Making Canada an Energy Superpower: Pipelines, Politics, and Capital with Adam Waterous

Podcast Briefing: an Edited Q&A

The following Q&A has been adapted from the HC Commodities Podcast and edited for clarity and length.

The long-term outlook for oil demand

Paul Chapman: Since you founded Waterous Energy Fund in 2017, the world has experienced higher interest rates, less free trade and greater instability. Was the renewed importance of oil and physical commodities predictable?

Adam Waterous: When we started the business in 2017, Canada’s oil industry had largely been left for dead. We had a different perspective for two simple reasons.

First, we believed the developing world would continue to develop. The correlation between liquids consumption and GDP per capita is extremely high. Of the world’s eight billion people, roughly one billion live in what we would describe as the developed world and seven billion do not.

The US represents about 4% of the world’s population but consumes about 16% of its oil, approximately four times the global average. If living standards rise across the developing world, it is difficult to reconcile that growth with forecasts suggesting global oil demand will peak at around 107 million barrels per day.

There will be efficiency gains and renewables will take a greater share of the energy mix, but the underlying requirement for energy will remain substantial.

Energy poverty and the climate challenge

Paul Chapman: How do you balance the need to address energy poverty with the challenge of climate change?

Adam Waterous: I think it is important to distinguish between a challenge and an emergency. An emergency is usually a near-term matter of life and death, and energy poverty is causing millions of deaths through exposure to cold, heat and indoor air pollution.

The idea that the world should simply reduce energy consumption makes no sense when billions of people are seeking the standard of living enjoyed by the developed world. That is not the same as saying we do not have a climate change challenge. We do, but the moral imperative of addressing energy poverty cannot be ignored. 

Energy security in a more fragile world

Paul Chapman: How seriously are governments taking the shift from sustainability towards energy security, and are we facing a deeper period of deglobalisation?

Adam Waterous: Two major developments have changed the energy security conversation.

The first was the war in Ukraine, which challenged the assumption that countries could always rely on increasingly integrated energy systems and dependable trading partners. Europe’s reliance on Russian gas, particularly in Germany, became the most obvious example.

The second is the development of drone technology. Critical energy infrastructure can now be disrupted by relatively small groups using comparatively accessible technology. Historically, a conflict might end with a ceasefire between countries and weapons being put down. That becomes more difficult when smaller groups retain the ability to attack a pipeline or other energy infrastructure.

The perceived and actual reliability of global energy trading systems has therefore been permanently disrupted. That is most visible in the Middle East, but it is not limited to the region. 

Can renewables remove geopolitical risk?

Paul Chapman: Could growing concerns around the security of oil supplies accelerate the shift towards renewable energy?

Adam Waterous: Oil production is concentrated in a relatively small number of regions, so we are likely to see greater variability in production. However, moving from oil into renewables does not necessarily remove geopolitical risk.

Solar and wind supply chains have their own concentrations and dependencies, particularly on China. One of the lessons from Europe’s reliance on Russian gas is that relationships between trading partners can change. It is not as simple as replacing oil with renewables and assuming the security issue has been resolved. 

Canada and the US: a tale of two oil producers

Paul Chapman: How do you compare the development of the Canadian and US oil industries over the past 15 years?

Adam Waterous: Fifteen years ago, the US was producing just over five million barrels of oil per day. Between 2011 and 2019, it added close to eight million barrels per day, reaching approximately 13 million. That growth benefited US consumers and strengthened the country geopolitically.

Canada moved from approximately three million to five million barrels per day, but it generally restricted the development of its energy industry. The US has been on its front foot, while the Canadian industry has been on its back foot.

This year is pivotal because we believe that dynamic is beginning to flip. US production has remained around 13 million barrels per day while its reserve life index has been shrinking. Our view is that the question is not whether production will decline, but when that decline begins and at what rate. That creates a major geopolitical challenge for the US and an important opportunity for Canada.

Why Canada is pivoting back towards energy

Paul Chapman: Is Canada’s renewed focus on energy simply a reaction to its changing relationship with the US?

Adam Waterous: The friction in the US-Canada trade relationship is structural. It has been personified by Donald Trump, but the US is dealing with a significant trade deficit and concerns about deindustrialisation. Any US president would have had to address those issues.

