Over the past two years Canada, and specifically Alberta, have seen an unprecedented exit of capital. This has been caused by several factors – topping the list of course is the collapse of oil prices.
Of course the oil industry has been hit the hardest, but why have multinationals left Alberta and western Canada when, concurrently, they have maintained (and in some cases increased) operational activity in other parts of the world? There are three reasons for this: higher operating costs, limited access to markets for their product and an unfriendly political climate.
Before breaking these three factors down, lets list some examples of multinational oil companies who have either left or substantially reduced their exposure in western Canada.
- In February 2014 Devon Energy sold $3.125 billion of seets to CNRL
- In March 2014, Apache sold a large portion of their Western Canada assets for $374 million
- In September 2014 Statoil put an oilsands project on hold for 3 years as it grappled with rising costs
- In December 2014, EOG Resources divested the majority of its Canadian assets
- In February 2015, Shell withdrew an application for a new oilsands mine
- ConocoPhillips sold a massive land package in November 2015
- In April 2016, Murphy Oil sold its 5% interest in Syncrude to Suncor for $937 million
- In June 2016 Chevron announced it was looking to unload more assets in Western Canada
High Operating Costs
It’s no secret Western Canadian oil has tremendously high operating costs. This is due to several factors: deep drilling in parts of the Western Canadian Sedimentary Basin, tougher weather conditions, heavier crude oil in some parts and relatively high labour costs. Canadian crude currently is among the world’s most expensive to extract. A majority of producers in the area are now focused purely on survival vs. growth.
High-cost Alberta producer Lightstream Resources, in the first quarter of 2016 had production expenses accounting for 46% of the realized sale price per barrel (not including royalty charges or transportation expenses). This is in stark contrast to other basins in North America.
In Texas, the Permian basin is widely considered to be one of the most attractive basins in North America. Diamondback Energy, which focuses only on the Permian basin, had production expenses accounting for 29% of the realized sale price per barrel (not including royalty charges or transportation expenses).
Other United States plays are equally as good as the Permian if not better. Continental Resources Inc. says its best wells today are in the Oklahoma Stack play. The company says its drilling there can yield a 75% return with oil at $45 a barrel.
“A common thread running through both segments [oilsands and shale/conventional] is the high cost of labour, distance to markets and lack of pipeline access that discounts the value of Canadian oil,” says Yadullah Hussain reporting for the Financial Post. “Add the sniping between provinces on pipelines, lengthy reviews of major projects and new regulations around climate-change policies, and the price tag of operating in Canada can be daunting.”
Access to Market
With limited pipeline availability, Canadian crude oil trades at discounts to WTI and Brent from $5/bbl all the way to $15/bbl. There is likely no country on the planet that has greater difficulty getting its product to market than Canada. Even with depressed prices, there are still times when a glut of oil is present due to pipeline constraint. Even looking at CEPA’s pipeline map it’s easy to see that for a country which produces ~4 mmbbl/d, there is clearly not enough pipeline infrastructure.
Since the Alberta NDP took power, Albertans have seen many companies raise alarms over several key decisions. For example, several companies put plans on hold over the impending royalty review earlier in the year, and the newly instituted carbon tax will only increase costs for oil and gas companies. Increased regulations and taxes have simply made Alberta a less profitable venture for oil companies. For multinational oil companies, capital allocation is global and will seek, all else being equal, the highest investment returns.
Furthermore, it is impossible to ignore the blatantly anti-oil and gas sentiment which several members of the provincial NDP have showcased. High ranking ministers have demonstrated against pipelines, written forwards for anti-hydrocarbon books, and have made some fairly troubling statements against approving pipeline projects. Even Premier Notley stood up in the legislature and stated she was opposed to the most viable pipeline option which would move nearly 800,000 bbl/d to the US: Keystone XL.
Any one of the above issues would pose a problem for any oil producing jurisdiction. When grouped together, Western Canada (and specifically Alberta) has recently positioned itself as a difficult region for multinationals to do business.
With files from James Rose