CAUTIOUS OPTIMISM AT THE CAPP SCOTIABANK INVESTMENT MEETING
The state of oil prices and general uncertainty facing the energy sector would suggest attendance at the third annual CAPP Scotiabank Investment Symposium would be thin on the part of companies and investors.
After all, it’s not as though the energy sector — despite the billions raised by oilpatch players so far this year — is high on the investment pick list. And, each day it seems, there is another bit of disappointing news to digest. On Wednesday, it was the surprise increase in U. S. oil inventories of 10.9 million barrels, coupled with news from Saudi Arabia that production there reached a record 10.3 million barrels a day in March.
Despite the challenges and the sector being somewhat out of favour, conference numbers here show a 20- per- cent increase in the number of investors listening to the presentations of 94 participating companies. It might also surprise some to learn the energy sentiment is perhaps better than believed; the S& P/ TSX Energy Index has returned 4.6 per cent this year while the broad S& P/ TSX Composite Index is up 3.8 per cent year- to- date.
The CAPP event, which moved to its new location and format in December 2012, remains the biggest energy conference in the country and has undergone a welcome format change from its days at the Hyatt Hotel in downtown Calgary. Gone are the mind- numbing presentations from company executives, filled with graphs of drilling locations and often liberally punctuated with seismic analysis and data.
The current version is structured by panels, focused on specific issues relevant to the represented companies and challenges in the industry.
The chatter before Wednesday’s opening sessions was all about the overnight announcement of Shell’s plans to acquire BG Group in a $ 70- billion US deal and whether it heralds the beginning of a round of consolidation, not unlike what was seen in the late 1990s when oil prices hit the $ 10 US a barrel mark.
The consensus here was that consolidation is not an ‘ if’ but a ‘ when’ — likely beginning in the second and third quarters, though it could be argued Halliburton’s $ 37.4- billion acquisition of Baker Hughes last November constituted the first move in that direction.
The Shell/ BG deal squarely shone the spotlight on Canada’s fledgling liquefied natural gas industry, with the obvious question being what the transaction means for B. C. LNG as both firms are pursuing projects.
It’s fair to see the deal as another big step forward LNG becoming a globally traded commodity. It also underscores the fact it’s a game reserved for big players. For that reason, too, there are expectations consolidation is inevitable among the 18 proposed projects.
“One thing I have learned is that the industry consolidates from time to time and that drives efficiency and productivity in the market,” said Don Althoff, president and CEO of Veresen Inc., which is building its Jordan Cove LNG facility off the Oregon coast that will be capable of processing 1 billion cubic feet per day.
“It only helps the underlying projects and I think this deal helps the Shell project because one of the issues is ... it’s hard to build them all. The demand is not there, it puts stress on the infrastructure. You won’t build all 18 Canadian B. C. LNG projects, you know that. This might be part of it. I don’t think consolidation is going to materially change anything.”
Despite the drop in oil prices, which is constraining projects predicated on oil- price- linked contracts, there remains a sense of optimism the window of opportunity for LNG projects in B. C. remains open.
“I think projects are all moving forward toward FID ( financial investment decision). Some have said they are going to move sooner rather than later while others are talking about late 2017 or 2018,” said Althoff. “The market will be there. When you look at demand and supply by the middle of the next decade, there is a supply deficit of 100 million tonnes by 2025, so there will need to be supply to meet the growing demand from the big Asian markets.”
Big question marks, however, remain. How will a remote part of the country handle the stress on its infrastructure? Where will the labour to build the projects come from and how great is the risk that costs spiral upward as they have in places like Australia?
The proponents all might say today that they will work together to stage development to mitigate potential pressures. However, those active in the oilsands know that’s easier said than done, especially when the market has certain expectations.
Strip away some of the skepticism, and the LNG world today, from a Canadian perspective, goes something like this: Pacific NorthWest LNG, backed by Malaysia’s Petronas, is due to make its final investment decision in June. When that happens — and expectations are it will get the green light — it will mark the creation of a new industry in Canada linked to global trade.
The energy sector is often characterized as being a great illustration of the triumph of hope over experience, which is one way to view the promise of an LNG industry in B. C. That might also explain the added interest at this week’s CAPP Scotiabank Investment Symposium.
When you look at demand and supply by the middle of the next decade, there is a supply deficit of 100 million tonnes.