The outlook for the Canadian construction industry remains positive but further projected cuts in oil production are set to limit the expansion of the industry in the next five years.

Canada’s energy outlook

Oil pipeline constraints, inefficient regulations and a lack of market diversity are major factors holding back investment in the energy sector.

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Although the government of Prime Minister Justin Trudeau recently re-approved the construction of the Trans Mountain pipeline expansion project, additional pipeline capacity is needed to boost activity in the sector and reduce transport bottlenecks.

On the regulatory front, according to Chris Bloomer, president and CEO of the Canadian Energy Pipeline Association (CEPA), the potential for new major pipeline development in Canada is bleak with the recent Senate’s passing of Bill C-69.

On 20 June, Canada’s Senate passed the Liberal government’s controversial Impact Assessment Act or so-called Bill C-69, to overhaul the country’s environmental assessment practices for a wide range of construction projects, including oil pipelines, highways, mines, water and power links, and consider their effects on public health, the environment and the economy.

The Senate also passed Bill C-48, to ban oil tankers from loading at ports on the northern coast of British Columbia.

While the new law will not affect any project that has been approved, it would jeopardize future investment in oil and natural-gas pipelines, Bloomer said. The government’s approval of the Trans Mountain expansion project is only part of the solution, he added. “We desperately need more investment. However, Canada is sending mixed messages that will send critical investment capital elsewhere.”

The New Impact Assessment Act broadens public participation in the review process by imposing more requirements for consulting affected indigenous communities and requiring the effects of climate change and public health to be taken into account when major national resource-exploitation projects are being evaluated.

Oil and gas

Conservative leaders across the country, including the government of Canada’s main crude-producing province Alberta and the oil and gas sector, condemned the approval of Bill C-69, claiming that it would prevent new major resource projects from obtaining the necessary approvals within reasonable times.

Overhauling environmental impact assessments and the oil tanker moratorium were key promises of the Prime Minister’s 2015 election campaign. However, with the Prime Minister’s approval ratings currently sitting at around 30%, the re-approval of the Trans Mountain pipeline expansion can be seen as being an attempt to boost his popularity in Alberta and gain the support of the undecideds for the October’s election.

A recent report by Canadian Association of Petroleum Producers’ (CAPP) “2019 Crude Oil Forecast, Markets and Transportation”, shows that Canada’s total oil production is expected to grow by 1.27 million barrels per day (b/d) to 5.86 million b/d by 2035, a 1.44% annual increase or less than half of what was anticipated in CAPP’s 2014 outlook. The report also shows that capital spending in the oil and gas industry is set to fall to US$37 billion in 2019 from US$81 billion in 2014, with oil producers expected to drill fewer wells compared to the past two years.

Construction sector

GlobalData expects Canada’s construction industry to grow by just 0.7% in real terms in 2019 and 0.5% in 2020 before recovering to an annual average of 1.1% over the remaining of the forecast period (2021-2023).

In addition to the struggles of the oil industry, weaker economic conditions and stricter mortgage regulations are expected to limit the expansion of the industry in the next five years. Given the elevated household debt levels and the general slowdown in the housing market in recent years, tighter mortgage rules could keep household credit and private consumption at modest growth rates and exacerbate the expansion of the residential subsector in 2019.

On the external side, rising US protectionism or a further escalation of trade tensions between the US and its major trading partners – which could include a failure to secure the legislative approval of the new United-States-Mexico-Canada-Agreement (USMCA) – would adversely affect Canada’s exports and business sentiment while a decline in oil prices due to the materialization of lower global economic growth would generate negative spillovers to the rest of the country’s economy, including the construction sector.

Even though government efforts to encourage infrastructure investment are welcome – including the creation of Canada Infrastructure Bank and plans to invest a total of CAD180 billion (US$139 billion) through 2028 under its long-term infrastructure plan, ‘Investing in Canada Plan’ – challenges remain in project selection, execution and coordination especially at the provincial and municipal levels. A more comprehensive infrastructure plan is, thus, required to prioritise projects, which will best serve Canada’s long-term goals.

With global demand for oil expected to continue to grow in the next two decades, Canada has significant opportunities to expand its oil and gas market, especially, if it improves its regulatory and fiscal policies both federally and provincially; if not, any attempt to increase oil production will not be attainable, and will lead to weaker economic growth, and reduced exports and business sentiment.