Weathering the storm

It was no surprize to the leaders of Canada’s oil and gas industry when Fatih Birol, executive director of the International Energy Agency, told a news conference at the G20 energy ministers’ summit in Istanbul, Turkey, earlier this month that global investment in oil and gas is expected to be 20 per cent lower in 2015 compared to last year – the biggest year-on-year decline in the industry’s history.

The 50 per cent drop in oil prices in the past year has slashed oil company revenue and left little money for new investment in either production or exploration. The focus now is on con- serving cash and developing the right strategies for longer-term business sustainability. The slowdown in acquisitions and investment has definitely been felt in Canada, but they have not dried up completely, says Calgary-based Michael Laffin, a partner and chair of the Asia region at the law firm Blake, Cassels & Graydon LLP.

While price volatility is an obvious reason for a drop-off in investor inter- est, it’s not the only factor, he adds. “There’s also the inability to construct pipelines, the pending royalty review, next week’s federal election, and as- sessing and integrating assets that may have been acquired in the recent past,” says Mr. Laffin.

Transactions are still happening, but they tend to be smaller and the pace at which they are being concluded is more modest.

“It’s worth noting that larger Chinese companies that acquired Canadian oil and gas assets in the recent past have established operations in Canada and continue to have significant annual capital and operating expenditures.

A number of them are also involved with LNG developments on the west coast that involves significant investment,” he adds.

But there’s still the question of how the many other players in the Canadian oil and gas sector should be positioning themselves to continue weathering what may turn out to be a long storm. Jason Langrish, president of the Energy Roundtable, says companies need to be as price competitive as possible by having low costs and developing only the most accessible resources.

“The large producers with deeper pockets, existing large capital commitments and economies of scale are looking 40 years into the future, so they are still developing projects with that time frame in mind,” he says. “The smaller producers are, in many cases, just trying to survive.”

Survival strategies include solidify ing balance sheets by raising money on capital markets and by selling off assets. “In this environment it can depend on your size, scale, cash flow and time line,” adds Mr. Langrish. “The next development in Canadian oil and gas is likely to be a wave of acquisitions where the smaller, more vulnerable producers are gobbled up by the larger firms with more cash or by pure investors from the U.S. and elsewhere that see value in assets at very low valuations.”

The federal government and its provincial counterparts have a role to play as well, says Mr. Laffin.

“They must do a better job of emphasizing: (a) the importance of securing market access to Asia and Europe for Canadian oil and gas; and (b) that a vibrant oil and gas industry is compatible with and able to fully embrace environmental responsibility,” he says. He would also like to see a “meaning ful and thoughtful” Canadian presence at the climate change meeting in Paris in December this year to illustrate the importance of Canada’s oil and gas industry, its challenges and its efforts in reducing emissions.

Mr. Langrish believes that the outcome of next week’s federal election could have a significant bearing on what the next government does – or does not do – for the oil and gas sector. “The biggest thing they can do is keep taxes and royalties at a reasonable rate and secure greater access to international markets by helping achieve energy export projects,” he says.

Mr. Langrish acknowledges that market diversification will remain a challenge for some time due to ongoing public opposition to new oil pipelines, but oil by rail will continue to grow in the absence of new pipelines.

He adds that while the focus has really been on high-cost LNG projects on the west coast, many of which will not be built, the outlook for LNG developments elsewhere in Canada looks positive.

“The sleeper projects, in my view, are those off the east coast whose potential markets will include Europe,” he says. “While East Asia has been the target of massive LNG projects from places like Qatar and Australia, the desire of the EU to diversify away from such a heavy reliance on Russian gas imports presents significant opportunities for the LNG proposals in Nova Scotia and New Brunswick.”

ABOUT
The Energy Roundtable is a private-sector forum that was launched in 2004 to help define the Canadian energy sector’s role in domestic affairs and international oil and gas markets. The Energy Roundtable delivers high-level, thematic confer- ences that:

• Promote Canada as a stable and growing supplier of energy in aresource-constrained world.

• Profile innovative ideas on how to sustainably develop Canada’s vast energy resources and get them to international markets.

• Explore the commercial oppor- tunities that this presents to investors and service providers.

The annual conference series gath- ers leaders in Calgary, London and Toronto, whose communities are invested in developing Canada’s energy future.