Laura Paglia:

Welcome to Candid Conversations for Financial Markets podcast series. I’m your host, Laura Paglia, President and CEO. Our podcasts are designed to provide insights, transparency, and provocative yet achievable proposals for matters that move financial markets in Canada.

We are fortunate to be joined today by Professor Pandes, who co-authored with Yoro Koskinen, University of Calgary, and Na Nujian from the University of Montreal, through the Global Risk Institute, a comparative view of energy and cleantech stocks and their performance in Canada and the US. Their paper was published last year based on data from January 2018 to December 2022 and remains very timely and informative today. The report has received continued attention and remains of particular interest as the new US administration takes force with strong cross-border views on natural gas and energy.

According to the Canadian Centre for Energy Information, globally, Canada is a leader in oil and gas production, being the fourth largest producer of crude oil and the fifth largest producer of natural gas. 97% of Canada’s proven oil reserves are located in the oil sands.

Canadian refineries can process nearly 1.9 billion barrels of crude oil per day.

Professor Pandes, based on your research and market information, what would you say is the outlook for Canada’s oil and gas industry for 2025, the next five years, and the next 10 years?

Canada’s Oil & Gas Outlook

Ari Pandes:
Well first, thanks for having me on here, Laura. It’s a pleasure to be talking about our study that we put together.

So it’s always a tricky endeavour to make predictions about, you know, where the future of oil is going just because there’s so much going on around the world and there’s so many events that can upend those predictions.

But I would say we’ll see continued growth, but more modestly than we probably saw in the last 10, 20 years. And part of that is the fact that we’re probably not going to see the large mega projects, particularly in Canada, in the next while, unless there are some events that change things. So it’s going to be more about leveraging existing assets, optimizing existing assets, getting more efficiencies out of existing assets.

And layer on top of that, you know, a push to renewables, although we can debate sort of the politics around that, that we’re seeing particularly with the new administration in the US, and I’m sure we’ll get to that.

But regardless, I mean, if we go far down the road, we’re still going to see renewables be a much larger portion of the mix of energy globally.

And so I foresee, you know, incremental production increases, and it’ll certainly increase in Canada, but not to the same degree, I think, that we saw previously.

The other thing is we’ve got export capacity issues.

You know, we just had the TMX pipeline come online, but at some point, if you’re going to ramp up production, you need to get that oil out.

And again, it’s hard to see large pipelines continue to get built in this country unless something changes. And so for those reasons, a variety of reasons, I see oil increasing in Canada, not at Brecknik pace, but certainly we’ll see production increasing going forward 10, 15 years out. And at some point, it’ll probably plateau.

And that’s the Canadian side.

Laura Paglia:
Professor Pandes, thank you for that. Let’s break that down into the various constituents, starting with what has been very topical, the incoming US administration.

And it’s received a lot of attention. The inaugural speech said, “We will drill baby drill. We have something that no other manufacturing nation will ever have. The largest amount of oil and gas of any country on Earth, and we’re going to use it. We’re going to use it.”

So, Professor Pandes, is that factually correct?

US Energy Policy & Its Impact

Ari Pandes:
Yes and no. So it is true that the US is the largest producer of oil and gas, or oil in particular.

But there’s geological limits, I would say, for them to be able to ramp up in the amount and the pace that the president alluded to. And so as a politician, you can certainly make claims that you’re going to drill baby drill, but I think it’s the economics that’s going to dictate that. And so there’s a difference in the assets of Canadian oil in particular, and US oil. And so if we look at the Canadian oil sands, which is predominantly the oil that’s coming out of Canada,

they are long life, low decline assets. And so there’s a lot of longevity in our oil. And so the largest cost comes from actually getting these projects and drilling off the ground. But once they’re in place, they produce steady cash flows. The marginal cost is modest.

Whereas in the US, the shale oil, which is predominantly sort of the newfound oil that they have, particularly over the last 20 years, is a shorter life, high decline, rapid decline asset. And so a lot of the low hanging fruit has been exploited, I would say, in that shale oil. And so if Canadian oil was to go offline and the US was going to make up that difference, it would be extremely costly and it requires continued investment. And the slowdown we’ve seen in shale oil over the last 5-10 years is evidence of that. I think the economics are more difficult. I think it requires continued expenditures.

