Eurasia Group Cites Trump Policy Uncertainty As Chief Global Political Risk
By: Elsie Ross
Published: Daily Oil Bulletin
United States President-elect Donald Trump’s uncertain approach to foreign policy is the top global political risk in 2017, a Calgary luncheon audience heard Wednesday.
“The level of uncertainty is very high,” Robert Johnston, chief executive officer of the Eurasia Group, a Washington D.C. global political risk consultancy, told the Calgary Chamber of Commerce 2017 Global Outlook. “We say Trump is definitely a wild card.”
The theme of the Eurasia Group’s top risks is that of a geopolitical recession, a recession driven not by economic forces but rather by the uncertainty generated by the actions of states, primarily the United States but other governments as well in reacting to the actions of the Trump administration.
The main risk the consultancy sees is of Trump pulling back from the global community and institutions such as the North Atlantic Treaty Organization (NATO), the World Trade Organization (WTO), the International Monetary Fund (IMF) and the global climate movement. “These were all things built on the back of international organizations that were basically created and led by the U.S. and remarkably Canada,” said Johnston, who also heads the firm’s global energy and natural resources strategy group.
However, when it comes to trade, Johnston does not believe the U.S. will impose a border tax on Canadian oil as U.S. House of Representatives Speaker Paul Ryan has proposed and which has prompted considerable concern in the Calgary oilpatch (DOB, Jan. 18, 2017). “I think right now there’s a very low probability [25 per cent] that tax will be applied broadly and an even lower chance that it would target crude.”
This particular program is “full of problems and I think like Trump said that it’s too complex,” said Johnston. A border tax also would create problems for U.S. refiners who import a range of crudes from heavy to light from Canada while most of the U.S. production is light, said Peter Tertzakian, chief energy economist at ARC Financial Corp.,who also spoke at the luncheon.
Canada, likely along with Saudi Arabia, will be the next area of supply response, he suggested, noting that Saudi Arabia has said that the production cuts they agreed to in November 2016 to help rebalance the market are coming off this summer. “They [the Saudis] are still focused on market share but they still are concerned that if they cut their production too much, someone else in the oilsands or in the shale oil U.S. or deepwater will step in and take that share.”
In the U.S., Trump appears to be influenced most by the small and medium oil and gas producers such as those in the Bakken and the Permian Basin, according to Johnston.
“And I think those people think of the energy market as the U.S. market and their regulatory concerns are anything that is between the wellhead and the refinery,” he said. “They are not worried by global climate and all that stuff, they are worried about the Bureau of Land Management, the EPA (Environmental Protection Agency), methane emissions, seismicity regulations and Trump will do a lot to help them.”
“If you back away completely, you are basically betting that whatever Trump does will continue beyond 2020 and that other countries will back away from their climate goals as well,” said Johnston. “To make that bet, might be a bit risky.”
In the longer term [beyond 2020], he believes that most of the world is moving to a low carbon transition because all the major emitters have their own national interests for reducing their greenhouse gas emissions. China, for example, is concerned about pollution in its cities and the co-benefit of reducing that pollution also reduces greenhouse gas emissions. “If we back off now, we might just have to go back again in a few years.”
Although some Canadian producers have expressed concern that the carbon tax will make them uncompetitive with U.S. producers, Johnston suggested that the tax is actually a good thing for investors. “If they know where carbon pricing is headed in Canada, it’s much easier to value assets,” he said. “You can build in a carbon price as B.C. and Alberta are doing. There’s also uncertainty for investors in the U.S. about promised deregulation and when that might occur.”
“I think the bottom line is that investors prefer North America generally and they prefer short-cycle unconventionals and we want to be part of that,” he said. “We’ve got great rule of law and stability and I think we should take advantage of that and rebrand a bit.”
That rebranding effort “is really easy; we just have to start doing it,” Johnston told reporters, later suggesting that while it might not be easy it was “doable.”
“The rocks are the same, the market is the same, the rule of law is the same,” he said. “Yes, there are some regulatory issues and some cost issues but we spend way too much time talking about that and not enough time talking about what we have in common with the U.S. and why we are just an attractive investment as they are.”
“One [risk] is that Trump tries to extract something unreasonable either from TransCanada or the Canadian government,” Johnston told reporters. “Number two is that it gets blocked again in Nebraska.”
On the LNG export side, contracts for LNG with large Asian buyers are coming up for renewal in 2024-25 and Canada has another chance to develop its export industry after missing the last window of opportunity for LNG exports, he said.
“Those Asian utilities, many of them my clients, are looking for gas,” said Johnston. “Let’s give it to them. Let’s get a plant built and approved. If we don’t, the window’s going to close again.”
In the question and answer session that followed, Johnston said that he believes that long-cycle projects such as the oilsands and deepwater offshore projects will come back in a much more limited role as prices improve. Investors also will be more selective, looking for a place where they can put technology to work. “High tech innovation is the future when applied to the oilsands.”
Published: Daily Oil Bulletin
United States President-elect Donald Trump’s uncertain approach to foreign policy is the top global political risk in 2017, a Calgary luncheon audience heard Wednesday.
“The level of uncertainty is very high,” Robert Johnston, chief executive officer of the Eurasia Group, a Washington D.C. global political risk consultancy, told the Calgary Chamber of Commerce 2017 Global Outlook. “We say Trump is definitely a wild card.”
