Investment piling into U.S. shale

Continued from FP1

With expectations that energy prices will be more volatile in the future, international companies are betting on projects that can be ramped up quickly, and Canada’s oilsands have become too long a game to fit the new environment, said John Brussa, chairman of the Calgary-based law firm Burnet Duckworth & Palmer LLP, and a director of six oil and gas companies.

“The U.S. and international majors are piling into U.S. shale,” Brussa said. “You are seeing a rotation out of longer-term projects to shortercycle time projects.”

It was not the intention of Canadian policy-makers to scare off so much foreign capital, yet they wear a big part of the blame because they made it harder to get anything done in the oilsands, by stretching out pipeline reviews, imposing carbon taxes, capping oilsands development.

“If there is a shrinking pool of dollars going into oil and gas exploration, people are going to look at it and say: There is an issue in Canada, so it’s off the list” of investment destinations, Brussa said.

Even more uncertainty comes from the U.S., where President Donald Trump is considering a border-adjustment tax that would make it more expensive to import Canadian oil and gas, he said.

The exodus is so large it reframes the oilsands as a regional industry led by four major companies: Cenovus, Suncor Energy Inc., Canadian Natural Resources Ltd. and Imperial Oil.

Many are welcoming the return to domestic control. The survivors will be larger, more nimble and more relevant market participants.

They will be more aligned with Canadian values, whether in interacting with aboriginal communities or by accepting higher environmental requirements.

In the past, oilsands companies were heavily reliant on foreign capital because the domestic market was just too small to meet their needs.

The companies’ high concentration in one basin magnifies their vulnerabilities, for example if market access remains elusive, or if Canadian oil discounts persist, or if politicians keep punishing the sector because it doesn’t fit their greenenergy aspirations.

Indeed, in a report to clients, Raymond James analysts expressed concern that Cenovus has become a riskier investment.

“Cenovus goes from exhibiting one of the strongest balance sheets in the peer group, to one of the most levered, with investors unlikely to find a lot of appeal at this juncture in the combination of above-average financial leverage married to assets with above-average operational leverage,” the firm said in a report to clients.

“In addition, the company will become decidedly less integrated following this transaction, with effectively all of the acquired oilsands production being in excess of existing heavy oil processing capacity just at a time that we expect Western Canadian heavy oil supply to begin breaching pipeline capacity out of the basin.”

With oil prices firming, this should have been a time of renewal, investment and optimism in the oilsands. Instead, the flight of foreign capital means a continuation of challenging times.