Amid the COVID 19 oil price crash, the amount of current oil and gas assets with recoverable reserves for sale globally has ballooned up to over 12.5 billion boe, according to a recent Rystad Energy report.
While some companies are divesting low-priority assets, others are considering whether this may be the right time to acquire assets at a low price. Certainly a recent IHS report stating that global oil demand has recovered to 89 per cent of what it was before the COVID-19 pandemic crushed oil markets and oil prices encourages interest in oil exploration and production. The energy research firm is now estimating that oil demand growth would recover to between 92 per cent and 95 per cent of pre-pandemic levels even without a vaccine by the first quarter of 2021. They report global oil demand has rebounded primarily on the back of European and Asian economies reopening. In addition, production from the U.S. is set to decline sharply — by three million barrels per day this year. Meanwhile, oil supply in Canada & abroad is rebounding and could potentially gain some market share.
If global demand is recovering and the Canadian Federal government continues to layer on more regulatory complications and cost on the domestic industry, does it make sense for Canadian companies to operate abroad to serve global demand with O&G sourced from outside Canada? While Federal aid programs have been created to provide liquidity to small- and mid-sized companies, and the large employer emergency financing facility (LEEFF) is available to larger oil and gas corporations, industry points out very few companies have qualified, with just a handful obtaining EDC and BDC assistance. It is true Canadian E&P companies, in general, are struggling with liquidity and try to survive through the severe price collapse caused by COVID-19 -but are global opportunities realistic for a few, well placed Canadian E&Ps? According to Tony Cioni, Founder – CITO Energy Group, specializing in domestic and international exploration and production development “going international” for Canadian companies means they can achieve growth by diversifying geographically. He notes there are similar opportunities for high-tech oil service firms looking to get to work outside of Canada.
“For Canadian companies, diversification means different things for different industry segments. Ten to fifteen years ago in a conversation about diversifying outside Canada, the question that would come up is “Why would I bother? I have huge sales contracts with several majors in Alberta. It just sounds complicated.” However, if you are an oil service company, many of your domestic clients have been reduced and many are no longer operating in Canada. Since you are not selling to those clients, you might have to diversify by pivoting your technology to another industry sector. But even if you pivot to another sector, the fact of the matter is that Canada has become a good jurisdiction to prove an idea but not a good jurisdiction to commercialize. Aside from Canada’s energy policy issues, we are just a small market. So ultimately you will still arrive back at the international question for growth and it may be best to diversify geographically.”
As a company considers risk, some of the categories of risk to manage when considering whether to go international require keen insight into a prospect country’s laws, government regulation, and business practices as well as culture. Here are just five of the many considerations.
- Corporate structure or capital requirements- any restrictions or a state prerogative precluding ownership or ownership above 49%? For example, Saudi Arabia will not permit you to set up a wholly owned subsidiary for direct sales into that market.
- Local laws- do they inhibit expatriating profits or give preference to locals or allow your business to protect its intellectual property? This crosses over with local market risks, such as forex risk of doing business in Brazilian Reals. Or bans on hard currency transfers, as was seen after the Asian currency crisis.
- Choice of Law/dispute resolution- Can you choose governing law other than local law? Can you designate foreign courts or international arbitration for dispute resolution in a neutral venue?
- Labor- Can ex-pats enter the market – Will law or politics require your interface with local labour unions, social/pension schemes?
- IP/IT- If you access through the cloud in that country, do you provide access to all data & IP in your system worldwide?
How does a company analyze and decide what country they should even think of going to? For example, there are serious issues going into a country with extremely high inflation. Consider inflation in Argentina. It was 34 percent in 2018, expected to rise to nearly 53.4 percent in 2019. In regards to their IMF debt this year, they agreed to a restructuring of debt as the country was “ hobbled by recession long before the pandemic” according to a Washington Post article which reports Argentina has also been involved in talks with the International Monetary Fund about restructuring $44 billion in debt owed to the IMF.
Pat Cunningham, also of the CITO Energy Group notes that ”As a cultural or institutional question, if the state cannot pay its bills, can a company expect their bills will get paid? Does a large service provider like a Schlumberger or Haliburton do well there? Do we know of companies that have been brought in as a subcontractor to a large service provider with that provider shielding them? It’s not that you shouldn’t go to that country– but there are perhaps four scenarios where it’s not as risky. And if you’re not one of those four scenarios, you’re potentially taking on a ton of risk.”
So, what does diversification mean to an Alberta E&P company of say 30,000 boe per day? Cioni advises it comes down to a critical question – “Does the company have the DNA to go international? An organization needs the in-house staff and the technical and operational expertise that lends itself to operating in another country. They need to be able to determine the stability of the investment proposition.”
When deciding where you go, Cioni says it is all about the right approach:
“If you go to a trade information session about a country, it might look really prospective. The role of Government trade offices is to make information available for presentation, but when it comes to actual risk identification and mitigation, you need the help of folks who know how to execute in those environments. Those experts can help you pick a country that makes sense for your product, based on your risk/reward profile. After that assessment is complete, those experts can help you actually execute on your strategy.”
Maureen McCall is an energy professional who writes on issues affecting the energy industry.