Morningstar DBRS' Takeaways from 2025 Credit Insights Calgary: The Effects of Tariffs and Policy Changes on the Power and O&G Markets

As part of its takeaways series, Morningstar DBRS is publishing several write-ups from Credit Insights Calgary, a well-attended event that looked at credit market conditions influenced by geopolitical tensions, tariffs and counter-tariffs, changing interest rates, and the Canadian federal election.

Jaideep Nagpal, Senior Vice President, Project Finance, and Ravikanth Rai, Senior Vice President and Sector Lead, Energy and Natural Resources, discussed the effects of tariffs and policy changes on the power and oil and gas (O&G) sectors. Both analysts underscored the interconnectedness of the power and O&G markets in Canada and the U.S., which will likely limit both the imposition of tariffs and their effects on these sectors.

EFFECTS OF TARIFFS AND POLICY CHANGES: POWER SECTOR
From a project finance perspective, tariffs and policy changes compound costs and complicate logistics for the power sector. With global demand for power increasing, Nagpal does not foresee tariffs having a material impact on the credit ratings of current operational projects in the Morningstar DBRS portfolio. Some near-term effects on costs can be expected, potentially some higher operating and maintenance costs (e.g., equipment, spare parts) but no material impact is expected on Morningstar DBRS' portfolio of operating power projects.

However, policy changes in the U.S. are creating challenges for the power sector, particularly for renewable energy projects. President Trump's executive order has effectively stopped offshore wind projects, Nagpal said, and the effects are being seen with onshore and solar projects as well. With renewables out of favour with the U.S. administration, interest in natural gas and nuclear sources is growing. In the wake of the U.S. policy changes, environmental, social, and governance (ESG) concerns have taken a backseat as corporates are rethinking their ESG strategies.

The U.S. renewables industry is facing further uncertainty from the future of federal tax credits that have supported the development of renewable energy sources. A congressional review is expected to take place in the coming months that could have a significant impact on the future of the industry.

In contrast, growth in the renewables sector is set to continue in other major markets (e.g., Europe, China, India), although they could experience ripple effects from the bear-ish conditions of the U.S. renewable industry.

The impact of tariffs on the Canadian power sector is likely to be low. Nagpal underscored the interdependence of the Canada-U.S. power grid, where imports and exports go in both directions. Although Canada has been a net exporter of electricity, recent low hydrology has been closing the trade gap; for example, because of persistent droughts, BC has imported a significant amount of its electricity from the U.S. The integrity of the grid and the cross-border relationship is critical for overall power grid stability in Canada and the U.S.

For the most part, renewable energy developments in Canada seem set to continue. In 2023, Alberta led the country in developing renewable energy sources, adding 2,200 megawatts of power from some of the largest wind and solar projects in North America. But by 2024, policy changes reduced that growth to a trickle. The provincial government's agriculture-first policy presents a key challenge to renewable development. The new policy imposes a 35-kilometre buffer zone around designated areas protected for agriculture or pristine viewscapes, limiting the development of wind projects in particular.

EFFECTS OF TARIFFS AND POLICY CHANGES: ENERGY SECTOR
Rai and his colleagues were skeptical from the onset that tariffs would be imposed on the energy sector. "Our opinion was based, to a large extent, on U.S. dependence on Canadian energy," Rai said. The U.S. is a net importer of Canadian O&G. In 2023, approximately 61% of total crude oil imports came from Canada as did almost 99% of natural gas imports. That reliance on Canadian O&G products will likely keep tariffs to a minimum. "In a sense, the physical proximity of the two countries, the pipeline infrastructure, and the rail network make it an integrated energy market and difficult to decouple," Rai said. Most of the crude oil the U.S. imports from Canada is refined in the landlocked Midwest, which has no other access to a crude oil supply. Even the Gulf Coast, which has access to tidewater, is optimized to use heavy crude. Many refineries in the East Coast have also shut down and the region, especially New England, is dependent on refined products from Canada.

To minimize the impact of tariffs on U.S. consumers, U.S. domestic production would have to increase. However, an immediate increase in production is unlikely as most producers are focused on maintaining their balance sheets and returning capital to shareholders. Even if production could be increased, building or adapting the associated infrastructure would cost billions.

"While the direct impact of tariffs on the energy sector has been minimal, the economic upheaval they have caused has been very real," Rai said. "I don't think we've seen the end of that story yet."

The tariffs and counter-tariffs threatened and imposed by the U.S. and China--the world's largest consumers of crude oil--have created a pall on demand. "And that, coupled with the OPEC+ decision to gradually end its voluntary production cuts, has really created a bear-ish market in our perspective," Rai said. "As a result, we revised our crude oil base-case price assumptions in 2025 downward."

Overall, most issuers in the Canadian O&G sector are well positioned to weather any tariff-related storm thanks to the lower Canadian dollar and strong balance sheets that provide resilience and flexibility.

Written by Deirdre Maclean

NOTES:
For more information on this industry, visit https://dbrs.morningstar.com or contact us at info@dbrsmorningstar.com.

To see Jaideep Nagpal's and Ravikanth Rai's slide decks from Credit Insights Calgary, please see Related Documents below.

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