Construction of Kinder Morgan’s Trans Mountain Expansion is big test for Canadian oil and gas industry – Collyer
Eric Nuttall of the Sprott Energy Fund is mad as hell, so mad he’s taking his $146.3 million energy fund out of the Canadian oil and gas industry and investing in American shale production instead. Is capital fleeing Alberta for more the welcome climes like Texas? Is there an “exodus from Canada’s energy patch”?
“We’ve taken our capital out of Canada, largely,” Nutall told BNN in a July 31 interview. “There’s such profound sentiment headwinds as a result of both provincial and federal government [measures.] Whether its carbon taxes, royalty regime changes and pipeline takeaway issues: we don’t get that in the U.S., we get the same commodity exposure, with equally good fundamentals without all that noise.”
He makes the point that pipelines are approved in Texas in six to nine months, whereas in Canada projects might take up to 10 years – assuming it isn’t cancelled at the very end like Enbridge’s Northern Gateway, a 525,000 b/d pipeline that would have transported Alberta crude oil to the West Coast.
“When you look at the majors selling out oil sands, Petronas not going ahead with LNG projects, these should all be like shocking warning signals to our federal and provincial governments, and yet there just seems to be a total apathy,” Nuttall added.
“It’s beyond my imagination why it’s not becoming more of a national priority.”
Energy economist Andrew Leach of the University of Alberta tweeted Wednesday that the Sprott “Fund has lost 50% of its investors money this year, making them experts in capital flight? Capital keeps flying off their books.”
Dave Collyer, former head of the Canadian Association of Petroleum Producers and a long-time Shell Canada executive, says Alberta certainly has challenges – building new pipelines to ship oil sands output that is forecast to rise by 1.5 million b/d by 2030 chief among them – but they are offset by the oil sands industry’s drive to lower costs using new technology and the commitment to lowering the carbon-intensity of crude oil in an increasingly carbon-constrained world.
I interviewed Collyer about his opinions on capital flight from the Canadian oil and gas industry. The interview has been lightly edited for clarity.
Nuttall did not respond to an interview request for this column.
Markham: So Eric Nuttall says he’s sick of no pipelines, sick of high regulatory compliance costs, sick of continual opposition from First Nations and ENGOs, sick of the tepid support from government. He’s just sick of all of it and he’s leaving for Texas. And how prevalent is that attitude in Calgary?
Dave: I think it’s definitely a concern. Capital will go where there are good investment opportunities. It always has and it always will. So, what does that mean for us in Canada? It means we’ve got to deal with a high cost structure, and there’s no question about that. And I think the industry is dealing with it, but we have to demonstrate we can be successful. We have to demonstrate that we get our GHG-intensity down. I’m talking about the oil sands in particular, but the cost issue applies elsewhere as well.
We have to get a pipeline or two over the goal line, and Kinder Morgan is critically important in that context. If we’re not successful with the Trans Mountain Expansion after all the work that’s gone into it and all of the I think correct positioning of it in the public domain in terms of the balance of economic considerations and environmental considerations. If we can’t get that done, we’ve got a big problem.
Are there opportunities to take some cost out of the regulatory system? Sure there are. And we should continue to look at those.
But we need to change public opinion on the fundamentals, particularly market access and pipelines. If I look at the NEB [National Energy Board] panel report, the fundamental premise is that if you talk to more people for longer periods of time you will get more support. And I think that that premise is fundamentally flawed.
You definitely have to talk to key stakeholders. You have to consult the way you are required to consult. But to say that somehow we have to do more – talk to more people for longer periods of time about more issues and somehow, out of the other end of that, it’s going to become a much different perspective on support for these projects I think is just fundamentally wrong. Trans Mountain Expansion is, frankly, going to be the test of that.
Markham: Please give me your view of Cenovus and CNRL buying $32 billion of oil sands assets from Shell and ConocoPhillips, which was widely viewed as capital flight within the industry?
