Canada's Bet on Oil and Gas Expansion May Backfire Amid Asian Energy Shift

The Canadian government has been aggressively promoting oil and gas expansion in Canada through various measures, including fast-tracking pipeline proposals, establishing the Canada Strong Fund, and encouraging major pension funds to invest in new infrastructure.

This push for oil and gas growth is driven by expectations of increasing demand from key Asian markets. However, a closer examination of market trends suggests that this bet may not pay off.

Rapid electrification and the expansion of renewable energy capacity in Asia are driving down demand for imported oil and gas. In fact, globally, energy scenarios predict that oil and gas demand will peak by 2030 and the mid-2030s respectively.

The current Middle East conflict may temporarily boost the relative attractiveness of Canadian producers, but it also risks undercutting long-term market demand for Canadian hydrocarbons.

A study by the Carbon Tracker Initiative found that new LNG projects in Canada may fail to compete with prices expected to drop to $10/MMBtu and below as soon as 2028. This would lead to value destruction for companies invested in these projects.

The Canadian Big Five banks, Royal Bank of Canada (RBC), Toronto-Dominion Bank (TD), Canadian Imperial Bank of Commerce (CIBC), Bank of Montreal (BMO), and Scotiabank have increased their financing of oil and gas expansion companies, with RBC and Scotiabank dropping their 2030 emission reduction targets.