“Remember the Golden Rule,” said the stunted king from the cartoon The Wizard of Id, “whoever has the gold, makes the rules.”
A growing number of institutional investors are heeding the king of Id’s sarcastic “golden rule.” But unlike Parker and Hart’s irreverent cartoon, the real-life outcome of shareholder activism – the influence of the guys with the gold – on big energy companies, may not be so funny. Today’s new rules are such that companies, guided by their vocal shareholders, are progressively shunning big, risky oil and gas projects that take forever to build.
The full impact of today’s corporate decisions will show up in a few years, probably in the form of higher commodity prices. In the meantime, the accelerating trend is for capital in the energy business to shift away from megaprojects in favour of smaller, shorter cycle and more certain. Canada’s conventional upstream business (that which excludes oil sands) is already a beneficiary of this tilt in capital allocation.
It’s not a secret that big investors are exerting more influence on how a company’s capital budget should be spent. Executives leading publicly traded, independent oil and gas companies with global reach are all listening
It’s hard to argue with the golden rule in today’s vulnerable energy complex. Why would any rational investor want their capital directed to countries laced with corruption, sanctions, rebel insurgency, civil war, or authoritarian leaders that can expropriate assets with a quick throne speech?
Uncertainty has gone up even in benign, free-market economies with stable politics and rule of law. For example, project delays and cost overruns have ravaged returns in Australia. And we know that multibillion-dollar oil and gas projects – LNG, oil sands, pipelines – with cost uncertainty and regulatory ambiguity can be readily found in Canada too.
U.S. and Canadian resource plays – hydraulically fractured light oil and shale gas – are natural receptors for relatively safer capital in today’s uncertain world. Good upstream plays in places like Alberta and Texas can be developed at a fraction of the cost of global megaprojects, offering superior returns in a friendly back yard.
With few other options for investment, megaprojects have been the flavour of the decade in the energy business. Big multi-year projects will still attract capital on the global stage, but new competition from smaller North American projects is pushing the hurdle to attract that type of gold higher. Ultimately, commodity prices will have to rise to attract risk-seeking gold again.