Vol. 24, No.42 Week of October 20, 2019
Providing coverage of Alaska and northern Canada's oil and gas industry

When good might be bad

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With foreign investment exiting Alberta’s oil sands, will there be investment?

Gary Park

for Petroleum News

At first glance it should be more good news than bad for the domestically controlled sector of Canada’s oil and gas industry.

Divestitures of US$30 billion in assets held by foreign-based companies means a sizeable return of ownership in the oil sands to the pioneers who opened up the vast play in northern Alberta.

A good thing? Not necessarily.

Although investment in the resource will no longer be so heavily dependent on U.S. companies and their Canadian branch plants, turning back the clock to a time when only Canadians participated in development of the oil sands doesn’t guarantee a return to rapid growth in investment.

The oil sands always have and always will be dependent on U.S. refineries that can process heavy crude and on U.S. investors willing to gamble on a play that has such shaky returns.

Five years since price crash

Just consider the past five years since the oil price crash, when Canadian heavy crude prices plunged to a record low in 2018, drastic job cuts forced Alberta’s unemployment rate above 7% and capital spending started a decline that has already lasted five straight years.

If the leading Calgary-based pipeline companies, TC Energy and Enbridge, thought a turnaround was in store for major transportation projects “they might need to hold on,” said Laura Lau, who manages more than C$2 billion in market investment at Brompton Corp. in Toronto. “The pipeline situation is getting worse; everything is getting worse.”

That grim assessment, which includes the ponderous rate of approvals by Canada’s regulators and soaring opposition to any form of oil and gas development, explains why companies such as Kinder Morgan, ConocoPhillips, Royal Dutch Shell, Marathon Oil and Murphy Oil have jammed the oil sands’ exit doors.

Decline in foreign interest

The result is mirrored in the decline of oil sands output by non-Canadian companies. The Alberta Energy Regulator has reported that the volumes rose from 320,000 barrels per day in 2010 to 647,000 bpd in 2014, then started a slide to 573,000 bpd in 2018.

The Canadian Press has calculated that the working interest by foreign companies has varied from 22% of total oil sands output of 1.44 million bpd in 2010 to 33% of 1.98 million bpd in 2014 and 20% of 2.9 million bpd in 2018.

The move by Oklahoma-based Devon Energy to sell its Jackfish thermal recovery project of 100,000 bpd to Canadian Natural Resources has further lowered the “foreign” share to 16%.

The underlying reason for the pullout was explained by Patrick Pouyanne, chief executive officer of France’s Total, when the company sold its undeveloped Joslyn oil sands project to Canadian Natural.

“Reducing our exposure to Canada’s oil sands by selling this asset is in line with our global strategy to focus our oil investments on low breakeven resources and develop a resilient portfolio in the mid- and long-term,” he said in a statement.

Even so, Total remains the largest, foreign-controlled producer at 101,000 bpd, while CNOOC, the state-owned Chinese giant, reached 71,000 bpd.

Some assets retained

ExxonMobil (partly through its 70% owned Imperial Oil), Japanese and other Chinese companies (PetroChina and Sinopec) are all retaining some production assets and refining stakes in the oil sands.

PetroChina, which paid C$3.8 billion over five years from 2009 for stakes in three projects, is testing various technologies to raise its production and said it is “committed to Canada for the long-term, having maintained its investments through economically challenging times.”

CNOOC said its oil sands interests are an important part of the company’s North American portfolio and will remain in its Canadian operations.

Upcoming election

For those in search of hope, there might be some in the Canadian election on Oct. 21 when a victory for Conservative leader Andrew Scheer might inject hope where there is a lack of trust in the Liberal administration of Justin Trudeau.

Rafi Tahmazian, a senior portfolio manager at Canoe Financial, said a change of government should help restore the perceptions of foreign investors in the support they could count on from the federal government, even to the extent of removing a ban on oil tankers operating off the northern coast of British Columbia and scrapping Trudeau’s plan to overhaul regulatory approvals.

He said the positive aspect of the overhaul of industry ownership is that “Canada owns Canada again.”

Alberta priorities

For Alberta, the priorities are clear: It wants to unplug the regulatory logjam, remove the choke points on rail and pipeline delivery systems, open up new markets both onshore and offshore, and once more attract capital investment.

But the road ahead will likely be long, bumpy and uncertain.

Alberta Energy Minister Sonya Savage is troubled that petroleum producers have failed to raise spending despite her government lowering corporate taxes and promising another cutback. Even so she is calling for patience.

Although several large producers posted improved second quarter results, only a minority have hiked spending plans.

Savage said some are actually taking advantage of their bottom-line improvement “to buy back shares and to reposition and balance their books. It’s the same as when you are a private citizen. You come across a windfall and you pay down the mortgage.”

She told the Calgary Herald that the government would “like to see that money being invested into jobs. We’d like it to stay here in Alberta.”

The United Conservative Party government of Premier Jason Kenney pledged when elected in April to lower the corporate tax rate by one-third to 8%, estimating that would create 55,000 jobs and expand the economy by C$12.7 billion.

Instead, Alberta’s unemployment rate topped 7% in July as 14,300 jobs were lost.

Free cash flow up

However, some signs were encouraging, with the six largest oil sands players reporting C$3.6 billion in free cash flow, up by C$900 million from the first quarter, BMO Capital Markets reported.

Peter Tertzakian, executive director of ARC Energy Research Institute, said companies are mostly diverting their new money for share buybacks or raising dividends, noting Alberta does not need new production in a constrained market.

“Why would you invest your surplus if you can’t sell the product?” he asked.

Only moderately encouraging was the Kenney government’s first fiscal update covering the April to June quarter, which showed a fiscal deficit of C$835 million, down 30% from the same period of 2018, while resource revenues from oil grew by C$164 million from the first quarter and corporate and personal income tax revenues gained C$166 million from a year earlier.

But Alberta Finance Minister Travis Toews emphasized several times that revenues were essentially flat and warned of a “period of restraint” when his government releases its first budget in late October.

He said the fiscal update was “difficult” given that revenues were flat and operating expenditures were up.

“We have been clear all along, given the state of Alberta’s finances, we are entering into a period of restraint. There is no doubt about that,” Toews said, while his province braced itself for billions of dollars in widespread spending cuts.

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