Deborah Yedlin.
All Canadians stand to pay for resulting loss in growth
CALGARY – It used to be that things were relatively simple in the world of Alberta’s energy players.
The decision regarding whether to develop a particular play rested primarily on one factor: the commodity price.
Given the issues facing the Enbridge Northern Gateway and TransCanada’s Keystone XL pipelines, the increasingly heated rhetoric surrounding the possible takeover of Nexen by the China National Offshore Oil Company and Friday’s announcement that the federal government will extend its review of Progress Energy’s purchase by Malaysia’s Petronas, it’s clear the economics of Alberta’s oilpatch are more dependent on the vagaries of politics than ever before.
Where it was once about looking at the forward curve for prices, what the cost structure would look like, whether there was a need to raise money and the length of time it would take for a regulatory review — the leaders of today’s oil and gas companies need to bring a bigger tool kit to negotiate all these variables.
From a purely economic standpoint, it’s hard to deny Northern Gateway. Having more than one buyer for a product, regardless of what it is, makes good business sense. This holds particularly true for a country whose economy is inextricably tied to oil and natural gas exports. Diversity of markets and customers means better pricing. How can a government turn down the prospect of a $132-billion boost to its gross domestic product over a 15-year period. Where else will that kind of economic growth come from?
But it’s not only about economics anymore.
The same holds true for Keystone XL. As TransCanada’s Alex Pourbaix said to a business audience at the Petroleum Club this week, KXL ended up being used for political gain — a way to balance the environmental vote, ensure dollars continued to flow into election campaign coffers while not shutting the door entirely on the unions, whose members so badly need the jobs.
The economics of KXL make sense. Access to Gulf Coast refineries, not just for Canadian production, but also for the growing number of barrels coming from the U.S. Bakken plays, makes economic sense. Get the barrels there — and refined — and a world price is the result. Then there are the 1,300 direct jobs, 7,000 manufacturing jobs and the $20-billion boost to GDP.
But it’s not just about economics anymore.
The $15 billion for Nexen — analyzed purely from the perspective of the numbers — makes sense. It’s a small player in Canada; the oilsands leases are good, but not great. They had been “quietly” for sale for quite some time, but no one was interested. The deal takes shareholders out at a good premium, boosts the value of RRSPs and RESPs, creates liquidity that can be used to start something new and also gives the company an owner with deep pockets who can invest in developing Nexen’s assets. Without this, growth at Nexen was going to be a more challenging proposition, which would likely have had an impact on employees at the company. But it’s political now. While the federal government has been quiet through the process — save for the unnecessary comments of Calgary West MP Rob Anders — Premier Alison Redford revealed her government’s position about the deal this week. In a nutshell, Redford said she wanted firm commitments regarding adherence to environmental standards, more clarity on research and development initiatives and a guarantee that half of management and the board of directors would be Canadian.
And now comes the news that the review of the $5.5-billion purchase of Progress by Petronas is going to take longer.
Again, this is a deal that makes sense on the basis of economic merit. The play for Petronas is a long-term bet on natural gas exports. In case anyone has forgotten, the price for natural gas is mired in the $2-per-thousand-cubic-foot range — anyone hoping for a doubling of the price in the short-term is dreaming in Technicolor. There are going to be many smaller players suffering this winter with low natural gas prices; it’s tough to make a buck.
The only real hope for the sector is to get in on the export game. Right now, it’s dominated by the big players — Encana, Apache, EOG, Shell and others. It’s much harder for the smaller companies — the size of Progress and smaller — to get a piece of this market.
The only way they have a hope of getting involved is to do a deal with a bigger company, like Petronas. For the record, news came this week that ExxonMobil, ConocoPhillips and BP are pushing ahead with a liquefied natural gas export strategy from Alaska’s North Slope whose price tag could be north of $60 billion US. Folks, the clock is ticking. Canada has been blessed with a natural resource bounty. The increasingly unconventional nature of the oil and gas reserves, which means they are more expensive to develop, requires companies to look at creative ways to offset their risk either through joint ventures or by finding a buyer or investor with deep pockets.
The federal government itself estimates the energy needs more than $600 billion in capital in the next 10 years for resource development. Those dollars once came from the United States, but the world has changed; it now comes from points “away.”
Without mergers, acquisitions and joint ventures, the value of Canada’s resources risks being stranded. And if that is what ultimately comes to pass — because of politics trumping economics — not only will it have a negative impact on Canadian companies operating overseas, foreign investment will continue to decline.
All of this will be a cost ultimately borne by every Canadian.