Our Take: Eastern Canada Joins 'Advantaged' Shortlist

Europe’s urgent need to source non-Russian oil and gas, strengthened government support, upsized resource potential and the region’s relatively low carbon footprint have coalesced to move Eastern Canada onto the industry’s shortlist of “advantaged” barrel jurisdictions. Although challenges remain for prospective LNG developments, we see the region’s offshore increasingly making the cut for capital-selective producers.

• BP’s decision to effectively swap its Canadian oil sands portfolio with Cenovus for cash and a stake in the Bay du Nord project offshore Eastern Canada captures both slow-burning and fast-developing trends in the country’s oil and gas sector. The UK major is the latest international oil company (IOC) to exit the higher carbon and capital-intensive oil sands patch. It is also the latest producer to see fresh promise in Eastern Canada amid robust oil and gas prices, improving government support and Western desire to replace lost Russian production.
  
• Sanction of the Equinor-operated Bay du Nord is not guaranteed. But the project appears to tick some crucial strategic boxes: (1) Equinor puts the development’s operational (Scope 1+2) emissions at 8 kilograms of carbon dioxide equivalent per barrel — a touch higher than the US Gulf of Mexico, but 10 times below the average oil sands scheme. (2) It offers large scale that should lower unit development costs, with peak production pegged at 200,000 barrels per day and recent discoveries bumping recoverable resource estimates to around 1 billion bbl. (3) Its close proximity to Europe and Canada's efforts to advance oil and gas within climate goals potentially make Atlantic Canada a preferred substitute for Russian supplies.
  
• Crucially, provincial flexibility on fiscal terms at the recently sanctioned West White Rose (Cenovus, Suncor) signals potential scope for wider support. Newfoundland and Labrador is willing to accept much lower royalties from the project when oil is below $75 in exchange for much higher royalties when oil is above $90. Project sponsors cited that downside protection as crucial to giving the green light — confirming our long-held view that improved fiscal terms can have a significant, near-immediate impact on capital allocation amid permanent spending constraints.
  
• Key on our radar next are: (1) Equinor’s two-well appraisal program near Bay du Nord, which could inform FID timing. (2) Exxon Mobil and QatarEnergy’s three-well exploration program in the Flemish Pass Basin kicking off this summer. (3) Results from Newfoundland's bid round, closing in November. (4) BP’s five-year exploration program starting next year, with the multibillion-barrel Ephesus prospect among the targets.
  
• Europe’s dash to secure non-Russian gas is giving stalled Eastern Canadian LNG projects another look, but we see these potential developments remaining challenged, despite their advantaged locale. Lacking big IOC sponsors, projects also face high hurdles on feedstock supply, with politically tenuous pipelines required barring a jump-start in provincial upstream activity. Projects would need government support and swift action to advance.