Dave: I would say that there were specific drivers in each for them to exit Canada. In the case of the Shell deal, I think post-BG acquisition [Shell bought BG for $53 billion in 2016 and said it would sell $32 billion of assets to pay for the acquisition], Shell strategically needed to pay down some debt and rationalize its portfolio. I think they’ve got a corporate strategy from a GHG perspective reduce the carbon-intensity of their portfolios. They’ve got a bias to natural gas, the oil sands is higher GHG-intensity, it’s higher cost, so if you look at that package and say, “We want to rationalize the portfolio,” then it’s not surprising to me that the oil sands ended up being one of the assets that they decided to sell.
I know when they talked about the basis for the decision that carbon policies specifically were not a driver in that decision and that they continue to support the Alberta climate leadership plan.
If you look at the ConocoPhillips deal, again, they had some drivers to rationalize the portfolio more broadly and reduce debt levels. They made the decision not to exit the oil sands because they’ve still got a fairly significant oil sands presence, but to reduce their exposure. They were already partners with Cenovus on a number of the assets, so it makes logical sense that they were going to sell out to their partner.
Markham: My understanding from energy economists I’ve interviewed is that the big producers, the super-majors like Shell, rationalize their asset base all the time, especially in a low price environment. Based on your experience, is that a fair comment?
Dave: I think it is. I mean, you don’t do it every day but they’re always looking to rationalize the portfolio and focus on those things that provide the best returns. It’s not surprising to me that any of those companies would be looking at their portfolio on an ongoing basis and making decisions about where they want to invest their capital.
I think there’s some broader macro trends or issues that are relevant in all of this. If you back up and look at oil sands in particular, if you back up five or 10 years and look at a world that was projected to be supply short and where there was less focus on carbon intensity, the notion of investing in long-life, stable assets that you could count on for the next 40 years even at their [high] cost structure, had a lot of appeal. and I think that’s what frankly led to a lot of the international companies looking to invest in oil sands.
Now, the world’s changed over the course of the last decade or so. Now, it looks like we’re going to be supply long for an extended period of time in a world of lower prices with more carbon risk over the longer term. And so some of that portfolio focus that led people to invest in oil sands in the first place weren’t necessarily that familiar with Canada. Some of that’s changed in the last 10 years and I think it influences the views of at least some companies as to whether they want to be here or not.
We’ve still got a relatively high-cost business structure in Canada. We still have market access challenges and we’re having trouble getting pipelines built. There is no question that it’s more difficult to get things done in Canada than it is in some other countries with which we’re competing. Not all, but some.
And if you look at the challenges in LNG projects or pipeline projects where you’ve got First Nations opposition, local community opposition, ENGo [environmental non-government organization] opposition, I would say mixed support from government – some supportive, some not – were an issue post the BC election.
If you combine what I would characterize as the basic economic challenges – cost competitiveness and market access, – with some of these other issues sort of compounding the challenge and it does certainly raise some competitiveness issues. We have to figure out how to get around those if we’re going to attract capital.
So, I think the fundamentals are more an issue with respect to where people choose to put their capital or not than are some of the concerns about government policy. Not to say government policies aren’t a factor and a consideration that people look at, but I would start with the fundamentals and to me, cost structure in a world where prices are going to be lower for longer, challenges around market availability and sort of the broader dynamic around public support for large energy projects are important considerations that go into the decisions that people make about where they want to invest their capital.
Markham: One of the points the economists I talk to make is that when a basin opens up, or there’s a big new development in the case of the oil sands, then the majors are often the first guys in. They’ve got the capital, they’ve got the appetite for risk, they can manage all of that. But once the basin is developed and becomes more mature, then the majors sell out to local companies that are maybe focused in terms of their expertise and their knowledge of the geology – and maybe a little more comfortable with regulatory issues. To what extent is that process at play here?
Dave: I think we’re seeing it with the last three significant acquisitions, if you will – Suncor with [00:08:28], CRNL with Shell and Cenovus with ConocoPhillips, they all reflect exactly what you just said. Large, local players buying up international interests. I think there are two or three reasons for that: one is, frankly, the international players have more flexibility in where they put capital. So it’s easier for them to come and go.
Suncor and Cenovus and CRNL don’t have a big presence internationally, which makes it harder for them to move capital around. Their business is largely here. Those companies, because they are here and they know they’re going to be here for the long-term, are more committed ways to growing their business and their maintaining presence here and probably to your point, are more willing to accept the risks in in the more focused portfolio that they’ve got.
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