And unless prices get higher or elevated for longer periods of time, I don’t buy into that argument. I mean, it’s going to be the economics, not the politics that dictates whether they’re going to be able to drill at that pace and the claims that are being made.

And so I think we would be thinking twice about whether they’re going to be able to make up that difference and whether they’re going to be able to drill at the pace that they would like to be able to drill.

And so that would be sort of my– there’s just geological limits, I would say, unless there’s a breakthrough technology. And that’s always a possibility. It happened before. But unless something like that happens, barring any sort of breakthrough technology, I don’t see production ramping up in the US. They’re already very high.

And so for them to make a big contribution to production, you need some sort of a breakthrough technology in order for them to do that. And so I don’t foresee that happening, at least in my personal view.

Clean Tech vs. Traditional Energy

Laura Paglia:
Your data points show the market putting greater value on growth prospects of clean tech rather than traditional oil and gas over time.

Could you explain why?

Professor Ari Pandes:
Yeah. And so in some sense, it’s not surprising in that clean tech in many ways resembles tech.

And in technology firms, they derive the bulk of their value from growth assets, from future growth opportunities. As opposed to assets in place, which is where traditional energy companies derive a bulk of their value. And so we would expect to see bigger growth opportunities for clean tech versus traditional energy. And I would say these growth opportunities have become more pronounced, given the momentum around energy transition. And I know there’s a lot of rhetoric in policies right now, particularly floated in the US around that. But the growth opportunities are there still in clean tech. And so you would expect valuations for future growth opportunities to be reflected more in the clean technology sector versus the energy sector.

And so we go about looking at the data on this, testing this in the data. And so the way we did that is we looked at price multiples or valuation multiples for each of these sectors, clean tech and traditional energy.

And so for those that are unfamiliar with price multiples or valuation multiples, they are basically standardized prices. And so you look at market values of equity,

you look at market values of the enterprise, and you scale that by some fundamental driver, whether it be revenues, whether it be earnings, whether it be EBITDA. And so you can think of these things as just standardized prices.

And so if you look at multiples, and the classic is like the price to earnings ratio, for example, the PE, but more commonly we use enterprise value multiples such as EBITDA, EBITDA revenues if you’re thinking about earlier stage companies. And so at the end of the day, because you’ve got a price, a market value in the numerator of that price multiple, what does that reflect? Well, it reflects future cash flows and growth opportunities. And so what we find is that in the clean tech sector, we see much higher price multiples, valuation multiples, than in the traditional energy sector.

And much like we see in the technology space,

what that reflects is that the market is valuing future growth opportunities, future cash flows more heavily than current earnings. And so you see elevated multiples, which is not a surprise, given the growth opportunities in that sector in clean tech versus traditional energy.

And so what that tells us is that the market is valuing future growth opportunities in clean tech much more so than they are in the traditional energy sector. And that’s why we say there’s a lot of growth potential in clean tech and probably less so in the traditional energy sector, where the bulk of the value is coming from existing assets. And they are producing cash flows, certainly, but those cash flows are being generated from existing assets in place as opposed to potential future growth opportunities.

Clean Tech in the US vs. Canada

Laura Paglia:
You concluded in your paper that clean tech has much better prospects in the US, while oil and gas firms in Canada may outlast their American counterparts.

So firstly, do you still believe that clean tech has much better prospects in the US in light of the changes that we’ve seen south of the border?

Professor Ari Pandes:
I do. And again, it goes back to sort of market dynamics and economics. And so the US is a very pro-business, market-oriented economy.

And my view is if there’s money to be made, whatever industry it is, capital is going to be allocated to that in order to make money. And so, I mean, a great example of that is a state like Texas. And so when you think about Texas, most people associate that with hydrocarbons, traditional oil and gas. But I think a lot of people don’t realize that they are at the forefront and invest heavily in renewables, particularly wind and energy. They’re a market leader in that space.

