Alright, so fresh off what appears to be a fairly “bang-on” Canadian election call it is time to move on to a bit of a post-mortem on the election and some thought into what we might expect for the next four years from a Liberal government in Ottawa, particularly as it pertains to the energy sector.

First, a point for American readers – this is not some monumental shift in Canadian politics. Since Confederation in 1867, the Liberal party has been in power in Canada for a vast majority. It is not called the “natural governing party” for nothing. The power base of the Liberal party is and always has been in Ontario, urban Quebec and the Maritimes as well as urban British Columbia. Other parties may wax and wane in these areas and on occasion, the Liberals may make inroads into areas of Conservative strength, but by and large, over time, these distributions hold true which is why I was so confident in my prediction, especially when the opposition to Stephen Harper was so strong.

There is no point hashing over the reasons why the Conservatives lost or the Liberals won or the NDP got halved, there are many political pundits who can write the compelling analysis and parse the details. Suffice it to say that mood appeared to be – we like some of the ideas the Conservatives have, but we’re kind of tired of that Harper, the more we look at Mulcair the scarier his policies are, so can’t we all just cuddle up in the middle of the room and warm ourselves by the fire? Yes we can, and this fella with nice hair is joining us.

So, a majority government… I think regardless of your political leaning this is a good thing. It provides for four years of stable government. And markets like stability. The Trudeau Liberals have the parliamentary heft to implement their centrist platform without being beholden to NDP support as they would have been as a minority government. A Conservative minority would in all likelihood not have lasted long past a throne speech and a coalition between Trudeau and Mulcair would have been unworkable. So a big check mark there.

But what does it mean for the energy sector?

First off, notwithstanding the outpouring of outrage and dire warnings of National Energy Program 2, that is the least likely outcome. The son is not the father, the party today is not the party of 1980 and the economic environment is fundamentally different. Not going to happen. Move on.

Also, to dispel some more mythology, the Conservatives, while in theory friendly (or hands off) to the oilpatch, did not have the most stellar track record as it regards supporting the energy sector either, think specifically of the elimination of income trusts (hmm – wouldn’t that structure be useful in this market environment) and no new pipelines to the US or the coast on their watch. In their defence, it’s a big country with lots of diffeernt areas to manage, so to any ruling party, the energy sector is just one part of the economy.

In broad terms, the sector will find itself with a different kind of focus on it. Trudeau’s promise to balance economic growth against environmental concerns means that the energy sector overall is going to have to live with more scrutiny on its practices and more costs in terms of greenhouse gases etc. than for the last number if years. But there is a big difference in my mind between an energy sector being told to “clean up” and adhere to new rules and the attention that those efforts get than an energy sector that is perceived as getting away with something with minimal oversight. Restoring the focus on compliance instead of perceived evasion implicitly changes the message and perception.

Let’s look at the sector in terms of three E’s: Exploration, Environment and Export.

Exploration

The Liberals recognize the important contribution the oil sands and the upstream energy sector make to the Canadian economy overall as evidenced by the many campaign speeches Trudeau made to business audiences in Western Canada including one to an energy audience at the Calgary Petroleum Club.

In terms of specifics, the Liberal platform is pretty silent aside from a generic statement about wanting to get rid of so-called subsidies to the oil patch, which really are tax breaks such as flow through shares and accelerated depreciation provisions and various credits or deferrals related to exploration expense. These tax incentives (as opposed to direct subsidy) cumulatively add up to about $1 billion a year. The problem with eliminating them, especially in a low price environment, is they might discourage much needed investment. In addition, many of these tax credits apply to the mining industry as well – it is hard to see how you can target just one sector. Plus, the taxation of Canadian upstream E&P is a complex matter that must consider inter-dependence with provincial fiscal regimes and royalties as well as the incovenient political fact that many of these tax incentives were actually introduced by previous Liberal governments.

Environment

It is on this front that the Liberal government is likely to make its biggest splash on the international stage as well as domestically and in terms of its impact on the energy sector. The Liberal platform called for tightening of regulations and the introduction of a carbon pricing scheme. While Trudeau appeared to favour a cap and trade scheme, his platform indicates that the provinces will be allowed to introduce their own policies as long as they meet overall targets such that energy producing intensive provinces such as Alberta and Saskatchewan can avoid the massive wealth transfers implicit in cap and trade, while provinces with manufacturing based economies can still implenent cap and trade agreements such as the one between Ontario and Quebec.

Higher environmental costs are a negative for the industry overall, especially in a low price environment, but the reality is that all energy companies have already factored higher carbon costs into their plans so this is not a surprise. Arguably, many energy companies are increasingly taking a “let’s get on with it” approach as the years of dithering and uncertainty have their own corrosive effect on business planning.

