Home July 2017 The Silver Lining

The Silver Lining

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Steve Williams.

As Alberta oil and gas companies are trimming and refocusing efficiencies, it’s a stretch to suggest the downturn could possibly have a silver lining.

But it does!

It wasn’t so long ago – maybe five to 10 years – when Alberta oil, particularly the oilsands, was booming and everybody clamoured for a piece of it.

“We were victims of our own success,” says knowledgeable industry expert Ben Brunnen, vice president, oilsands and fiscal policy, with the Canadian Association of Petroleum Producers (CAPP). “Particularly in the past five years or so, there was significant interest, especially in the oilsands. After all, it’s a great resource.”

According to global stats, the Alberta oilsands contain the third-largest crude oil reserves in the world and are a strategically critical Canadian resource.

With the flood of investment came the contentious issue of foreign ownership, and the trend quickly became a hot topic in Ottawa and in the news.

The classic example, and a much-cited symbol of Canada’s urgent business crisis, was the controversial $15.1-billion takeover of Canada’s Nexen by Chinese state-owned CNOOC. “It was not only about foreign ownership of Canadian assets but foreign state ownership in the Canadian economy and the possibility of foreign control of Canada’s oilsands,” Brunnen says.

The controversy was, by no means, limited to the Nexen deal. Victor Vallance, senior vice president, energy and global corporates with DBRS, Canada’s premier business credit ratings agency, explains that “There was much concern, primarily due to the acquisition of controlling interests in Canadian oil and gas companies by state-owned enterprises (SOEs), mostly from Asia.

“The Canadian government was concerned that the takeovers of oilsands producers would place too much control of Canada’s key resource in the hands of foreign governments. In late 2012, the federal government introduced new rules restricting SOEs from acquiring controlling interests in Canadian oilsands companies.”

Some oil company executives and industry analysts find it frustrating the federal finance department still has only rough estimates about specific numbers and dollar values of foreign ownership in the energy sector.

A 2015 federal government briefing note showed that, until recently, likely between 40 and 50 per cent of the energy sector was owned by foreign investors.

Canadian energy resources are just a high-profile tip of the iceberg.

When it comes to business in general, Statistics Canada calculates foreign capital accounts for about half of all direct investment in Canada, and the figure has climbed in recent years.

Federal regulations got tough and the global oil price downturn continues as extra discouragement for foreign investment. But deals are still being made and actually turning out to be good-news opportunities for Canadian investment and ownership.

“Foreign investors, companies that have an international profile to their portfolio, have been divesting their oilsands assets for about two years,” Brunnen points out. “The sell-off reflects the global price slump which has placed many companies in a more difficult position and having to reconcile their investments.

“The total value of proven reserves has decreased by $217 billion since 2005. The oilsands are large capital investments with long payouts. The companies needed shorter payouts. Many are choosing to exit the oilsands and prioritize their LNG assets.”

The trend is echoed by the recent stats and the tracking of industry experts like Vallance. “Foreign companies like Shell, Marathon, ConocoPhillips, Statoil, Murphy and Total have all sold large parts of their Canadian oil and gas holdings; mostly to reduce indebtedness, and also reallocate capital to other geological basins like the Permian in Texas that offer better returns on capital, compared with Canada.

“Canadian companies believe it’s an opportune time to add to their existing oilsands holdings at favourable costs. Also, with their expertise in developing oilsands they can increase returns by reducing costs, implementing cost efficiencies, increasing utilization rates by de-bottlenecking and adding capacity on existing developments,” he says.

“Canadian companies such as Canadian Natural, Suncor, Cenovus and Athabasca will own and operate a larger percentage of the oilsands and the oilsands will make up a larger portion of each of these company’s assets.”

Brunnen guesstimates that “assuming the Shell/CNRL, ConocoPhillips/Cenovus, CNRL/Marathon and Shell/Marathon transactions are finalized, the updated control in the oilsands will be 65 per cent Canadian, 27 per cent U.S. and eight per cent Europe and Asia.”

Suncor Energy is one of the key Canadian players in the shifting scenario of oilsands ownership. Steve Williams, Suncor’s CEO, cautiously agrees that these are cycles of valuable oilsands opportunity and that, if foreign multinationals continue sell-offs and leave, Suncor will continue to make more oilsands purchases.

“We don’t feel any pressure to buy and although we have the financial strength to act, we are watching closely for opportunities,” he admits. “I don’t think the oilsands exodus is quite finished and there are sellers, if you know where to look. In fact, there may be some good opportunities because there aren’t many companies out there now that have balance sheets capable of making purchases.”

Oilsands production was 448,500 barrels per day in the first quarter of 2017. Sell-off by sell-off and acquisition by acquisition, Canadian companies will soon be in charge of more than 65 per cent of total oilsands production.

In March, Suncor reported first-quarter net earnings rose to $1.35 billion, compared with $257 million a year earlier. Williams confirmed Suncor may purchase up to $2 billion worth of its shares this year and that it will be “relatively aggressive” in buying stock, particularly in light of the oilsands sell-offs.

Of course the shift in oilsands ownership is about much more than curbing foreign control in the name of gung-ho nationalism.

“It is a technology play and a truly unique asset,” Brunnen says with Canadian pride. “The costs are coming down, productivity is increasing and more and more Canadian companies are seeing opportunities to optimize production and the potential of new technology.

“There continue to be some positive announcements about increased markets and pipelines and the focus in the oilsands is decreased costs, increased production and increased market access.”

Most industry experts and analysts agree. Despite the negatives about the various downturn broadsides, increased Canadian ownership of the oilsands is a positive.

“When you get right down to it,” Williams says, “the Canadianization of the oilsands is a good thing. It aligns the Canadian interests. What we end up having is a Canadian resource, increasingly owned by Canadian corporations, working with Canada’s provincial and federal governments, trying to get the proper access with absolutely the right environmental standards to market.

“So you get a bit of a Canadian brand. That’s good, because there is a real need to look after Canadian interests. This is a very competitive world and we have to do as much of that as possible.”

Williams is also positive about Canadian companies making “good deals” and that consolidation among a handful of companies for which production from the deposits is a core business means better supply chains, better connectivity and more motivation to work co-operatively to make the business more efficient.

Industry insider Victor Vallance agrees. “A larger portion of Canadian oilsands developers will focus more on improving investment returns and on environmental stewardship at existing projects, and responsibly developing new resources of oilsands.”

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