And so politics aside, I mean, they’re a traditionally red state and you’d think, OK, they’re all in on oil and gas and they’re going to be opposed to renewables.

But what you see in a state like Texas, and it’s not just limited to Texas, other traditional oil and gas states is the same because the geography is such that they’ve got a lot of wind and they’ve got a lot of sunshine in those states. And so there’s money to be made and they’re pro-business. And so they’re all in on not only oil and gas, but also in renewables.

And so the reason why we claim and say that there is better long-term prospects in the US for clean tech is because, again, the valuation multiples and the pricing multiples point to that. And so if you look at the clean tech enterprise value to EBITDA, for example, a standard pricing multiple, they are much higher in the US than they are in Canada, which tells us that the market, this isn’t just me saying that, it’s the market is basically valuing higher growth prospects in clean tech in the US versus in Canada.

And so politics and rhetoric is one thing, but at the end of the day, it’s going to be the economics and the markets that dictate. And so what you’re seeing in the US is they’re all in on both things. And it’s not politics that’s dictating that, it’s just the economics and the markets and where the money is to be made that’s dictating that.

Investment and Economic Competitiveness

Laura Paglia:
Thank you, Professor Pandes. If money is to be made in the clean tech firms, what does the US have that Canada should be sure to get?

Professor Ari Pandes:
Yeah, and that’s kind of the question that we’ve been grappling with in Canada and North America for decades. It’s nothing new and it ties back to our productivity challenges and our economic challenges. And there’s been a lot of chatter about that.

Over the last little while, and there’s a lot of alarm bells being run with that. And so part of it is just sheer size and scale. I mean, the US market is enormous.

They’ve got a lot of capital flowing around, whether it be private or public capital.

There again, I mentioned this earlier, a pro-business, pro-market economy, and an ultra-competitive economy. And so when you’re in a competitive environment, it’s sink or swim. And companies in order to compete always need that edge. And so they’re always looking for that edge, that next investment, that next opportunity.

And so the capital is also very competitive, moving to opportunities where they see potentially highest returns.

And so it’s just a symptom of kind of the differences in the economies in both countries. So where they are pro-investment and pro-risk, we invest much less in this country and tend to take on less risk. And so we tend to be conservative in the types of investments. And so they’ve got an investor base and a marketplace that understands technology-oriented companies. And as I mentioned earlier, technology-oriented companies derive a bulk of their value from the future. And that’s riskier and more uncertain. But their industries and their companies and their investor base is willing to take bets on future growth opportunities, where in Canada, we’re less inclined to do that. We’re much more conservative in taking those future bets when it comes to corporations, but as well as investors. So they’re just a better understanding of those types of businesses in the US than in Canada. They’re more hungry. They’re more aggressive when it comes to bringing in new technologies, bringing in different ways of producing and adopting technologies. And I think we fail to realize there’s often spin-off benefits that come from that. So we often think very narrowly, OK, I’m going to invest. It might not work out. But oftentimes in that process of investing and experimentation, experimentation, there’s a lot of spin-off benefits that come off from that that can actually bring on new opportunities and new industries. And so I think we often have tunnel vision when it comes to that, whereas in the US, they’re much more open-minded and they see a lot of value come from experimentation and investment that I think we just don’t see in this country. And so part of it is it’s hard to replicate the greater capital that exists. But certainly, we can take on more pro-business policies that will help. And so I mean, you just look at the Inflation Reduction Act, the IRA. And so they move so swiftly and so fast on that. And here we are consulting and discussing and moving slowly. And you saw a huge ramp-up in investment in the US. And we were playing catch up, which is often the case in Canada. We’re usually playing catch up with a lot of our policies, regulations, and tax incentives.

And so I would say those are the reasons in part why the US moves quickly, why they’ve got a lot of opportunities and technology and clean tech in particular.

And I think we need more of that in this country, less consultation, less getting hung up on things, and just moving forward.

