the 4000+ appointed positions across government. It is through these many appointed positions, and the dozens of small unreported and routine decisions they execute, that the Republican agenda will be carried out. Meanwhile, the outgoing administration may be unwilling to make routine decisions. This will slow down approvals, permitting and hearings, at least for the next few months.

 

Outlook for Canada

 

What does all this mean for Canada’s oil and gas sector, its producers and key suppliers?

 

First, oil sands are likely to benefit. Many of the operators are US oil companies who will want to see open crude markets and will press the Administration on this point. A Republican desire to reduce dependence on imported crude oil could signal more domestic production (a tall order – 7m barrels a day) or a reliance on stable continental and friendly sources (oil sands).

 

Second, transport services, and in particular the cross border pipelines, will face a more receptive pro-business federal administration (state level governments may still oppose pipeline developments under pressure from lobby groups). Additional market access will support further oil sands growth, and Canada’s conventional supplies, but new pipeline projects may be a few years away from construction, and current pricing may make additional pipelines uneconomic.

 

Third, there’s some upside in the US midstream, perhaps for Canadian investments. The pro development, pro infrastructure stance of the new administration could put in place federal policies that promote development (tax rules). This may create continental opportunities for growth and expansion that may outpace the Canadian opportunity set.

 

Fourth, Canadian LNG investments, particularly those that compete directly with US projects for capital in the same portfolio, will likely face an uphill battle to get to sanction.

 

Fifth, Canadian services are likely to benefit if the administration follows through to enable more exploration and development, although current prices may make new greenfield developments less likely. New trade rules may make it imperative to have a permanent presence in the US.

 

Finally, the renewable sector may see policy and tax changes that make existing investments less economic and new investments harder to sanction. Canadian renewable operators with US-centric growth plans face new uncertainty and risks.

 

Now What?

 

I’d play a wait and see game. Until the Republican appointees are in place it’s hard to get a clear read on the future. Meanwhile, these are my views only. Treat them as you would anything you read on the internet.

 

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