CRUDE AWAKENING
The year-long meltdown of oil prices has fuelled widespread concern in Alberta and an emerging consensus that the industry is suddenly at an unexpected crossroads. Claudia Cattaneo reports,
They were a diverse group, about two dozen of them, a mix of retired oil and gas executives, climate-change advocates, former politicians and academics. Some had been in Alberta forever. Others less than a generation. And they had gathered in a living room in northwest Calgary in mid-September because they all felt it: the growing disquiet over the future of the province’s energy industry, and particularly its workhorse, the oilsands.
In Alberta these feelings are deeply personal. Emotions were raw; anguish that the crash in oil prices has put Alberta’s prosperity in real jeopardy; grief about a changing climate; resentment over outsiders interfering in local concerns; the fear of knee-jerk policy and business moves. The views were diverse, but one widely-held view is that Albertans being most directly affected are the furthest away from the decisions being made. Like workers in a rust-belt factory town waiting for news of whether they’ll have a job next year.
“Citizen voice on a big issue like Alberta’s energy future is largely missing in Alberta,” said Donna Kennedy-Glans, the former provincial MLA and corporate lawyer who organized the gathering as part of the launch of Viewpoints Alberta, or ViewpointsAB.ca.
“We make decisions in corporations that are largely topdown. At the policy level in government, decisions are open for public input but most people are intimidated to present to an expert panel,” she said. “A lot of the advocacy that happens is very focused and really isn’t engaging the wider public. We wanted a space where different perspectives could be shared by Albertans on what they thought about Alberta’s energy future — and these are the owners of the resources.”
Her organization’s immediate goal is to ensure the voices of rank-and-file Albertans are heard at the Paris UN climatechange summit in December, which could spell even more trouble for the already beleaguered oilsands if it somehow succeeds in producing an aggressive, global greenhouse gas reduction regime.
The group’s long game is to “create the space for an energy vision to emerge in Alberta, between catastrophe and complacency,” said Kennedy-Glans, a Red Tory who left politics before the last election.
From restaurants to boardrooms, kitchen tables to social events, Alberta is abuzz with difficult conversations about the future of Alberta’s once-prized oilsands deposits — the world’s third-largest accumulation of oil and for the past decade the stalwart of the energy sector and of Canada’s economy. And what it means for a province that was once promised it had a future of virtually unlimited wealth and security just waiting to be dug and steamed out of the northern earth.
The consensus today is that the industry is suddenly at an unexpected crossroads, that its meltdown over the past 10 months is leading to long-term changes, and that the next chapter of Alberta’s oil future is a big unknown.
It’s a real question now whether the capital-intensive, high-cost oilsands can overcome the adversities that have sprung up in front of them: oil prices less than half of what they were last year, competition from a whole new bounty of American tight oil, fierce campaigns against the oilsands and bitumen pipelines, higher expectations to reduce greenhouse gas emissions, and looming changes in royalties by the province’s new NDP government. Could they end up a stranded resource, with production plateauing when projects currently under construction are completed by 2020, leaving the vast majority of all that oil wealth in the ground, even as the world’s thirst for energy expands.
Production growth from the oilsands is expected to continue, albeit at a slower pace, for the next four years, or until the end of the decade. We can see at least that far ahead.
Investment dealer Peters & Co. spelled out the first wave of new production in a recent report: the second phase of the Kearl project owned by Imperial Oil Ltd. and Exxon Mobil Corp.; Phase 1 of the Sunrise project owned by Husky Energy Inc. and BP PLC; Phase 2 of the Surmont project owned by Conoco-Phillips and Total SA.
Then will come the second wave: the Fort Hills project owned by Suncor Energy Inc., Total and Teck Resources Ltd.; and Phases 2 and 3 of the Horizon project owned by Canadian Natural Resources Ltd.
There is no third wave in the queue.
Many projects have already been delayed: Foster Creek Phase H and Christina Lake Phase G, owned by Cenovus Energy Inc. and Conoco-Phillips; the Kirby North Phase 1 project owned by Canadian Natural; the RISER expansions owned by MEG Energy Corp.; and the Carmon Creek project owned by Royal Dutch Shell PLC.
It will take higher oil prices and favourable fiscal terms for more projects to be green-lighted, Peters & Co. said.
“Overall, we expect that production will grow from 2.1 million barrels a day today, to 2.75 million barrels a day by 2020,” the firm predicted.
It was supposed to be 3.3 million barrels a day by 2020 — the forecast before oil prices crashed a year ago. And it’s a long way away from a longerterm target of five or six million barrels a day industry was aiming to produce.
With a royalty review by Alberta’s NDP government this year that could result in higher payments to government by 2017, higher provincial corporate taxes, higher carbon costs and tighter environmental regu- lations, launching new projects will be harder than in the past.