Canada’s Strengths in Oil & Gas

Laura Paglia:
Well, thank you, Professor Pandes. What do we do exceptionally well? You noted in the report that oil and gas firms in Canada might outlast their American counterparts.

So what does Canada have in oil and gas that’s perhaps missing in the US and could lead to greater prospects for Canada?

Professor Ari Pandes:
Yeah, I think it’s actually just luck, to be honest, in that we’ve got a geology in the oil sands that just a longer life, low decline geology.

And so, you know, I can’t say it’s our more pro-business policies, per se, or tax incentives or our regulatory environment that is envious from the US perspective.

It’s probably simply a function of the geology where, as I mentioned earlier in the discussion, they’ve got an asset base where their assets are shorter life, more rapid decline, and just requires constant treadmill-like investment.

Whereas ours, you know, it requires large initial expenditures, big money, and a long time to get those assets developed. But once you do, it just kind of churns away cash flow for a long period of time because the marginal cost, once the asset is up and running, is not as high.

And so I would say it’s more a function of our luck in terms of the geological makeup of our asset base when it comes to oil versus the US.

And that’s not to harp on, you know, Canada and our economy and our regulatory environment and our tax environment. I know it sounds like I’m saying that, I mean, but there is an element of that that I’d be remiss not to mention in the discussion.

Regulatory Challenges in Canada

Laura Paglia:
So thank you, Professor Pandes. You do reference the need for a predictable, stable, and clear regulatory environment in Canada. What does that look like?

Professor Ari Pandes:
To be honest, I think the low-hanging fruit is we kind of do it to ourselves where we’ve got a lot of internal barriers. You’ve got different levels of government often not working in tandem with one another. So you’ve got, you know, one part of a government sort of foot on the gas and other one foot on the brakes.

And so I think you need more of a holistic approach to our regulatory environment. I mean, you know, there was an IMF report came out that’s saying the internal trade barriers that we have between provinces is the equivalent of a 20% tariff. I mean, we’re getting hung up on tariffs coming in from the US at 25%. But there is some estimates and some studies that suggest internally we’ve created 20% tariffs just between provinces. And I think there’s a lot of red tape that you find, a lot of slowdowns in approvals processes, and just not a lot of working together.

And a lot of our policies are often patchwork. You know, you’ve got the infrastructure bank, you’ve got sort of a strategic growth fund, you’ve got these tax incentives. And so you’ve got all these different things kind of in a patchwork fashion, instead of just thinking sort of what can we come up with in a streamlined fashion working together that’s going to unlock a lot of value for the country. And so instead of sort of these different provincial governments and municipalities working sometimes against each other, or at the least get them to work together, I think that would be a big improvement. And just getting rid of internal barriers to trade, we can unlock a lot of value through mechanisms like that.

And so I think this is heightened now, given what we’re seeing with the new administration coming in the US, that I think there’s a lot that we can do internally as a country to help improve our situation, setting aside other things.

I mean, I think a lot of people don’t realize our trade agreements with international allies and partners are actually more liberal than the trade agreements that we have within provinces.

And that even comes to sort of immigration and skills development, where we’ve got different licensing across provinces. And so there’s even restrictions on internal mobility within the country, which I think is a problem. So we’re much more friendly internationally, actually, than we are internally.

And so I think that’s a low-hanging fruit that there should be some urgency to among our country, our politicians, just coming together and working more closely with one another.

US National Energy Emergency & Canada’s Opportunities

Laura Paglia:
Thank you, Professor Pandes. So the U.S. declaration on a national energy emergency—

That may bring winning opportunities for Canada’s oil and gas sector because?

Professor Ari Pandes:
Yeah, and so I think, I mean, the silver lining in all of this, in my opinion, is that it’s bringing more urgency towards a made-in-Canada solution.

So oftentimes we’ve seen a lot of divisions in the country, particularly east-west divides, where I think the east sometimes doesn’t understand the nuances of the energy sector and the importance of the energy sector. But you’ve seen a lot of news, announcements, and discussions that’s actually highlighted how big the energy sector is to the Canadian economy.

It’s the number one export by far.

