Canada is one of the world's largest oil and gas producers, and the oil and gas sector is its most important export industry.
As investment in green energy increases rapidly globally, stock markets have matured for Canadian and U.S. oil and gas companies, with future uncertain despite recent record profits and rising stock prices. I'm starting to see that.
A smart and economically viable energy transition to a low-carbon economy is paramount to the country's future prosperity. As part of the transition, Canada must become a favorable destination for clean technology investment.
According to a report by the International Energy Association, investment in clean energy (including nuclear power) continues to grow faster than investment in fossil fuels, with fossil fuel investment expected to reach USD 1.1 trillion in 2023. In comparison, investment in clean energy is USD 1.7 trillion. This trend will continue for decades to come.
Our recent analysis of stock market data from 2018 to 2022 provides important information about how capital markets view risk and return for oil and gas and clean technology companies in both countries. Masu.
U.S. cleantech companies gain recognition
Our research looked at how Canadian and U.S. stock markets value the prospects of traditional energy companies, clean technology companies, and both.
Our research suggests that there are significant differences between the Canadian and U.S. clean technology industries. Clean technology has much better prospects in the US, but Canadian oil and gas companies are likely to outlast their US counterparts.
Our report shows that markets view cleantech companies as growth companies in both Canada and the United States, despite the disappointing stock returns of these companies since 2021. A growth company is one that aims to reinvest current profits back into the business to expand even more rapidly and then turn a profit. later.
Energy and Natural Resources Minister Jonathan Wilkinson stands up during Question Period in Ottawa on February 1, 2024.Canadian Press/Adrian Wilde
Valuations are much higher in the US, suggesting the market sees a positive long-term outlook for the sector south of the border. Canadian cleantech companies may have trouble scaling up and taking advantage of opportunities.
US cleantech companies are also attracting more equity capital, especially since the country passed the Inflation Control Act (IRA) in 2022. The IRA is significantly accelerating cleantech investments in the United States.
Although Canadian tax credits for clean technology are large, they do not seem to have as much of an impact on investments as IRAs, perhaps because the rules for Canadian tax credits and other incentives are considered more complex. .
The real problem is not Canada's energy transition policies themselves, but rather the complexity, uncertainty, and lack of clarity in implementing these policies.
political uncertainty
Clean technology opportunities exist in Canada, but there is no room for increased regulatory risk. Disagreements between the federal government and some state governments create uncertainty and negatively impact investment.
Alberta's sudden moratorium on renewable energy didn't help, especially considering the province has quickly become Canada's renewable energy hotbed. The state has since lifted the moratorium, but its new regulations for the clean technology sector have been criticized as being too strict.
Political uncertainty, combined with a more risk-averse corporate attitude than in the United States, creates unnecessary hurdles to the commercialization of clean technology innovations in Canada.
A pumpjack pumps oil and gas from a well near Calgary in September 2023. THE CANADIAN PRESS/Jeff McIntosh
This should be a concern for many, as Canadian clean technology companies may want to locate south of the border. As a result, Canadian taxpayer-backed startups may end up creating more wealth in the United States than at home.
Meanwhile, Canadian oil and gas companies have performed well recently, and their valuations and stock return track record back it up. Interestingly, Canadian energy companies are valued more highly relative to their profits than their US counterparts, which is contrary to the general opinion among Canadian energy sector experts.
One reason for the more optimistic assessment is the impending completion of the Trans Mountain pipeline, which will increase export capacity for heavy oil from the oil sands. There is no doubt that the energy sector will continue to contribute to Canada's economy, at least in the medium term. The important question is: For how long?
Reducing greenhouse gas emissions
The oil and gas sector needs to reinvest more of its profits into technologies that reduce emissions. However, if Canadian policies and incentives do not support sufficient investment return prospects, the sector will continue to be under-invested in the energy transition. In particular, it is necessary to make it easier for small and medium-sized enterprises to take advantage of tax incentives.
Reducing greenhouse gas (GHG) emissions is critical to continuing to raise funds and generate profits beyond 2030. The oil and gas sector has been criticized for slow progress in this regard, but has recently announced regulatory applications for carbon capture projects. That's certainly encouraging for the Alberta Energy Regulator's oil sands producers.
Although it will be difficult to compete with the United States for investments in clean technology and reductions in greenhouse gas emissions in the oil and gas sector, Canadian companies should continue to take advantage of opportunities. Both industries require a predictable, stable and clear regulatory environment to provide investors and businesses with the certainty they need to continue investing in Canada.
Our success as a nation depends on it.
