With Cenovus yesterday announcing the blockbuster deal to buy the majority of ConocoPhillips Canadian assets (which primarily resided in Alberta) for $17.7 billion CAD, the exodus of multinational oil companies from Alberta continues.
Since 2014, there have been fourteen massive deals done by multinationals to leave Alberta’s energy industry. Deal size for each of the fourteen has been valued at anywhere from half a billion dollars to yesterday’s largest yet of close to $20 billion.
It may be encouraging that the companies on the other side of each deal have mostly been Canadian companies. For the exiting multinationals, it is important to note that they have the ability to target any basin in the world. By choosing to sell their Alberta assets, these actions are most certainly not a vote of confidence for the province’s most prolific industry.
To recap, the deal includes ConocoPhillips’s 50 per cent interest in the FCCL Partnership, an oilsands venture between the two companies in northern Alberta, as well as the majority of ConocoPhillips’s Deep Basin conventional assets in Alberta and British Columbia. Combined, the assets have forecast 2017 production of approximately 298,000 barrels of oil equivalent per day.
Over the past three 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.
Yesterday’s blockbuster deal comes on the heels of other noteworthy divestitures from Alberta energy assets. Most recently this was evidenced by Shell and Marathon’s decision to largely exit Alberta’s oilsands. Furthermore, in the fall of 2016, Shell sold close to $1.4 billion worth of Deep Basin and Montney assets to Tourmaline. And in December, Statoil announced it was selling its Thermal Oil assets to Athabasca Oil Corp, and shortly thereafter, Koch Oil Sands sent a letter to Alberta’s Energy Regulator requesting the cancellation of a SAGD project on account of the province’s burdensome red tape and carbon tax.
Of course the entire oil industry has been hit the hard, 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.
And as a reminder, 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
- In December 2016, Statoil sold its Canadian Thermal Oil assets to Athabasca Oil Corp for $582 million
- In October of 2016, Koch Oil Sands issues letter to AER requesting canellation of SAGD project
- In December of 2016, Shell sells Montney and Deep Basin assets to Tourmaline for $1.4 billion
- In March 2017, Shell divests oilsands assets to CNRL for $7.25 billion
- In March 2017, Marathon divests oilsands assets to CNRL for $2.5 billion
- In March 2017, ConocoPhillips divests majority of Alberta assets for $17.7 billion
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.
Several high-cost Alberta producers, 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 BOE Report