Unless you have a penchant for the energy industry, you’re likely unfamiliar with the Panhandle Producers and Royalty Owners Association (PPROA). If Clinton had won the election, it’s unlikely a small commercial real estate blog in Edmonton would be writing about them either. However, with Trump’s win last week, we think this Texas based association has the potential to impact Alberta in a huge (said in a Donald Trump voice) way. PPROA is an advocate for the U.S. energy industry, specifically companies in the Texas Panhandle, Western Oklahoma and Southwestern Kansas. In April, the association released its Panhandle Import Reduction Initiative, which essentially aims to restrict shale gas imports from OPEC nations.
Dr. Daniel Fine wrote a white-paper on the initiative, which can be neatly summed up with the following:
“What we propose to the country and to the industry is a return to President Eisenhower in 1959, when he, by proclamation, established import quotas on foreign oil,” Fine said. “We will take care of Canada, our hemispheric ally. But OPEC, no. We’re going to rigorously put quotas on the import of oil.”
The reference to Eisenhower was regarding the Mandatory Oil Import Quota Program he enacted following years of increased foreign oil imports in the 1950’s. Nixon lifted the ban in 1973 and OPEC has steadily exerted their influence on the energy market since.
Trump campaigned on an “America-First” platform, which could have large implications for NAFTA, TPP, Paris Climate Accord and Iran’s Nuclear Pact. While this may take months, or even years, to unravel, the impact on our provincial economy could be immediate. If the PPROA is successful in getting a ban on OPEC imports, Canada would need to significantly ramp up production to meet the demand.
Dabbling into the theoretical, there is the potential for this increased demand to narrow the differential (sometimes called the Heavy Oil Discount) between Western Canadian Select and West Texas Intermediate. Producers may see an upside if that gap closes, which coupled with the foreign currently uptick could see a quick impact on margins.
We are emphasizing this as a possibility as the energy industry is a big machine and unfortunately there isn’t one simple leading indicator that can be relied upon. With any machine, there are a multitude of gears and levers that operate independently of one another. We have heard from a number of companies in the industry about how less attractive Alberta is compared to a decade ago. Built on Ralph Klein’s strategy to create an “Alberta Advantage”, companies were attracted to the low corporate taxes and royalty rates. These same companies now lament increases in taxes, uncertainty at royalty rates and a dramatic rise in minimum wages. From a corporate level, to a larger macro perspective, investors are concerned about our ability to get product to the market. The debate over pipelines has been contentious for years, so hope abounds for Trump reversing the presidential veto on Keystone XL.
These moving parts are why very smart analysts working with leading edge information and technology struggle to predict future prices. As we have alluded to many times, Goldman Sachs has predicted oil prices ranging from $20 to $200 / barrel in the past 10 years.
So while the future of oil prices is completely unpredictable, we believe Edmonton’s commercial real estate market to be directly hinged to the ebbs and flows. If we see another year of low oil prices, we would expect to see continued downward pressure on the real estate market. If we see a short term gain in prices, oil producers will likely increase drilling but it will take more time for the machine to run at 2014 levels. Barring a large, sustainable spike in oil prices, we are anticipating it could be another 12 – 18 months before our economy is firing on all cylinders (sorry for all the machine metaphors).
Chad GriffithsPartner, SIOR, CCIM
Chad is a partner with NAI Commercial Real Estate and focuses on the Greater Edmonton area. Chad entered the industry in 2004 and has completed over 400 commercial transactions with clients ranging from small, local companies to large institutional owners. Chad has been a top 15 producer with NAI Canada-wide since 2013.
Ryan BrownPartner, BCom, SIOR
Ryan is a partner with NAI Commercial Real Estate in Edmonton and is currently ranked nationally as one of NAI's top advisors. Having executed in excess of $100 Million worth of sales transactions and over 2 Million square feet of lease transactions, Ryan has developed a firm understanding of asset evaluation and an aptitude for building design, functionality, and long-term practicality.
Darcie is a licensed Commercial Real Estate Agent in the Province of Alberta with a focus on the Edmonton market and its surrounding areas. Darcie accomplishes custom solutions for her clients through her personable nature and results driven attitude. Darcie can help if you are looking to invest in commercial real estate or are looking for representation for a sale or lease transactions.
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