The consequences are being felt in important Canadian industries such as steel, automotive manufacturing and aluminium, particularly in Ontario and Quebec. The federal government therefore has to consider where Canada will earn hard currency and generate future economic growth.

That creates a natural pivot towards expanding the energy sector. It is not simply a short-term reaction to one US administration. It is a recognition that the makeup of the Canadian economy is changing and that the relative importance of Canadian energy will increase. 

Doubling Canadian oil production

Paul Chapman: What would it mean in practice for Canada to become an energy superpower?

Adam Waterous: The central objective is to double Canadian oil and gas production over the next ten years. For oil, that means moving from approximately five million to ten million barrels per day.

The most important change is that the federal government, through Mark Carney, has embraced Danielle Smith’s vision of making Canada an energy superpower. That is a substantial departure from the previous 15 years, during which there was significant domestic opposition to growing the oil sector.

The heavy lift was getting the federal government to embrace the growth of the sector. The second question is how to achieve it. That is where the discussion moves into infrastructure, regulation, project approvals, Indigenous participation and whether projects should be led by the public or private sector. Those implementation details matter, but the central development is the change in the country’s objective.

Regulation, private capital and project delivery

Paul Chapman: What changes are needed to turn that ambition into new projects and production?

Adam Waterous: The industry’s position has been that growth requires regulatory reform rather than government funding. Its recommendations included changes to the emissions cap, industrial carbon pricing, Bills C-69 and C-48, a six-month deadline for project approvals and measures to facilitate Indigenous participation.

My concern is that creating new bureaucracies to circumvent the existing system does not fix the underlying problem. The alternative is to shrink, reform and streamline the regulatory process, then allow the market to determine which projects attract capital.

Mark Carney gets full marks for embracing the objective, but I believe the implementation is suboptimal. The system itself needs to be fixed. 

The economic and workforce opportunity

Paul Chapman: Is it genuinely realistic for Canada to add another five million barrels per day, particularly given concerns about labour availability?

Adam Waterous: Between 2011 and 2019, the US added approximately eight million barrels per day. For Canada to add five million over ten years would require growth of about half a million barrels per day each year. This can be done.

I hear concerns about labour shortages, but parts of Ontario and Quebec are likely to have people looking for work as other industries face economic pressure. Canada has an available workforce, and expanding the energy sector could create significant employment.

The broader economic impact would be substantial. Based on the figures discussed, every additional million barrels per day could add approximately C$21 billion a year to GDP. Adding five million barrels would represent more than C$100 billion in additional annual GDP.

Canada has generally been growing at around 1% to 2% a year. Oil production growth on this scale could transform the country’s economic position as well as its standing in global energy markets. 

Why thermal oil remains attractive

Paul Chapman: Having sold Strathcona Resources’ natural gas business, what makes thermal oil more attractive from an investment perspective?

Adam Waterous: We are strong believers in scale. Natural gas is generally a thinner-margin business, so a producer needs to be very large to make the economics work. We were proud of the gas business, having grown it from around 5,000 to 75,000 barrels of oil equivalent per day, but we ultimately sold it for twice what we had invested.

Thermal oil and SAGD have a different investment profile. They are long-life, low-decline assets that can generate significant free cash flow. In the thermal oil business, the proportion of EBITDA required to maintain production might be around 35% to 40%. In shale, it would not be uncommon for that figure to be 70% to 80%, leaving considerably less free cash flow.

The Canadian oil sands resource is also highly concentrated among a small number of major producers. If Canadian output increases from five million to ten million barrels per day, those companies could become extraordinary economic engines for the country while benefiting from significant economies of scale. 

AI, oil and natural gas

Paul Chapman: With so much capital flowing into AI and the power infrastructure required for data centres, do you see a bubble or a lasting opportunity for the energy sector?

Adam Waterous: AI is a transformative technology that will be with us permanently and change our lives for the better. However, genuinely valuable technologies can still become overbought and overinvested in. That can make related securities risky, even when the underlying technology has lasting value.

The oil and gas industry should be one of AI’s biggest beneficiaries because it is highly data-intensive and process-intensive. AI could improve the identification and development of resources, although there is also a potential near-term challenge if it helps bring significantly more supply to market.