With pipeline, regulatory and political frustrations reaching new heights, the nation’s energy stocks slumped to their lowest level in almost two years this month. The iShares S&P/TSX Capped Energy Index ETF, which tracks Canadian energy companies, has seen about $56 million in outflows this year versus $32 million in inflows for an ETF focused on U.S. stocks. The pain has extended to the fixed-income market, with U.S. dollar high-yield bonds from Canadian energy issuers returning less than their global peers in the past 12 months.

At the heart of the sector’s woes is a dearth of pipeline capacity, which has depressed Canadian oil and natural gas prices. A new regulatory regime designed to speed up pipeline approvals is instead seen delaying projects while Alberta and British Columbia are fighting over one of the conduits the federal government has approved. On top of that, the industry is facing carbon taxes other jurisdictions don’t have to pay and it’s competing with American drillers which are seeing taxes cut under the Trump Administration.

“I’m not crazy about Canada,” Paul Tepsich, founder and portfolio manager at hedge fund High Rock Capital Management Inc. in Toronto, said by phone. “We’ve got taxes going up and regulations going up.”

Tepsich said he reduced the average exposure to Canadian energy equities in his clients’ to well under 3 percent from 8 percent a year ago. And while credit exposure remains relatively steady, he has no plans to add new holdings. He’s been adding to short-dated U.S. Treasuries amid market volatility and will look to selectively add U.S. energy names.

The big albatross for Canadian energy companies has been weak prices, caused by the pipeline pinch. Western Canadian Select, the main grade of oil extracted by Canadian oil-sands producers, is trading near the widest discount to West Texas Intermediate crude in almost four years. Alberta Energy Co. natural gas prices are also lagging their U.S. equivalent. WCS discounts would cost the Canadian economy about C$15.6 billion a year, or 0.75 percent of GDP, if maintained at current levels, Scotiabank Chief Economist Jean-Francois Perrault said in note.

The pipeline frustrations recently erupted into a trade war between oil-producing Alberta and neighboring British Columbia after the coastal province proposed limiting new shipments of oil-sands crude through its borders, possibly stalling a major expansion of the Kinder Morgan Inc. oil pipeline. Alberta Premier Rachel Notley banned imports of B.C. wine and abandoned talks to possibly buy more electricity from its neighbor.

Prime Minister Justin Trudeau’s government also announced earlier this month a plan to revamp the national energy regulator with a goal of giving the industry a speedier, more efficient approval process. But the plan also may include adding new types of projects that require federal approval and allows more input for some stakeholder groups, sparking industry fears it won’t become any easier.

Legal Challenges

The proposed legislation appears to effectively prevent any major new project from reaching any form of positive recommendation, the research team at GMP FirstEnergy, a major investment bank to the energy sector, said in a note. “A lack of hard timelines and a regulatory process that has been subject to dithering and near endless legal challenges will become the major stumbling block for domestic and international investor confidence in the Canadian energy sector.”

Federal Resources Minister Jim Carr said earlier this month the Liberal government has balanced government support for the energy industry with protecting the environment and receiving input from Canadians, noting C$500 billion in projects are planned over the next decade.

Banker and bondholder willingness to refinance debt and give companies time to boost output helped keep many struggling producers out of bankruptcy as oil prices slumped in recent years. Investor flight means it will be tougher for Canadian energy companies to access financing for capital-intensive projects. Suncor Energy Inc.’s $14 billion Fort Hills project, approved when WTI was $100 a barrel but started production last month, may be the last of a generation of mega Canadian oil-sands projects.

‘Zero Confidence’

“I’m inclined to believe that we don’t see another oil-sands project built,” Geof Marshall, the guardian of $40 billion of assets at CI Investments’ Signature Global Asset Management in Toronto, said by phone. The majority of his energy holdings are concentrated in U.S. regions like the Permian Basin, where there’s more capacity to move the commodity, he said.

Rafi Tahmazian, who helps manage about C$1 billion in energy investments at Canoe Financial in Calgary, said he began trimming holdings of Canadian energy equities after Justin Trudeau was elected in 2015. He started shifting further into the U.S. after Donald Trump became president and vowed to trim regulations and environmental protection.

Canada needs to cut taxes and ensure pipelines and LNG terminals get built, Tahmazian said.

“My job as an investor is to gauge and make investments based on my confidence in a leader of a company and a country, or a province or a state,” he said. “And I have zero confidence there right now.”