Alberta Oil Industry Shifts Focus to Shareholders, Stalls Expansion

Despite Alberta’s oil industry raking in billions in profits, a significant portion of these earnings is going to shareholders rather than fueling major expansion projects. During the previous boom, oil companies reinvested a large chunk of their profits back into capital spending. In 2014, the investment in Canada’s oil and gas sector reached approximately $80 billion.

Fast forward to today, the latest data from the ARC Energy Research Institute shows a significant decline in investment, with current figures hovering around $30 billion. This drop in capital spending has not translated into a surge of new projects in the region, with the opening of Suncor’s Fort Hills mine in 2018 marking the last major oilsands development.

Jackie Forrest, the executive director of ARC, highlighted the shift in companies’ spending behavior, noting that before 2020, a larger portion of cash flow was directed towards growth and capital expenditures. However, post-2020, around half of the cash flow is now being allocated to shareholders, with governments also benefiting significantly through royalties and taxes.

The after-tax cash flow, as illustrated in the graph above, represents the money oil companies have remaining after covering costs, including payments to governments. This cash is typically used for debt repayment, project investments, asset acquisitions, or returning funds to shareholders through dividends and stock buybacks, explained Richard Masson, an executive fellow at the University of Calgary.

While companies are reinvesting about half of their after-tax cash flow, most of these funds are directed towards maintaining current production levels rather than expanding operations, according to Masson. This trend is attributed to factors such as market access uncertainties and fluctuating prices.

Factors at Play

Charles St-Arnaud, the chief economist at Alberta Central, pointed out similar trends among non-Canadian oil producers, emphasizing the impact of global factors such as forecasts indicating a plateau in oil demand by the 2030s. This outlook raises questions about the rationale behind massive investments in expanding oil production.

Masson emphasized that future investment hinges on various elements like resource availability, market access, capital availability, and workforce expertise. Despite challenges, Canada remains a competitive destination for investment, with ample growth potential in the industry even amidst forecasts of peak oil in the mid-2030s.

Global investor expectations have shifted following experiences in regions like the Permian Basin in Texas, where significant investments did not yield expected returns. This has led to a trend of companies prioritizing returning cash to shareholders to remain competitive.

Industry leaders also cite regulatory uncertainties, including legislation like Bill C-69 and proposed emissions caps, as hindrances to new investments.

Steady Industry Outlook

In Fort McMurray, Alberta, the heart of the province’s oilsands sector, the industry’s cyclical nature has been evident over the years. Currently, the region is experiencing a phase of stability rather than the typical boom or bust cycles.

Owen Erskine, owner of Mitchell’s Cafe in Fort McMurray, noted a lack of significant growth in personnel influx and investments, indicating a relatively subdued period for the industry. This contrasts with previous booms that brought a surge of out-of-town workers to the city.

The ‘Mature’ Phase

While oil has been a major economic driver for Alberta, it also underscores the province’s heavy reliance on a revenue stream that may face challenges amid the ongoing energy transition. St-Arnaud highlighted the need for proactive measures to safeguard these revenues, stressing the potential impact on government funding if oil revenues decline.

According to St-Arnaud, the industry appears to have entered a “mature phase,” where companies are prioritizing optimizing existing operations over extensive production expansion. This phase is characterized by companies focusing on maximizing returns rather than pursuing significant growth ventures.

While recent infrastructure developments like the Trans Mountain pipeline expansion have provided some support, uncertainties around market access and federal policies continue to influence long-term investment decisions.

Looking ahead, the industry’s response to fluctuating oil prices will likely determine how companies allocate their resources, particularly in prioritizing shareholder returns in times of constrained cash flows.