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Canada’s receptive oil patch in line for trillions in new investment

The first trillion dollars came over one hundred years. The next trillion is likely to take only a dozen.

Last week, Western Canada's oil and gas industry celebrated its centenary in Turner Valley, Alta. Since the time a big metal spike repetitively bashed a hole in the earth at an oil well named Dingman #1, Canada has grown to be the world's fifth-largest producer of crude oil and natural gas.

To explore and develop Canada's hydrocarbon resources took $1.2-trillion of investment. Our feature chart this week shows the annual investment pattern adjusted for inflation and expressed in real, 2013 dollars.

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At the current rate of investment, which is between $60-billion and $70-billion a year for upstream spending, the next trillion dollars will find its way into the ground in a decade and a half or so. But it may be faster than that, because of the attractiveness of Canada's developed assets – assets that are increasingly being recognized by a world desirous for energy security and stable investment.

The first $1.2-trillion did more than just create productive capacity (currently 4.2 million barrels a day of oil and 14.2 billion cubic feet a day of natural gas). The invested capital established a large-scale resource platform off of which the next trillion will come much faster. That's because Canada's oil and gas infrastructure goes beyond holes in the ground. Roads, airstrips, electrical grids, distribution systems, skilled labour pools and experienced communities have been built around one of the few free-market oil and gas businesses in the world. As well, a sophisticated oil field service sector gravitates around 810 drilling rigs. The domestic infrastructure also includes sophisticated regulatory institutions that have long-standing experience in implementing and ensuring stringent safety and environmental practices.

But the biggest accumulated asset is the knowledge of knowing where the oil and gas is located. After a century of exploration, over half a million wells have been drilled across the vast Western Canada Sedimentary Basin (WCSB), one of the largest accumulations of hydrocarbons in the world. Technical information about each of these wells has been captured and is publicly available for any entrepreneurial company to use. This body of knowledge offers a subtle, but huge competitive advantage over many other oil and gas jurisdictions in the world, because it substantially diminishes the chance of drilling unsuccessful wells in the collective exploration and development risk profile.

Coincident with 100 years, Canada's oil and gas industry is undergoing a process renaissance. Conventional, vertical drilling is yielding to horizontally drilled and hydraulically fractured wells, yielding prolific new supplies. Oil sands extraction processes have also been improving across a spectrum of metrics. Step changes in technology are rejuvenating the WCSB, in readiness for the next 100 years.

Contrary to popular belief, Canada's oil and gas industry is diversifying its markets, expanding supply lines within the United States and beyond to global customers. For example, railways are moving Canada's oil to market faster, in greater volumes, and to many more refineries than ever before. Natural gas diversification is gaining momentum. Over the next few years, Canadian gas will float into international markets whether it's directly off the B.C. coast, or through indirect absorption into the U.S. liquefied natural gas trade. Each of the 15 potential Canadian LNG projects are measured in tens-of-billions of dollars a year in investment and are supplementary to the bars in our feature chart.

Balancing social and environmental tensions has always been a part of the industry's operating landscape (contentious pipeline debates have been going on since the 1950s), but in contrast to Canada's circumstance, much of the rest of the world's oil and gas supplies are buried under progressively thickening layers of corruption, geopolitics, environmental degradation and cost. No wonder oil supply outages outside North America are at a record high.

Global upstream capital spending by the oil and gas industry is currently estimated at $750-billion annually. The sharpening contrast between domestic and international circumstances suggest that a larger fraction of that annual investment will want to come to Canada over the next dozen years. Used wisely, that's a trillion-dollar birthday present.

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Peter Tertzakian is chief energy economist at ARC Financial Corp. in Calgary and the author of two best-selling books, A Thousand Barrels a Second and The End of Energy Obesity.

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