And so my hope in dollar value terms, so my hope is actually that this brings a lot more people together and working together and understanding that, look, if we don’t come up with a made-in-Canada solution with many of our industries, not just oil and gas and energy,

but the reason why I’m talking about energy is because it is the number one dollar value export. And so what this might reignite, I hope, is, you know, maybe pipelines now getting developed within the country going east-west instead of thinking going north-south because we might not have that reliable partner down south that we once saw.

And so if you think about the oil crisis in the 70s, like a lot of these east-west pipelines got developed in response to that. Some of them had to trickle through the US, unfortunately, which now is sort of at jeopardy. And so a lot of people don’t realize that Ontario oil and gas that comes from the West actually has to go through the US to come back into Ontario, for example.

But maybe now we have more coming together of politicians and industry groups in the country to come up with more of a made-in-Canada solution that I think could be the silver lining in all of this.

And so I think talk of export taxes on oil and gas and curtailing oil and gas while we think it might make an impact on the US is also going to create pain on this side of the border. Because of the very reality, as I mentioned earlier, that that is our number one biggest export, you know, tax revenue generator for all of Canada.

And so curtailing that or taxing that, there’s going to be severe pain in Canada. And I don’t know if it’ll meet the objective that we necessarily want. And so my hope is that it’s going to bring together Canada more in coming up with more made-in-Canada solutions where we start thinking about diversifying our export capacity and not relying on a sole jurisdiction, which has been the case now in the US. Because we can see that that can change pretty quickly.

Canada’s Future in Clean Tech & Energy

Laura Paglia:
Thank you, Professor Pandes. You would really like to see Canada become a lucrative destination for clean technology investments.

You would like to see that because?

Professor Ari Pandes:
Well, I think, you know, our future prosperity depends upon it at the end of the day. And so for whatever reason, sometimes we think it’s either one or the other, like it’s either oil and gas or renewables and fail to realize that these things can move in parallel with one another, where we can have continued production and investment in oil and gas. But that doesn’t mean that we need to stop investment and opportunities in the clean tech space.

And so there’s all kinds of predictions that we can debate when oil and gas demand is going to plateau. And at some point, it will. And so it’s true that we will need it for the foreseeable future.

But at some point, you know, renewables is going to become a much larger percentage of the energy mix, not just in Canada and globally. And so my question is, why wouldn’t we want to be at the forefront of the industries of the future? Because if you want to have a long-term vision for the country and the economy in particular, you’ve always got to be looking forward at the industries of the future.

And so, like I said, clean tech is really technology. And we know in the US, the technology sector has been a big boon for that economy. And they’ve been at the frontier of that.

And so that’s why they’re still all in on clean tech. They’re not, you know, putting limits on that because there’s market opportunities, there’s business opportunities and growth opportunities in that sector.

And so my view is that we should treat this as any other technology sector and we should be investing much more heavily because it’s just going to help us in terms of prosperity and economic growth. And most importantly, something that we’ve been talking a lot about in Canada, productivity. And that’s what technology is all about, right? Making our labour force more productive, getting people to work.

And, you know, I’m apolitical when it comes to that. It’s just about creating jobs, generating revenues.

And the big bonus of that is it helps reduction of GHG emissions, it helps the environment. And those are all spin-off benefits that come from this. But it shouldn’t be because we believe in climate change or we don’t believe in climate change. It should be because we care about jobs and prosperity that drives this.

And the benefit is going to be that it does make a positive impact on the climate as well. And that’s the biggest win-win of all of this. And so I would say get rid of the divisions and just think about, you know, what’s going to be helping the future of prosperity in the economy and the process.

And I think that’s going to be a big part of the productivity of this country. And I think, yes, there’s going to be continued investment in oil and gas, but we should also be continuing to invest in parallel in clean tech and clean technologies. Because who knows, when I could spin off technologies and benefits and new industries developing out of that, that we don’t even know about today, that I think could be quite valuable to our future.

Laura Paglia:
Thank you very much for joining us today, Professor Pandes. Very helpful to know.