Not all multinationals are fleeing the oil sands, and the ones that are have other monkeys on their backs

In a series of recent transactions, multinational oil companies have sold off their positions in Canada’s oil sands. There has been all sorts of speculation about what this means, because that is what we do – we have to assign meaning. Some were angry at Shell, some were excited that it meant more of Canada’s resources in Canadian hands, and some seized on the transactions as proof that the provincial government is ruining everything.

These little viewpoints tend to be over dramatic because they fail to rise above the local landscape and view things the way global mega-corporations would. To be angry at Shell is kind of an insular and insecure response by taking it as something personal and not viewing the bigger picture. To be excited that the resources are in Canadian hands is a bit dramatic too; it is hard to argue that CNRL owning a bigger slice will provide a bigger benefit to Canadians than Imperial Oil’s ownership of Cold Lake and Kearl assets. Imperial has had a world-class research lab in Calgary for decades (maybe it’s gone now) and has done more to develop oil sands technology than anyone, and they are 70 percent US owned.

The attacks on Notley are drearily familiar and come from the likes of the legendarily narrow minded Kevin O’Leary, the world’s greatest (and only) Kevin O’Leary salesman, who blamed Shell’s decision on Notley’s policies. As has been pointed out by others, Shell’s current strategies and actions have as much in common with Notley’s as any other political party. Notley’s policies may well have been unhelpful at this stage of the cycle, but Shell has dealt with every crazed regime in the world from Russia to Nigeria, and it is doubtful they were bowed by a short-term swing in a provincial governmental bias.

As a more useful starting point, imagine the forces acting on these corporations as a whole, rather than as we see it as a big slice of Alberta’s (and Canada’s) economies.

Shell is a truly global company with a market capitalization of around $230 billion. It operates in nearly every country, but more importantly is headquartered in the Netherlands, a country that is proposing to ban gas and diesel powered cars within 8 years. Consider the pressure the company would be under in its home jurisdiction to move towards, if possible, a cleaner burning fuel such as natural gas.

Statoil is similar. In fact its headquarters are in the only other country to (thus far) announce plans to move completely away from petroleum-powered vehicles. While not outright banning them as first reported, Norway is tilting the incentives table extremely heavily in favor of electric vehicles that will have the same effect, or close to it. Statoil also has massive renewable energy plans not yet seen here in North America, such as their expectation to spend 15-20 percent of expenditures on “new energy solutions” by 2030.

The pressure in the home countries is therefore quite intense, and as global companies that no doubt factored into acquisition and disposition activities. In Shell’s case, asset dispositions are front and center anyway after the company acquired BG for $52 billion. At the deal’s closing, Shell indicated that tens of billions of dollars of asset sales were coming, and also pointed out that the combined entity would need $60 oil to break even. Guess which highly valuable (and strategically backwards) asset has trouble meeting that hurdle.

Shell’s oil sands properties do represent a massive deposit, but are in a bit of a straitjacket. The company needs $60/barrel oil to be successful (especially the high cost oil sands), but if that price does materialize for any length of time, Canada will soon become pipeline constrained (even with Keystone XL and Kinder Morgan expansions approved). On the other hand, futures prices for oil are ridiculously low, with a forward 2021 price for oil recently under $50. If that is the planning yardstick, the oil sands don’t look attractive either.

And finally, to make it all crystal clear that factors beyond Canada’s competitiveness are at stake, Shell mentioned recently that 10 percent of executive bonuses will be tied to how well the company manages greenhouse gas emissions. The executives could practically calculate the amount of money that would go directly into their jeans from the sale of anything related to the oil sands.

Within those parameters – companies moving towards natural gas or renewable energy, requirements to sell assets, and properties that fetch a good dollar despite low oil prices – the oil sands properties become a very likely sale target.

That doesn’t at all mean that Shell is done with Canada, or even the oil sands necessarily. The majors come and go, depending on what opportunities arise and to a certain extent what the competitors are doing. For such big beasts they often exhibit a sheep-like demeanour. Outsourcing administrative functions, pursuing the hottest prospects…they tend to follow each other, in much the same way that they got into the oil sands in the first place. They are like a big migratory herd looking for food; they might be gone for a while but if the eating is good they will one day return again.

In the past, Shell has become disinterested in Canada and wandered off, only to return. Once one of the largest landholders in the WCSB, Shell embarked on a massive divestment spree in the 1990s (along with every other major), then returned with a massive purchase of Duvernay Oil for $6 billion in 2008, and once again built a sizeable position in W5 Alberta.

The oil sands are bit different than regular plays. The massive scale of investment required meant that only the biggest companies could do it properly, and with oil at $100 they all moved en masse to the region. The remote locale also meant that major cost escalation played havoc with economics as everyone moved in.

But one advantage next time around is that a lot of the infrastructure for the next phase of development is now there. Roads have been built, pipelines laid, and many supporting businesses have established roots. The next time oil prices head for the heights don’t be surprised if the herd returns.

The oil sands remain the largest proven deposit of oil available to the free market, close to the world’s largest consumer, with no arctic barriers, offshore complexities, or pirate problems. The cycle will happen again, as long as the world needs its 95 million barrels per day fix.