The Canadian market is overreacting to concerns around Venezuela’s oil sector, according to a leading expert in the oil and gas industry.
Canadian energy stocks sold off sharply on Monday after U.S. President Donald Trump said the U.S. would take control of Venezuela’s vast oil reserves after the capture of longtime leader Nicolas Maduro.
Canadian Natural Resources and Cenovus Energy dropped around five per cent and Suncor Energy dropped by 1.4 per cent.
“I think the reaction today is based upon a lot of ignorant views,” Eric Nuttall, partner and senior portfolio manager at Ninepoint Partners told BNN Bloomberg in an interview.
“This belief that Venezuela is suddenly, magically — after many years of chronic underinvestment — going to surge production, and not just production, but heavy oil, and therefore displace the demand for Canadian production is really, really dumb.”
Nuttall said even if Venezuela is able to resurrect their oil production, global oil markets will still need every barrel because the demand for oil is only going to grow.
He said that this year is expected to mark the peak rate of production from non-OPEC+ producers, which currently supplies two-thirds of the global oil.
Nuttall believes OPEC+ has only about 1.4 million barrels per day of actual spare capacity, rather than the nearly four to five million barrels per day estimated by the International Energy Agency. He said demand is projected to grow until at least 2050.
“The world’s still going to need every barrel that Venezuela can produce in addition to every barrel that Canada can produce,” said Nuttall.
How does increased oil production in Venezuela affect Canada?
Venezuela remains a direct competitor to Canada in heavy crude markets, according to Randy Ollenberger, managing director of oil and gas equity research at BMO Capital Markets.
Ollenberger explains the risk that Canadian oil companies could be displaced from the market if U.S. companies invest significant capital to increase Venezuelan oil production, which would then go to the U.S. Gulf Coast for refining.
In that case, Canada, which sends billions of barrels of oil to the U.S., would have to move that oil elsewhere, he said.
“We have some pipeline capacity to the West Coast that’s available, but not enough to fully move that oil,” said Ollenberger.
“So that would create some challenges for Canadian heavy oil producers, and we’re seeing that reflected in the performance of those stocks today.”
Ollenberger said Canada would not see an immediate impact on supply in that situation, and that it would take 24 to 36 months to see a major effect.
However, he noted that smaller increases in Venezuelan exports could happen sooner.
“If the blockade is lifted and Venezuela complies with U.S. demands, that could mean we see an additional 300,000 to 400,000 barrels a day of heavy oil coming into the U.S. market,” Ollenberger said.
He added that restoring production to historic levels would require significant capital.
Nuttall highlighted energy forecasts indicating that adding just 500,000 barrels per day could take two years and roughly US$10 billion to US$20 billion in investment. Meanwhile, restoring output to pre-Hugo Chavez levels of three to four million barrels per day could require a decade and as much as US$100 billion.
“If you think of their pipeline networks, they haven’t been touched in 50 years,” said Nuttall adding that the cost estimate for maintenance alone would be nearly $60 billion.
“I think that once the dust settles, intelligent questions are going to be asked and answered, and people are going to realize that today’s reaction is a massive overreaction,” said Nuttall.
Need for another pipeline
Nuttall emphasized the need to build another pipeline to Canada’s West Coast to increase oil capacity by at least one million barrels per day and diversify the nation’s customer base.
“We cannot be under the thumb of the U.S. We have long argued for this, and this past weekend’s events is yet another example of the necessity for that,” said Nuttall.