Export

Up until several months ago, oil and gas was Canada’s number one export and is likely to reclaim that position in short order. But Canada has only one customer – the United States. The United States and Canada have the largest and most complex interconnected system of pipelines in the world but growth in that system is symbolically hung up on one proposed project crossing the border. Hence the push for new pipelines to “tidewater” which are comprised of the Northern Gateway, the Transmountain expansion and Energy East and the growth of oil by rail to back-fill the capactiy of the yet to be approved Keystone XL. The Liberal party platform is cognizant of the need for Canada to develop and diversify its markets but wants to ensure the regulatory framework for review is robust. The Conservative government streamlined the National Energy Board review process to the consternation of some and some of the streamlining may be walked back by a Liberal government… or it may not. The reality is that it takes too long for major infrastructure projects to get approved and built in Canada and that is why the money goes elsewhere time and time again. So back to the original point – robust doesn’t mean never-ending. It remains to be seen what changes get made, but it is unlikely that any of these projects go back to square one.

As it regards specific projects, the Liberals are already on record as being supportive of the Transmountain and Keystone XL. Energy East is likely in the same bucket, but out of political expediency and a desire for votes in Quebec, the party was largely silent on this project in the campaign. On the Northern Gateway front, Trudeau has said he isn’t in support of it, but a project that has already been approved (albeit conditionally) is hard to stop with severe financial consequences. The Liberal party knows what happens when contracts are dumped. One suspects that the Northern Gateway saga will continue in limbo for some time.

The reality is that two or three of the four projects get built or approved at some time during the Liberal mandate. Transmountain is the furthest along and follows existing right of way, the Energy East can be sold as a big “nation-building” project and the Keystone will happen when tight oil enters its period of secular decline and the U.S. decides that it is in its own interest to allow more oil sands to flow south.

Overall it would appear that the cost structure is going to change for energy companies as it regards environmental compliance and emissions, and that greater scrutiny will be evident across the board. Pipeline projects will likely be subject to delay, which is nothing new. In many ways, the world hasn’t changed all that much – the sector at the end of the day only does as well as the price of the underlying commodity allows no matter what tinkering we see from government.

So, the more things change, the more they remain the same.

Prices as at October 23, 2015 (October 16, 2015)

• The price of oil gave back some groud this week primarily based on demand factors.
  • Storage posted a surprise increase
  • Production was flat
  • Markets are by and large drifting
  • The rig count decreased again
• Natural gas lost ground during the week as anticipation of increased demand in winter played off a warm fall

• WTI Crude: $44.62 ($47.32)
• Nymex Gas: $2.289 ($2.429)
• US/Canadian Dollar: $0.7580 ($ 0.7742)

Highlights

• As at October 16, 2015, US crude oil supplies were at 476.6 million barrels, an increase of 8.0 million barrels from the previous week and 98.9 million barrels ahead of last year. Much of the increase was the result of increased imports and a decline in refinery utilization
• The number of days oil supply in storage was 30.7, ahead of last year’s 24.5.
• Production was supiciously unchanged at 9.096 million barrels per day. Production last year at the same time was 8.899 million barrels per day. Based on the numbers, it is likely that by December year over year production growth in the U.S. will be negative.
• As at October 16, 2015, US natural gas in storage was 3,814 billion cubic feet (Bcf), which is 4% above the 5-year average and about 13% higher than last year’s level, following an implied net injection of 81 Bcf during the report week.
• Overall U.S. natural gas consumption increased by 5.3% this week with a power consumption decrease of 6.5% being offset by a residential and commercial increase of 29.8%
• Oil rig count at October 23 was down to 594 from 595 the week prior.
• Natural gas rigs drilling in the United States are up to 193 from 192.
• As of October 19, the Canadian rig count was up to 192 (25% utilization), 121 Alberta (23%), 29 BC (36%), 39 Saskatchewan (32%), 3 Manitoba (16%)). Utilization for the same week last year was 49%.
• US split of Oil vs Gas rigs is 75%/25%, in Canada the split is 45%/55%

Drillbits

• Canadian energy services firm Precision Drilling reported a Q3-15 (Q3-14) loss of $87 million ($+52.8) on revenues of $364 ($584.5). Included in the loss is a $73 mm write-down in the value of assets and $24 mm in other write-downs. In addition, the company cut its 2015 capital spending plan to $531 and is projecting only $180 million in capital spending for 2016.
• Freeport McMoran and Southwestern Energy recorded asset write-downs in Q3 of $6.5 billion between them in a precursor to what is going to be a write-down heavy earnings season
• Steelhead Petroleum announced the closing of its initial financing by Arc Financial. The company is looking to deploy between $150 and $200 million on equity on high quality resource opportunities.
• Drumpf Watch – The Donald continues to lead in national polls by a significant margin. His closest competior is Ben Carson who polls about ten points back, although leading in Iowa. Caution should be exercized in putting too much stock into this quiet period in the race though, there is still time for the non-TMZ candidates, you know, the ones with depth and experience, to make a comeback. Interesting candidate to me at this point? Marco Rubio.