WHAT CENOVUS SAYS ABOUT US
The Cenovus takeover of Husky is due to weakness in the oilpatch, not strength, Jack M. Mintz says.
The $3.8-billion blockbuster takeover of Canada's fifth largest oil and gas company (Husky) by Canada's fourth largest oil and gas company (Cenovus) will obviously get much scrutiny in terms of its implications for shareholders and for the 2,150 employees, mainly in Calgary, who may be losing their jobs. But we should also be thinking about what such takeovers mean for Canada's competitiveness.
In yesteryear, the Cenovus takeover would have been celebrated as a terrific outcome: a Canadian company achieving greater economies of scale and competitiveness and also becoming a leader in a foreign-dominated sector of the economy.
Back in 1975, Pierre Trudeau created a state-owned oil company, Petro-canada, and set about subsidizing Canadian ownership in the oilpatch. His 1980 introduction of the National Energy Program, which suppressed Canada's domestic oil price and transferred up to $100 billion from Alberta to the rest of Canada, also discouraged foreign investors from investing in the oilpatch, given the heavy-handedness of this public intervention. Central Canada generally approved even as Western alienation caught fire.
It took the 1981-83 recession and huge federal deficits to bring a political sea change in Canada. After the Mulroney government was elected in 1984, the National Energy Program was dismantled, Petro-canada was privatized and foreign investors returned to Canada's resource sector. After 1997, the oil industry boomed with the growth of oilsands production. Foreign investment reached a feverish pitch by 2014, just before Justin Trudeau's election.
But the Cenovus takeover of Husky is due to weakness in the oilpatch, not strength. Because Husky is owned by Li Ka-shing, it will officially show up as a transfer of money out of Canada or negative foreign direct investment. As such, it follows a long line of foreign divestment from the oilpatch that now totals roughly $45 billion, including divestments by Devon, Conocophillips, Norway's Equinor, Chevron and Murphy Oil, just to name a few. Canadian companies have also been moving out: Encana (now Ovintiv) moved its headquarters to Denver and companies like Enbridge and TCE acquired important assets in the United States and Mexico.
Yes, oil prices have fallen and investment in the sector has declined worldwide since 2014 but Canada has seen the worst of it, as its share of global oil and gas investment has fallen. As our oil and gas sector employment fell by 3.2 per cent from 2017 to 2019,
American oil and gas employment rose by 14.9 per cent, highest amongst all sectors in the U.S. economy.
It's true that the transition to a low-carbon world — however and whenever that may eventually occur — will affect the global demand for oil and gas. But even with the electrification of light vehicles by 2050, OPEC forecasts a need for US$12.6 trillion in oil and gas investments as reserves deplete over the next 30 years. The question is whether Canada, which has one of best records in environment, social and governance criteria among all oil-producing countries, wants to be a part of that world or not. For some members of the federal Liberal cabinet and caucus, the NDP and Green party, the answer is clearly “No, not one barrel.”
Killing the oilpatch investment climate might not be so bad if other industries replaced lost income, taxes and jobs. But that seems very unlikely. According to the 2020 UNCTAD report on world investment, Canada had
4.4 per cent of the stock of global foreign inbound investment in all sectors in the year 2000. Foreign direct inflows rose sharply in the next decade so that our share of the global stock rose to 5.0 per cent. But by 2019, we were down to just 2.8 per cent, well below where we had been in 2000.
According to UNCTAD, the stock of inbound and outbound FDI were both close to US$990 billion in 2010. In 2019, outbound investment stock grew US$1.65 trillion while the stock of inbound FDI almost stayed flat at US$1.04 trillion.
All of this is consistent with the decline in non-residential investment in Canada since 2014. Not just oil and gas but every industry except residential real estate has seen real investment fall, reversing a trend since 2000. But Canada is not just losing investment. It is also losing high-value-added activities that pay the best salaries and most taxes. The performance of foreign-controlled firms, as measured by value-added per employee, is double what it is for Canadian-controlled firms, according to a 2019 Statistics Canada study.
The oil and gas industry pays the highest average salaries at roughly $110,000 in 2019. This compares with $60,000 in manufacturing and $50,500 in the service sectors. Clean energy jobs, which we're told will replace fossil fuel jobs, do pay well, at roughly $77,000, but that's not much better than a truck driver salary in the oil and gas sector.
In sum, foreign investors are abandoning the oilpatch. They're abandoning Canada in general. We're losing our ability to attract foreign direct investment and the better-paying jobs it brings. And we also have a poor investment record on our own account that will constrain what our workers get paid.
The Cenovus takeover of Husky should therefore be viewed as a wake-up call for Canada. If we don't improve our competitiveness for investment, Canadians will only be losers in the postCOVID world.
In sum, foreign investors are abandoning the oilpatch. They're abandoning Canada in general.