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Risk management and the future of oil and gas

The current geopolitical shift is changing how Canada does business. Get insights on the future of global policy and risk management from Robert Johnston, keynote speaker at the 2017 Conference for the Oil and Gas Industry.

You have quite an extensive background in energy infrastructure, industry and civil society relations, as well as resource nationalism. How does that previous experience inform your current work as the CEO of Eurasia Group?

I was fortunate to work in the energy industry in Houston at the beginning of my career, both in trading and risk assessment for overseas project development. It was a great opportunity to put my academic training in international affairs and foreign policy into action in a commercial context, looking at countries like Russia, Indonesia, Venezuela and Qatar. At Eurasia Group, we cover 90 countries and have 65 analysts, so I get to learn plenty from them as well.

Eurasia Group offers expert perspectives on risk management. Can you share your thoughts about how the current geopolitical shift is affecting the Canadian oil and gas industry?

Each January, Eurasia Group publishes a forecast of our top annual geopolitical risks, which identifies the most challenging political and geopolitical trends for global investors and market participants. This year, we labelled 2017 the “geopolitical recession,” as we believe that it marks the most volatile political risk environment in the postwar period. For the first time our top risk was a developed market, the United States. In our view, an “independent America” led by President Donald Trump marks a break with decades of U.S. exceptionalism. Following the election, we saw a dramatic shift from the U.S. being considered the world’s superpower to a wildcard. With only a couple months left in the year, we have reached a geopolitical inflection point that has an important impact on Canada’s oil and gas industry.

For Canadian gas producers, my organization is watching several important factors. On the supply side, U.S. liquefied natural gas supply, or LNG, will surge in the coming years. Market and political factors will continue to inform the competitiveness of new projects. This was seen most recently when the cancellation of the Petronas-led Pacific Northwest LNG export project weighed on broader LNG hopes. Meanwhile, American energy policies will support growth and exports, increasing competition for Canadian producers. That being said, China matters the most in terms of gas demand, where pollution abatement and efforts to reduce coal overcapacity are the main drivers.

A longer-term view raises important questions about a potential shift in energy geopolitics driven by different theories of slowing oil demand. The idea of peak demand is becoming increasingly popular, however there is currently little consensus about timing – and a world with slowing oil demand is disruptive for governments that are highly dependent on petroleum production and sales. The greatest impact falls on countries where political risk and supply costs are both high, such as Nigeria and Venezuela, while suppliers such as Canada, Mexico, Brazil and Colombia would feel more economic pain from lost investment. For now, varying predictions of peak demand will continue to cloud the investment outlook for long-cycle upstream projects like Canadian oil sands and the Arctic.

Do you think that new energy policies in the U.S. will influence other countries around the globe – especially other major emitters like China and India – or will America’s step back from the Paris Agreement remain an isolated approach?

U.S. withdrawal from the Paris Agreement is a major blow to international efforts to address climate change given that the America is the world’s second-largest emitter. However, I do not believe that it will cause the accord to unravel since other countries and regions, like the E.U., have demonstrated a firm commitment to it. Instead, the U.S. will be increasingly isolated and sidelined in multilateral climate discussions.

Climate politics today are not the same as they were during the fallout after the Kyoto Protocol, mostly owing to increased action to cut emissions by both China and India. Domestic policies aimed at reducing carbon emissions in those two countries, as well as other developing markets, are largely driven by air quality and energy security concerns. In the U.S., federal action on climate change will take a pause while President Trump is in office, though this does not signal complete U.S. reversal on the issue. During this time, states, cities and companies will continue to step up and take climate action for either economic or political reasons.

Canada is the counterpoint to President Trump’s climate change model. Under the government of Prime Minister Justin Trudeau, Canada is attempting to show the rest of the world that it is a country that can responsibly develop its vast energy resources while also prepare for a longer-term transition to a lower-carbon economy. Our climate leadership strategies are aligned with where the world is already heading.

As the impact of climate change becomes more pronounced, so will the demand for renewable energy and cleaner alternatives to coal. What’s your take on the future of solar, wind and natural gas?

Without a doubt, solar and wind are quickly gaining cost competitiveness, however the threat to natural gas will vary by region. In the U.S., cheap natural gas from shale plays like the Marcellus and Utica will still dominate in the power sector, though we are starting to see that some state-level policy support is threatening the traditional utility model. The Trump administration is clearly focused on promoting fossil fuels, however we believe that federal tax credits for wind and solar will remain intact.

In Asia, industrial policy and air quality concerns are driving strong support for renewables, particularly China and India. At the same time, we are starting to see demand for natural gas being squeezed by growing policy support for renewables and the cost competitiveness of coal. In Southeast Asia, policy support for renewables has been slower to materialize although the trend is heading in the same supportive direction. More broadly though, gas is still better situated to serve as back-up generation for renewables versus coal.

The challenge for many oil and gas companies right now is meeting investor demands while accounting for sustainable long-term business planning in a carbon-reduced economy. How can Canada stay competitive as it navigates the evolution of industry?

Shareholder activism on climate change is rising and expected to grow, especially as federal policies in many countries put even more pressure on companies. At the same time, support for global climate action among corporations is far more in consensus than at any other point in history. In Canada, we believe that investor certainty on the direction of carbon policies will help reduce investment risk in sectors such as the Alberta oil sands. As a result, Canadian oil and gas companies must demonstrate that they can still be profitable in a world where carbon prices are rising while oil and gas prices stay flat.

The outlook for both Canadian oil and natural gas supply is constrained by a lack of market access options and export opportunities. It remains to be seen, however, if forthcoming Canadian regulation such as the National Energy Board’s Canadian Environmental Assessment Act will be able to get energy infrastructure built without opposition from environmental groups and indigenous communities. Another critical component for Canada to remain competitive is technology and innovation, which has the potential to significantly alter the status-quo for oil and gas supply. Carbon-reducing technologies, especially in the oil sands, will enhance Canada’s competitive outlook and be an important driver in the allocation of capital.

We’re excited to have you speak at the 2017 Conference for the Oil and Gas Industry, where your keynote will explore the influence of international politics and current events on energy markets. What else can attendees look forward to in your session?

I am very excited to speak at the conference and grateful for the invitation. Along with my thoughts above, I will be sharing some insight from a recent trip I took to Asia in July where I visited clients in Beijing, Seoul, Tokyo, Hong Kong and Singapore. That region is particularly important for the Canadian oil and gas industry.