Peters says capital spending likely peaked in 2013 at $31 billion, fell to $28 billion in 2014 and is probably falling further to the $16-billion to $18-billion range per year in the foreseeable future, largely spending to maintain what has already been built rather than for new projects, unless conditions improve.
Rafi Tahmazian, senior portfolio manager and director at Canoe Financial LP, an investment-management firm based in Calgary, isn’t waiting around for that to happen.
He believes the oil price is at or near a bottom, which normally should be some relief for Alberta, but he has moved his cash aggressively into the U.S. oil industry. In Canada, he’s focusing on growing junior and intermediate companies. He’s standing down on the oilsands.
He’s convinced the deposits will be targeted for increased royalties by Alberta’s NDP (the party frequently argued for slowing down the oilsands, and higher royalties, before winning government) and even more punishment if one of the moreleft parties wins the Oct. 19 federal election. It all represents too much investment risk, he said.
The oilsands are so challenged they could decouple from producers outside Canada and end up sidelined from the rally if oil prices rebound, he said. In Tahmazian’s view, their appeal started to fade when Ottawa restricted foreign investment three years ago, after China’s Nexen Inc. takeover, starving the oilsands of necessary capital. With campaigns against pipelines, the oil shock and now the royalty threat creating a “tsunami” of adverse conditions, he can’t see a turnaround for years and believes the waves of layoffs will continue as projects are completed.
“Definitely any projects that were planned but not implemented are dead,” he said. “It’s just a very troubled industry.”
The devastation from the pullback is already widespread. Alberta flipped from high economic growth to a recession in less than a year. In Calgary, where corporate headquarters are based, an estimated 3,000 to 4,000 fewer cars and 10,000 to 15,000 fewer workers are commuting daily to the core due to widespread layoffs, said Greg Kwong, Alberta regional managing director for CARE Ltd., a commercial real estate company.
There is more subleasing space on the market than at any time in the past 20 years, and the overall office vacancy rate is nearing the 17-per-cent high point set in 2008. It started with backroom, accounting and clerical space late last year. Now nothing is being spared. From senior vice-presidents’ offices to modest cubicles, it’s all being thrown back into the rental pool. Employees still working are being squeezed into smaller areas.
“The oil business went through such a growth phase that companies were anticipating growth three, four, five, 10 years down the road, and took office space accordingly,” Kwong said. “Unfortunately, when the music stopped, they had committed a space they didn’t need. Now they had to throw that on the sublease market.”
A minority of firms have opted to position themselves for an oil-price turnaround, reasoning that it can’t get any worse, Kwong said. But the majority have hunkered down in a “capitulation” stage — accepting that this downturn is about “lower-for-longer” oil prices. In Fort McMurray, the northern Alberta community surrounded by oilsands plants (and which, until last year was struggling to keep up with demand for staff, housing and infrastructure) brand-new offices are sitting empty. The occupancy rate for rental properties is at a record low.
Only one oilsands project, Fort Hills, is still in construction, said Maria Noorani, manager of development integration and research at the Regional Municipality of Wood Buffalo, where Fort McMurray is located.
Everything else is either progressing very slowly or is at a standstill for the moment, to be reviewed in 2016 and 2017, depending on oil prices, she said. Unemployment has soared to 7.2 per cent, while the area’s young population continues to increase. According to preliminary results from its just-completed census, the region’s combined permanent and shadow population has risen about five per cent in the past three years, to about 125,000 residents in Fort McMurray and nearby centres.
“Everyone is making conservative budgets,” Noorani said. “At the municipality we have decided that projects requiring major capital that are not totally necessary will not go ahead.”
Layoffs, project cancellations and corporate losses are the most visible aspects of the meltdown. Scott Sharabura, associate principal at consultancy McKinsey & Co.’s Calgary office, said less visible but important changes also underway: a restructuring of the business to fit shoestring budgets — something oilsands companies haven’t had to do in 15 years.
Until now, their focus was on technical innovation to get barrels out of the ground, he said. Now it’s all about commercial, organizational and cost innovation. A big area of focus is their relationship with service companies, which account for 75 per cent of total spending at most oil companies.
“The focus so far has been on tough price negotiations, but to survive in a world of US$40 oil, developers and suppliers will need to put their heads together,” Sharabura said.
The business is looking more like a long-term bet, he said. Players with deep pockets and a lot of patience will survive, while companies at risk are the ones that hesitate. “A crossroad doesn’t mean a dead end. It means you have to choose which way to turn. Different companies will choose different paths. Some companies will emerge stronger. Some familiar names will probably disappear. And we may see some new nameplates in town.”
As far as Cody Battershill is concerned, a lot more than that needs fixing. At the top of the list for the Calgary real estate agent and leading advocate of oilsands development is upping public relations efforts to counter the environmental movement’s attacks.