The theme of the Eurasia Group’s top risks is that of a geopolitical recession, a recession driven not by economic forces but rather by the uncertainty generated by the actions of states, primarily the United States but other governments as well in reacting to the actions of the Trump administration.
The main risk the consultancy sees is of Trump pulling back from the global community and institutions such as the North Atlantic Treaty Organization (NATO), the World Trade Organization (WTO), the International Monetary Fund (IMF) and the global climate movement. “These were all things built on the back of international organizations that were basically created and led by the U.S. and remarkably Canada,” said Johnston, who also heads the firm’s global energy and natural resources strategy group.
However, when it comes to trade, Johnston does not believe the U.S. will impose a border tax on Canadian oil as U.S. House of Representatives Speaker Paul Ryan has proposed and which has prompted considerable concern in the Calgary oilpatch (DOB, Jan. 18, 2017). “I think right now there’s a very low probability [25 per cent] that tax will be applied broadly and an even lower chance that it would target crude.”
This particular program is “full of problems and I think like Trump said that it’s too complex,” said Johnston. A border tax also would create problems for U.S. refiners who import a range of crudes from heavy to light from Canada while most of the U.S. production is light, said Peter Tertzakian, chief energy economist at ARC Financial Corp.,who also spoke at the luncheon.
Price forecast
On the energy side, Johnston’s firm is forecasting a stronger oil market in 2018 with Brent averaging about US$63 per bbl, slightly higher than the forward curve and the high fifties anticipated this year. “Our thesis is that the market is moving back into a stock draw by the end of this year and that prices are going to have to go up to incent more drilling activity, absolutely first in the U.S.”Canada, likely along with Saudi Arabia, will be the next area of supply response, he suggested, noting that Saudi Arabia has said that the production cuts they agreed to in November 2016 to help rebalance the market are coming off this summer. “They [the Saudis] are still focused on market share but they still are concerned that if they cut their production too much, someone else in the oilsands or in the shale oil U.S. or deepwater will step in and take that share.”
In the U.S., Trump appears to be influenced most by the small and medium oil and gas producers such as those in the Bakken and the Permian Basin, according to Johnston.
“And I think those people think of the energy market as the U.S. market and their regulatory concerns are anything that is between the wellhead and the refinery,” he said. “They are not worried by global climate and all that stuff, they are worried about the Bureau of Land Management, the EPA (Environmental Protection Agency), methane emissions, seismicity regulations and Trump will do a lot to help them.”
Global climate approach
However, while Trump will abandon much of the domestic climate agenda, his administration may react more cautiously internationally in backing away completely from the global climate agreement, Johnston suggested. “I think Rex Tillerson [incoming secretary of state and former CEO of Exxon Mobil Corporation] is a guy who understands the international climate process and what it means for the ExxonMobils of the world but also for the U.S. and the U.S. economy,” he said.“If you back away completely, you are basically betting that whatever Trump does will continue beyond 2020 and that other countries will back away from their climate goals as well,” said Johnston. “To make that bet, might be a bit risky.”
In the longer term [beyond 2020], he believes that most of the world is moving to a low carbon transition because all the major emitters have their own national interests for reducing their greenhouse gas emissions. China, for example, is concerned about pollution in its cities and the co-benefit of reducing that pollution also reduces greenhouse gas emissions. “If we back off now, we might just have to go back again in a few years.”
Although some Canadian producers have expressed concern that the carbon tax will make them uncompetitive with U.S. producers, Johnston suggested that the tax is actually a good thing for investors. “If they know where carbon pricing is headed in Canada, it’s much easier to value assets,” he said. “You can build in a carbon price as B.C. and Alberta are doing. There’s also uncertainty for investors in the U.S. about promised deregulation and when that might occur.”
‘Rebranding’ Canadian shale gas and oil
Johnston also suggested that Canadian short-cycle unconventional investment needs to be rebranded as a North American shale play.“I think the bottom line is that investors prefer North America generally and they prefer short-cycle unconventionals and we want to be part of that,” he said. “We’ve got great rule of law and stability and I think we should take advantage of that and rebrand a bit.”
That rebranding effort “is really easy; we just have to start doing it,” Johnston told reporters, later suggesting that while it might not be easy it was “doable.”
“The rocks are the same, the market is the same, the rule of law is the same,” he said. “Yes, there are some regulatory issues and some cost issues but we spend way too much time talking about that and not enough time talking about what we have in common with the U.S. and why we are just an attractive investment as they are.”
Keystone XL, LNG
Although Johnston sees some risks, he believes this could be the year that TransCanada Corporation’s Keystone XL project proceeds, driven by Congress which wants to show that it can get deals done.“One [risk] is that Trump tries to extract something unreasonable either from TransCanada or the Canadian government,” Johnston told reporters. “Number two is that it gets blocked again in Nebraska.”
On the LNG export side, contracts for LNG with large Asian buyers are coming up for renewal in 2024-25 and Canada has another chance to develop its export industry after missing the last window of opportunity for LNG exports, he said.
“Those Asian utilities, many of them my clients, are looking for gas,” said Johnston. “Let’s give it to them. Let’s get a plant built and approved. If we don’t, the window’s going to close again.”
In the question and answer session that followed, Johnston said that he believes that long-cycle projects such as the oilsands and deepwater offshore projects will come back in a much more limited role as prices improve. Investors also will be more selective, looking for a place where they can put technology to work. “High tech innovation is the future when applied to the oilsands.”
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