Pushed to the margins
When Barry Munro, Ernst & Young’s top energy adviser in Canada, wrote his periodic note to his global team a few weeks ago, he started with one word: “Bleak.”
“I keep telling people that this cycle is different, this is structural,” said Calgary-based Munro, who advises oil and gas companies.
The mood in Calgary has soured considerably as declining global oil prices crush the city’s entrepreneurial spirit and force companies to freeze investments as they weather their worst crisis in decades.
But the big freeze follows a decade of sizzling growth that saw Canadian total oil production rise to 3.75 million barrels per day this year from just under 2.5 million bpd in 2005, as global investors positioned themselves in the world’s third-largest oil reserves.
During this time, Canada emerged as the fifth-largest oil producer in the world, giving the country grand hopes of becoming an energy superpower.
In recent months, however, companies have replaced talk of growth with cost-cutting and austerity, as regulatory uncertainty and impact of new environmental regulations challenge economic models.
“I am optimistic — I think there will be winners and losers as companies focus on operational excellence,” Munro said.
“Operational excellence” does not have the same ring to it as “energy superpower,” but it is a vital tool for an industry seeking to reverse a decade of cost inflation.”
“Canada and oilsands producers got stuck in a shortterm mindset and were unprepared for lower oil prices,” said Trevor McLeod, director of the centre for natural resources policy at the Calgarybased Canada West Foundation.
Oil and gas wages rose 61 per cent over the past decade, compared with Canadian average increases of 29 per cent, according to Statistics Canada. Capital investments went higher almost every year as US$100 prices allowed inflation to seep into an industry already seen as high maintenance.
“The out-of-control structure and our inability to build pipelines — those are the two big issues that continue to concern investors,” McLeod said. “If you can’t get to tide water and get world price for oil, you are getting shortchanged.”
The high costs left the new generation of oilsands developers flailing in the face of mounting costs. Sunshine Oil Sands Ltd., Southern Pacific Resources Corp., Laricina Energy Ltd. and others struggled as they experimented with small pilot projects that failed to give them scale and traction.
As the global rout bites and shareholders demand austerity, foreign investors are losing their appetite for the oilsands. French giant Total SA recently cut its exposure to the 180,000-bpd Fort Hills project under construction, joining a host of other oil majors such as Statoil ASA and Royal Dutch Shell PLC that have rolled back their oilsands ambitions.
Domestic oilsands companies have persevered and impressed with the speed of their cost-cutting initiatives. Suncor Energy Inc., Canadian Natural Resources Ltd. and Cenovus Energy Inc. have exceeded their cost-cutting targets for this year, raising hopes that major Canadian operators can keep their heads above water in a prolonged sub-US$45 oil environment.
The “lower for longer” oil prices will mean fewer but better-run oilsands companies in the long term, said EY’s Munro.
“Company management teams who are unable to have capital discipline and innovation — I don’t just mean technologically, but financially,” will suffer.
Another key impediment to growth is that the best oilsands plays have been spoken for. New projects are in more remote areas that are harder to extract, raising the barrier of entry for newcomers.
The downturn may spell the end of growth in the oilsands, at least in the medium term, but the basin fits major producers that are looking to balance their production with higher-decline unconventional plays, such as U.S. tight oil.
“Longer-term reser ves bookings of scale will be crucial for the majors and this is a problem that the oilsands solves,” investment dealer Peters & Co. said in a report.
That leaves the oilsands in play, but mostly on the bench for now — as a reserve.