As the newly appointed national leader of KPMG in Canada's energy industry practice, I'm honored to work with organizations in this space to continue their work driving world-leading innovation. In fact, I'm certain Canada will continue to be a key source of stable and environmentally responsible resources that will support energy transformation well into the future.
Innovation and transformation have long been recurring themes in Canada's energy sector and, now more than ever, our industry will lead. Yet, many energy and energy services entities continue to be in post-pandemic recovery mode and therefore must continue to focus on regaining their financial footing before pivoting further in the new energy world.
Certainly, the global pandemic put the energy sector's resilience to the test. Industry players of all sizes struggled and continue to struggle amid market fluctuations, volatile commodity prices, supply chain hurdles, rapidly evolving regulations and labour shortages. And while some companies had the benefit of drawing support from debt and capital markets, Canada lost more than a few good players during the most recent upheaval.
But oil prices have rebounded (granted they are volatile), natural gas prices are hanging in at attractive levels, and producers are showing signs of optimism as evidenced by 2022 capital budgets. Yet to satiate investors and navigate the energy transition, conversations must focus on allocation of capital. Should cash flow from operations (notice the use of the GAAP term, I am being mindful of National Instrument 52-112 that is now effective) be directed to further debt reductions, drilling and expansion programs, continued abandonment of wells and facilities, return of capital to investors and now more than ever investing in net zero and Environmental, Social and Governance (ESG)? Has the allocation of capital conversation ever been more challenging?
Positioning for net zero
Canada remains committed to reaching net-zero emissions by 2050. As such, there is an opportunity for energy sector players both to fill demand for oil and gas in the interim decades and to secure their position in the energy transition to come. Business as usual no longer exists and entities will need to adjust to the ever-increasing demands of numerous third parties to meet Canada's climate commitments, regardless of the individual views we may have on the subject. Companies will need to carefully consider the path they chart as we move to net zero. This adds further complexity to ever-competing capital allocations.
As we move to net zero, some companies may find it advantageous to invest in other established energy sources, such as wind, solar or nuclear. Those looking to move further away from their core businesses should do so with a measure of caution as venturing into new industries, even those with similarities, can have significantly different risks and challenges. The industry also needs to be mindful about divesting to reduce carbon footprints. We have seen divestment of oilsands plays or downstream facilities that reduce one entity's emissions. But does this really advance the energy transition? The loss of operating cash flows could negatively impact the capital necessary to advance a holistic carbon reduction strategy.
Carbon credits, meanwhile, aren't a new strategy but they are rapidly expanding. Because there are physical limits to how much carbon can be eliminated, reduced, trapped or stored, credits can play a key role in the coming years. However, caution is needed. Should capital be invested in offsets or credits—or, alternatively, should capital be more focused on technologies like carbon capture, methane mitigation, better processing and refining facilities, methanol, hydrogen, thermal and the ever-expanding list of cleantech that the industry is fostering and developing? Investing in technologies or core operational processes that reduce methane and carbon emissions will have a longer-term impact compared to buying credits.
Moving forward with balance
Making the energy transition will mean a different path for different players. Some may look within for opportunities, while some may ramp up efforts to pursue alternative energy options. Others still may seek partnerships that help them make the shift. Common among all companies, however, is the need to embrace the post-pandemic journey with balanced financials in order to further the energy transition on solid footing.
Transition is coming but it's going to be a wild ride—this much is certainly true. Luckily, our industry knows how to rodeo (and thanks to the Calgary Stampede and other great rodeos and fairs, we will get the opportunity to partake in world-class events this summer).