‘Cleansing’ of oil industry foreseen
Former Suncor chief sees low crude prices lasting four years — or more
Rick George doesn’t miss being the chief executive of Canada’s biggest energy company. He saw his fair share of downturns during his 21-year reign as CEO of Suncor Energy Inc., and fought off opposition and adversity to build one of Canada’s largest companies.
Today, his successor, Steve Williams, finds himself in a similar situation amid a price collapse that has seen oil tumble from $115 US per barrel in July 2014 to $52 today, forcing Suncor to cut 1,000 jobs and reduce capital spending by $1 billion. On top of turmoil in the markets, there are also climate change issues threatening the industry and unprecedented activism putting pipeline projects at risk.
“It’s a job that never ends and one that can always be improved upon,” George says, noting that he has always enjoyed a good relationship with aboriginal and environmental groups.
As he made his name in the oilpatch, George emerged as the industry’s de facto spokesman, riding the oil price roller-coaster for over two decades. Now, as chairman of Osum Oil Sands Corp. and PennWest Petroleum Ltd. — away from the rigmarole of running the day-to-day affairs of a company — he has the luxury of taking the long view.
The current oil downturn is going to last four years, “maybe longer,” he predicts.
“Companies are pulling capital to protect balance sheet. And even when we come out of this, they are going to be pretty conservative moving forward in terms of net capital investments, so you don’t instantly go back to conventional growth rates,” George said in a phone interview.
Since the last downturn of 200809, a lot of capital was spent in the industry that “should not have been spent and was not spent wisely,” he said.
“Players with weak assets spent capital on projects they probably shouldn’t have — and we see that in a number of oilsands companies in Canada, but also in other plays in [U.S.] shale that are not in the sweet spot.”
“All of that comes home to roost and, in some ways, a downturn like this is a bit of a cleansing of the industry.”
A dramatic 50-per-cent plunge in oil prices from their highs of last summer has forced companies to wring out excess fat from their cost structures. Wage freezes, job cuts, and curtailed capital expenditures have been the mantra as industry bosses hunker down for a prolonged downturn.
The International Energy Agency has cut Canada’s production growth forecast by 430,000 barrels per day by 2020, and expects new, unsanctioned projects to be delayed.
But George says oil prices will remain unsettled until it comes to a price point where “offshore, oilsands and a number of the extensive and expensive oil sources” are once again economic to invest in.
“I don’t see a bounce back to $100 crude, but I could easily see it back to $70 in the third quarter. There are analysts eyeing a U-shaped or V-shaped recovery. I am more somewhere in between the two — it’s not going to be a long recovery period, but it’s also probably not a sharp recovery.”
In the meantime, the cleansing cycle is helping the industry control costs, which should please George who took an axe to slash oilsands costs at Suncor in the 1990s by $3-to-$4 dollars per barrel — a remarkable achievement at a time when oil was trading at $20 US per barrel.
“The industry itself is not really good in a boom period at controlling costs and because we don’t have an oversupply of welltrained people, these downturns actually help the whole industry in retrenching and focusing on the cost structure, rather than just increase in volumes.”
But George, who was instrumental in merging Suncor with PetroCanada to create a $43-billion goliath in 2009, does not believe a similar, industry-rattling deal is in the offing today.
“The big companies in Canada are well-positioned to survive this [downturn]. So there is no really big thrust. You are going to see M&A activity in the service companies, and consolidation and cost saving will take place. You will see it in the smaller and medium-sized companies.”
His private equity firm, Novo Investment Group, is also eyeing deals, George says.
“At the bottom of the cycle there is going to be great opportunity for the people with motivation and cash.”
Beyond the current downturn, the Canadian oilpatch faces structural challenges. Pipeline approvals are entangled with environmental issues, complicating the regulatory process.
Does he believe that Canadian oilpatch CEOs have failed to get their message across?
“The industry has always played catch-up on the issue, as companies are bound by facts, while the detractors of the industry are never bound by those same boundaries,” George says.
“In a way, oil has always been an easy PR target, a little like politicians and bankers. And many times the industry has not done a really great job getting its full message out to the public.”
The former Suncor CEO believes TransCanada Corp.’s Alberta-to-Houston Keystone XL pipeline will eventually be approved, but the country needs to move away from its southern neighbour’s orbit.
“The best thing for Canada as a country is to get its oil and gas to the West Coast — that’s a big economic factor for this country. Then you will be much less dependent on the politics of the United States and are not captive to the Americans.”
The best thing for Canada as a country is to get its oil and gas to the West Coast — that’s a big economic factor for this country.