Oil producers are flush with cash. Now what will they do with it?

Canadian oil and gas producers are awash in cash for the first time in years, thanks to crude prices that have surged back to multi-year highsaftertheir collapse early in the pandemic.

Revenues are expected to reach record levelsthis yearif oil prices stay high, coming on the heels of a long stretchof belt-tightening and spending restraint across the industry.

The sting of a sharp downturn in the spring of 2020 is now largely in the rear-view mirror, as industry leaders find themselves in the enviable position of deciding what to do with the money gushing into company coffers.

Typically, when oil prices begin to soar after a downturn, there's a predictable pattern that plays out in Alberta, saysTamarack Valley Energy CEO Brian Schmidt:Tons of new startups, soaring land prices and companies cranking up production.

This year, though, despite resurgent revenues and oil prices at multi-year highs, the Calgary-based oilpatchexecutive hasn't witnessed that.

"I've never seen this kind of response to demand increases beforeever," said Schmidt.

While spending plans are up this year, they won't rise near the levels seen earlier in the last decade.Instead, companies are staying focused on the lessons of a punishing few years:Fiscal discipline.

It's a message that comes with shareholders demanding healthy returns, but also as calls grow for cleaner sources of energy.

The situation has many wondering what the companies will do with their excess revenue and howthey should invest it.

Gushing cash

Despite warningsabout how global consumption of fossil fuels is stoking climate change, demand for oil is expected to continue to reboundin 2022.

A report by BMO Capital Markets released this month said it believes that global oil demand "will continue to grow for the foreseeable future and soon achieve record highs."

The report said demand could increase by 4.6 million barrels per day this year, ultimately topping 100 million barrels per day. What's more, it expects West Texas Intermediate crude oilthe North American benchmarkto trade between $70 and $80 US per barrel in 2022.

This week, oil has been tradingabove $85US per barrel.

At these kinds of prices, the Canadian sector could see all-time records in both revenues and cash flow in 2022, according to the Calgary-based ARC Energy Research Institute.

"The Canadian industry is coming off a very good year when it comes to financial metrics," said Jackie Forrest, the firm's executive director. "The industry is doing quite well now."

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The outlook for the industry is both exciting and terrifying at the same time, says Brian Schmidt, the chief executive of Tamarack Valley Energy.

What to do with the cash?

Analysts, investors, politicians and climate-focused groupsare now watching to see what companies will do with the cash, particularlyto see if they will use it to:

• Increase spending to boost production.
• Increase spending to reduce emissions.
• Pay down debt.
• Increase dividends and share buybacks.

In recent years, investors have soured on big spending plans, instead putting increased pressure on the oilpatch to produce profits and return that money to shareholders.

Some also want companies to follow a plan to deal with greenhouse gas emissions, whetherby investing in greentech or turning to mitigation tools.

In BMO's recent report, it said the North American oil and gas group is in its strongest financial position in years and it believes the cash will largely be distributed to shareholders.

Canadian Natural Resources, Suncor Energy, Cenovus Energyand Imperial Oil have all raised their capital spending and oil production expectations for this year. But the companies are opting to spend on share buybacks, dividends and squeezing more barrels out of existing assets, instead of taking on new, large expansion projects.

Ed Whittingham, an energy policy consultant and former executive director of green energy think-tank Pembina Institute, hopes the surge in revenues will help fund retooling efforts to transition producers from high to low-carbon energy.

He underscores the point by referencing an old bumper sticker seen aroundAlberta: "Please God, Let There Be Another Oil Boom. I Promise Not To Piss It All Away Next Time."

"What I would say with this latest boom is if we don't piss it away all on dividends, it could be a good thing, net-net, for climate action," said Whittingham, who is also the co-host of a podcast titled Energy vs. Climate.

Transitioning from high to low-carbon energy is hard,he said, whether you're talking about a company, a province or a countryand you need healthy balance sheets to help to do that.

"Let's not let up on the urgency that we need to take that capital, coming in those strong balance sheets that we have, and start investing in the transition we need to make," said Whittingham.

Over the past year, several oilsands producers pledged to achievenet-zero emissions by 2050, bringing them in line with what the federal government has promised.

Analyst Kevin Birn said each company will have its own approach and respond in its own way, but current high oil prices provide the flexibility to pursue a number of options at onceeven with a focus on shareholder returns.

"I think they will spend more money because they're going to have to address rationalization of past years, and inflationary pressures from supply chain disruptions," said Birn, with Calgary-basedIHS Markit.

Birn expects producers will respond to higher prices and aim to increase upstream activity to varying degrees,but "they're also going to look at decarbonization and that's different for every company and the assets they hold," he said.

Those efforts could focus on methane measurement and containment, electrification and carbon capture and storage in the larger, more industrial operations, he said.

Keeping a lid on spending

Oilpatch fortunes began turning around last year, though itdidn'ttriggera spike in spending.

According to Statistics Canada,oil and gas capital spending over the first three quarters of 2021 totalled $8.5 billion, still 32 per cent below the sameperiodin2019, which was pre-pandemic.

True Canadian Energy, a company based in Nisku, Alta., which manufactures equipment and provides services to the industry, has seen activity grow as prices have climbed.

Co-owner Ryan Williams said he's not necessarily hoping for another boom, but would like the kind of stable growth that keeps investment strong, people employed and businesses afloat.

"Oil prices have been sustained over $60 for quite some time, so that all leads to more activity and more services.So we're continuing to look at areas where we can expand as well," he said.

Uncertaintyremains

Predicting the future of energy markets is a difficult task at the best of times, and even more so during the pandemic.

Oil prices briefly plunged a few weeks ago, when the Omicron variant first emergedand its impact was largely unknown, highlighting the market's ongoing volatility.

For Schmidt, of Tamarack Valley Energy, he's feeling quite good about the current state of the oilpatch. His company is introducing a dividend for shareholders, paying down debtandactivelymaking acquisitions.

Still, he isn't sure what the future holds beyond this year, considering the pressures facing the sector. There is increasing global scrutiny on the fossil fuel industry by regulators, the public and banks as countries try to combat climate change bytransitioning to lower carbon sources of energy.

It's scary, he said, because you don't know what's around the corner.

"I could go down the street and I could get probably a dozen different opinions on that," he said. "It's exciting and terrifying at the same time."