While cash-strapped oil companies slash budgets, the antioilsands movement has been
gathering momentum, as demonstrated by the expected rejection of the Keystone XL pipeline from Alberta’s oilsands to the U.S. Gulf by Barack Obama, and this week’s opposition to the project by Democratic presidential hopeful Hillary Clinton.
Battershill founded CanadaAction.ca in 2010 after growing incensed over the antioilsands campaign by Britishbased soap and shampoo company Lush Cosmetics. Since then, he has poured more than $100,000 of his own money to publicize the upsides of the oilsands and proposed oil pipeline projects such as Northern Gateway and Energy East.
Battershill believes his efforts are also gathering momentum, with politicians of all stripes — including Alberta’s NDP — getting behind it. His non-profit undertaking is supported by 700 volunteers and 200,000 followers on Twitter, Facebook and Instagram. It participates in trade shows, organizes events, and sells “I love oilsands” T-shirts, buttons and stickers.
“There have been a lot of failed campaigns and we need to go into a completely new direction if we hope to succeed in the future,” Battershill said, noting the oil industry’s own efforts have been hampered by too little co-ordination, too many unchallenged claims, and industry leaders censoring themselves from what needed to be said.
The industry, he said, has failed to understand what the oilsands are up against: a sophisticated opposition campaign amplified by the clever use of social media, but whose funding and organization is hidden from public.
Much of the assault has been organized by a single, obscure public relations firm, Communicopia, based in British Columbia’s Salt Springs Island, he argued.
On its website, the firm takes credit for helping the “tar sands campaign … raise their digital game, shift the narrative, and put opponents on the run,” on behalf of green groups, such as the Natural Resources Defense Council and Greenpeace.
“Tar sands, pipelines, and climate change have remained one of the top political stories in Canada and the U.S.,” Communicopia boasts. “The Keystone climate movement continues to grow every day, every major Canadian pipeline proposal has been delayed or is under threat, and due to both global economic conditions and the lack of new pipeline infrastructure, multiple tar sands mines have been cancelled.”
Battershill, a top Re/Max agent who for the first time in a dozen years in the real estate business is watching clients sell their homes and move away from Alberta, believes “there is no greater example of a fake grassroots or Astroturf campaign.
“We need to stand up for ourselves, and we need to find and engage and motivate the everyday Canadians that are part of this industry, and that benefit from our natural resources from coast to coast,” he said.
Chris Seasons led construction of the multi-staged Jackfish oilsands project — one of the region’s top in-situ oilsands performers — when he was the president of the Canadian unit of Devon Energy Corp., a company with large exposure both to Canada’s oilsands and U.S. tight oil.
He’s not prepared to count out the oilsands just yet. Industry is just scratching the surface in terms of coming up with technologies to reduce costs and lessen environmental impacts. They are so large and so well regulated next to other oil-producing regions they will continue to attract industry attention, he said.
“If you are going to choose where you are going to have responsible development of oil, this is one of the places you go to,” he said.
But he concedes the emergence of tight oil over the past three years, particularly in the U.S., makes it harder to return to high rates of growth.
Tight oil costs less and is more flexible, explained Seasons, now a senior adviser at ARC Financial Corp., a top private-equity manager focused on energy. If oil prices fall, oilsands projects are hard to stop when they are in development, while tight-oil drilling can be deferred.
But tight oil has its own unknowns, said Seasons, including whether the main production areas have staying power. “You have the Permian (basin) going well, you got the Bakken going on the longest, you got the Eagle Ford. Is there another basin that has yet to be developed or found? That is the question,” he said. “At the rate they have been adding production, how long can that go on before it starts to roll over, regardless of price?”
After four decades in senior roles in Canada’s oil and gas industry, including as CEO of Trans-Canada Corp. and then of Talisman Energy Inc., Hal Kvisle takes the long view. He proposed the Keystone XL pipeline before retiring from Trans-Canada, and he isn’ t overly concerned about oilsands activism forever standing in Alberta’s way, because he believes the noise will eventually subside and logic will prevail.
“When the dust settles, in Western Canada we will have suffered for 15 years because of this irrational delay process around Keystone XL. But eventually that pipeline is going to be built,” he said. “It connects the world’s largest source of stable crude oil with the biggest refining market in the world, and traverses the most benign pipeline territory I have ever seen.”
Kvisle has seen all this cost slashing, restructuring and consolidation before: It is, he said, no different from what happened in past oil busts and is a useful and healthy process. The sector will be a stronger competitor when the cycle turns, he said.
“When prices were US$110 a barrel, I wasn’t an optimist,” Kvisle said. “In circumstances like this, one should shift from being neutral to being a little optimistic. We should have been pessimistic a year ago, but that ship has sailed.”