‘NOT EVEN ON THE RADAR SCREEN’

OTTAWA • In October 2013, then-Liberal leader Justin Trudeau told a room full of oil and gas executives in Calgary that the arms-length National Energy Board had become so politicized under Stephen Harper that it was now “an advisory board to Cabinet.”

It was part of a mantra that he would repeat throughout his election campaign and well into his tenure as prime minister and that had eroded confidence in Canada’s regulatory approval process: For too long, major energy projects had been rubber-stamped despite strong environmental and First Nations’ opposition. “Governments may be able to issue permits, but only communities can grant permission,” Trudeau said.

Those words, some argue, have come back to haunt him. Trudeau’s government agreed to buy the Trans Mountain pipeline system and the proposed 590,000-barrel-per-day expansion from Calgary-based Kinder Morgan Canada Ltd. for $4.5 billion — an extraordinary move to ensure the project would be completed. The pipeline expansion has been delayed by intense opposition from First Nations and local communities along the route.

“I think the deal with the devil that Trudeau made was he acquiesced, and indeed actively participated, in a pact against institutions that we have very carefully developed in Canada,” said Brian Lee Crowley, the managing director of the Macdonald-Laurier Institute in Ottawa.

Ottawa’s effective nationalization of the pipeline, alongside a dramatic drop in foreign direct investment (FDI) in Canada’s vast oil and gas reserves, has in turn prompted political handwringing in recent years, and questions over whether Canada can still secure the sort of large-scale investments needed to expand its natural resources industry.

The total stock of foreign direct investment in Canadian oil and gas extraction slumped 7.4 per cent in 2017, to $162.2 billion, due to a hasty retreat by international oil producers, including massive divestments by Royal Dutch Shell Plc ($9.3 billion) and ConocoPhillips Co. ($17.7 billion), totalling nearly $30 billion, according to Statistics Canada. Statoil ASA and Total SA have also sold heavy oil assets. The exodus doesn’t account for the tens of billions of dollars in potential liquefied natural gas projects that were scrapped because of a combination of low commodity prices and domestic regulatory uncertainty.

The falling FDI levels come after several major pipeline proposals have languished amid years-long delays or were scrapped altogether, leaving few options for oil producers to get their oil to Asian markets. That has raised significant doubts over the dependability of Canada’s regulatory approval process compared to its competitors.

“In most jurisdictions the rules are fairly set,” said Bill Ross, the former vice-president of finance at Enbridge Pipelines Inc. “For whatever reason, in our country it’s a lot more complicated, particularly as it relates to energy investment."

Foreign investors, particularly those in the United States, have become increasingly apathetic toward what is happening here after years of persistent uncertainty, says Rafi Tahmazian, portfolio manager at Toronto-based Canoe Financial Corp. “They don’t even care — Canada’s not even on the radar screen anymore,” said Tahmazian.

The fund manager has been ramping up his exposure to foreign assets in recent years to 60 per cent, from 30 per cent a few years ago, in the $1 billion he manages on behalf of Canoe. The company oversees roughly $4.5 billion in assets under management.

That appears to be part of a broader shift away from Canada among domestic firms. Outbound FDI by Canadian companies has increased from about $60 billion in 2013 to $100 billion in 2017, while inbound FDI has roughly halved, down to around $30 billion, according to Statistics Canada.

“We used to be a jurisdiction where people would dial down risk by coming to Canada,” Tahmazian said. “And now these investors, including myself, dial up risk when coming to Canada.”

International companies are also kicking fewer tires in basins across Alberta and British Columbia. Malaysia’s Petronas announced this week that it would take a 25 per cent stake in Royal Dutch Shell Plc.'s LNG Canada project for an undisclosed amount, dipping its toe back into the market after scrapping its own $36 billion project a year ago — making it the first international company this year to acquire a stake in the Canadian oil and gas space.

Last year, acquisitions of Canada’s oil and gas assets by foreigners hit a decadelow of $1.43 billion, compared to about $12.5 billion on average annually over the previous decade, Financial Post Data shows. Unable to find growth at home, domestic energy companies have also stepped up hunt for international assets, with a record $34.3 billion in international M&A, primarily in the U.S.

Others have noticed a similar lack of interest among energy leaders toward the country’s future potential to secure capital.

“There’s been a certain level of resignation over the last six months or so, and just a difference in the optimism they might have had about being able to make changes that would improve the investment climate in the country,” said Monica Gattinger, professor at the University of Ottawa, specializing in energy.

The shift hasn’t all been because of regulatory shortcomings. Gattinger says Alberta producers have also been undermined by the shale revolution taking place in the U.S., which has mopped up private equity funds in recent years.

The flood of investment into the U.S. has been so allconsuming that it played a major role in the market correction of 2014, when global oversupply caused prices to plummet below US$30 per barrel.

“That is a fundamental shift in energy markets in North America over the last five years, and that, in turn, changed capital investment,” she said.

The investment boom south of the border is also tied to investors favouring plays with faster and better returns, as the long-term outlook for oil demand is called into question. Fewer investors now have the stomach for major oilsands project with decades-long life cycles and immense up-front capital costs, especially in times of volatile oil prices.

“I have trouble saying that it’s the business environment that’s slowing some of these expenditures, because I think it’s the economics that’s driving it,” said Michael Tims, the vice-chair Matco Investments, a private holding firm that is more than 90 per cent weighted toward energy.

Tims stressed that the recent retreat from the oilsands by major oil players, as well as generally lower FDI numbers, is part of a complicated web of factors. Investment levels into Canadian oil and gas companies and assets has also improved in recent months in line with higher commodity prices, he said.

“Companies are looking at the composite of a number of difference indicators, and it’s hard to point to just one thing,” Tims said.

Still, some observers warn the political class hasn’t been aware enough of the incremental burdens being placed on companies through carbon taxes, incoming restrictions on methane emissions, a lack of pipeline capacity, demand uncertainty and stilllow market prices for crude.

“It’s very curious the extent to which people in government don’t seem to get that opportunities are highly perishable,” said MacdonaldLaurier’s Crowley. “When a company makes a decision to spend billions, there’s a whole set of assumptions behind that.”