Changing Industry Dynamics, Public Policy Shifts Are Here To Stay

By: Pierre Alvarez
Published: Daily Oil Bulletin

Over recent weeks the Daily Oil Bulletin has talked to five high-profile, experienced and well-known oil and gas sector leaders about the current downturn. Is it different than others in recent memory? What will the outcome be? What is the best path, as an industry in Western Canada, going forward? An article on Peter Tertzakian appeared on Monday, one on Roger Soucy appeared on Tuesday and one on Charlie Fischer appeared on Wednesday.

Today: Pierre Alvarez.

With over three decades of senior management experience in the Canadian oil, natural gas, pipeline and electricity sectors, nothing much surprises Pierre Alvarez when it comes to the inherent ebbs and flows of Canada’s energy industry.

In fact it’s safe to say Alvarez, whose resume includes nine years as president of the Canadian Association of Petroleum Producers (CAPP) from June 1999 to September 2008, has pretty much seen it all. Yet he views the current and prolonged downturn as being a precursor of sorts to a forever changed business and operational reality for the Canadian oilpatch.

While he’s loathe to speculate on the future of the western Canadian oil and gas sector once the current downturn is in the rearview mirror—“predictions are not productive”—Alvarez notes the industry will be forever changed, with junior oil and gas entities perhaps being the most impacted.

“I think the changes are going to be significant, especially in Western Canada where I think the junior sector is going to have a much more difficult time bouncing back this time. I think lack of capital, cost of entry in terms of liabilities that are out there, the cost of the regulatory process and all that, makes it really difficult on them,” he says.

“The one thing I do know is I don’t think we’ll see the junior sector the way we have historically.”

Although Canada’s oil and gas industry still has legs and future opportunities beckon, the landscape, both currently and going forward, looks a whole lot different than what the industry was facing coming out of past slumps. And perhaps the most obvious and pronounced difference, according to Alvarez, is the metamorphosis of the United States from being Canada’s largest and most reliable customer to becoming a significant competitor.

“We’re seeing huge amounts of shale gas and tight oil being brought into the marketplace. You see U.S. gas take over a significant portion of the eastern Canadian market for natural gas and moving into the western part of the continent, as well,” he says.

“So you’re seeing a fundamental shift in market dynamics. Gone are the days where Canadian producers could still sell everything they wanted—they just had to produce it. And now, that’s not the case.”

Secondly, Alvarez points to the climate change-fueled push to increase the proportion of renewables in the energy mix as another development that is quickly becoming another fast-paced step-change facing the oil and gas sector. Whether it’s the inevitable ramp-up of electric vehicles, or increased emphasis on developing larger solar or wind power options, market share for petroleum-based energy sources will undoubtedly become more challenged in coming years and decades.

“Now we’re starting to see for the first time where renewables have gone from being next year or next decade to a whole lot sooner in their application and, in a lot of instances, it’s immediate,” Alvarez says.

“So I think that’s a huge change in what’s coming. You’ve now got to consider that in future plans for any number of reasons, not the least of which is you want to be able to offer a portfolio of energy services. I think the renewable piece, you have to look at.”

Public policy shifts have growing implications

Alvarez, who is currently vice chair of Global Public Affairs, a Canadian firm with global reach and that provides integrated government relations, strategic communications and issues management consulting services, says there’s been an “enormous” shift in public policy. And that has, and will continue, to change the business and operational environment under which oil and gas companies operate under.

“There used to be a [public policy] view of natural resources, and not just energy but forestry and mining, that natural resources were really seen as the engines of growth for the country. Where natural resources were seen as an obvious and significant part of the economy, now I think that’s much more in question as to whether that really remains,” Alvarez says.

“And that’s partly because of environmental perspectives. It’s also partly because of the shift in demographics where rural and remote Canada is de-populating in many ways. Hence, the immediate relevance of those areas to government is declining, whereas the big urban centres, where it is a service economy, IT, banking and those types of things, are increasingly seen as being the growth areas,” he adds.

“So government focus on policy is far more on those sectors than it is on the traditional and resources economies. Now, we’re seeing a lot less public support for those natural resource industries.”

While the dwindling rural importance as it pertains to shaping public policy and the resulting effect on natural resource industries may at first seem like a stretch, Alvarez says it shouldn’t.

“If you look at the demographic shifts where you’ve got larger and larger urban centres, where you’ve got more young people who didn’t grow up with summer jobs on the farm or those kinds of things and who would often work on the rigs during off times and who were familiar or used to the industry and as a result were big supporters of the industry, that’s a lot less now,” he says.

“I think a big part of it is because there is no connection back to those land-based activities that we had for a long time. That leads not only to governments being less interested, but it also leads to the rise of opposition to projects because I don’t think people are familiar with, or generally appreciate, the significance of the natural resource sectors.”

And that will not only affect the future of the oil and gas sector in Western Canada, but many small and remote communities, as well.

“It used to be the farm boys would work on the farm in the summer and then work on the rigs after. It helped allow those communities to be vibrant and self-sustaining. But it’s increasingly more and more difficult. There’s an obvious impact on government revenues because of this downturn, but I think of it more from a pure community point of view where what’s going to keep those communities going and vibrant?"

How can industry address the challenges?

Like most industry experts and observers, Alvarez stresses the need to continue to hammer down the cost structure as being paramount to the future health of the Canadian oilpatch.

“You can’t do anything about price but you can do something about costs. So clearly that’s got to be a part of it,” he says.

“The oil market is returning to some kind of equilibrium. So when you get there a significant change in supply could change the market relatively quickly. But I think the focus has got to be, to be able to do it cheaper, better and with less impact. Those are the things we can control, and things we have to control.”

Another obvious need is the ability of western Canadian producers to be able to access alternative markets in this day and age of prolific U.S. output capability.

“We do need to look at where the growth markets are, and they’re not going to be in the U.S., at least not for awhile. So pipeline access [to] various markets is hugely important, whether it’s for LNG or for oil going off the West Coast, which is obviously critical,” Alvarez says.

While the co-ordinated, vocal and well-funded efforts of the social media-savvy anti-oil faction poses a significant challenge to the industry, Alvarez is of the belief that most Canadians support the responsible and sustainable development of oil and gas, as well as the proposed  infrastructure projects required to open up new markets.

But with a vocal minority often grabbing the spotlight and headlines, it remains an uphill battle to sway the discussion in industry’s favour. And to do that, the sector will have to continue to pick up its game.

“I would argue that the minority are against these developments. There’s no question it’s a bigger proportion of the population these days, but I think a lot of the polls show a majority are in favour of these developments. They have to be properly done and properly reviewed and all those kinds of things, but I think there still is an appreciation for them,” Alvarez says.

“But there is no question the ‘off-oil’ movement is very sophisticated, very well funded and has the advantage of they don’t have to report to shareholders, they don’t have to report to a securities commission; you can make whichever claims you want. And with social media, it’s out there in the blink of an eye. It’s quick, it’s easy and there are no rules. You can say anything you want. That makes it difficult for the industry,” he adds.

“I think both industry and regulators have been slow in recognizing the degree of the challenge and the nature of the response that was required in terms of emergency response, public engagement, energy efficiency, proper planning, and First Nations’ involvement. I think we’re now seeing huge strides being made, but you’re having to play catch up."