Canada has staked its future on the oil sands. In November, Report on Business magazine together with Thomson Reuters examine what that means both at home and abroad. Read more from the issue at tgam.ca/oil.
For a few years, it seemed as if one of the best views on the oil sands might come from the prow of China National Offshore Oil Corp.'s global headquarters, just inside Beijing's Second Ring Road. The sea of cash controlled inside the ship-shaped glass tower had already been directed to Canada in the takeover of Nexen Inc., China's largest-ever foreign purchase. And the many billions of dollars controlled by China's state-owned energy giants appeared destined for matrimonial bliss with the oil sands, whose need for capital can only be met by extraordinarily deep pockets. This was supposed to be a forever kind of marriage.
But trouble has not taken long to emerge. Nexen is now among the worst-performing of CNOOC's assets, and the company has replaced Nexen CEO Kevin Reinhart with a Chinese executive, Fang Zhi, in a bid to clean house.
The problems at the company – led by a litany of disappointments at its Long Lake oil sands project – have sparked serious debate inside China's behemoth oil and gas firms about the value of pushing forward in Canada. Advocates argue there are still deals to be had, and that Canada remains a land of great opportunity. Skeptics doubt that drilling Canadian rock is worth it. Canada is an expensive place to buy land and hire people, costs the oil sands will have a hard time offsetting so long as commodity prices remain well below international, and even North American, benchmark prices.
If this skepticism becomes widespread, it could rewrite the standard scenario of steady oil sands growth. As Canada's biggest industrial project expands, so does its hunger for capital, at a time when some of those once most seduced by its endless acres of possibility are losing their taste for bitumen. "The relative economics of the business compared to investment alternatives for oil and gas companies has changed very dramatically," says Adam Waterous, Scotiabank's co-head of global equity and advisory, who ranks among Calgary's most senior banking figures.
For much of the last two decades, the oil sands were one of the few places the world's biggest energy companies could come for growth. "That has changed," Waterous says. "It's a very profound change in the competitive landscape."
Around Fort McMurray, enough work is already under way to mean that another roughly one million barrels per day will flow by 2020. It's no small volume, nearly a 50 per cent expansion from today. But it's a fraction of what is meant to come–a total of 5.2 million bpd by 2030, forecast by the Canadian Association of Petroleum Producers; or perhaps as high as 5.7 million bpd by 2048, according to the Canadian Energy Research Institute. The industry will need between $600-billion and $700-billion in capital spending over 35 years to make that happen, CERI has forecast.
The marshalling of that kind of money doesn't happen overnight, so decisions made today will echo for a long time. And those decisions are increasingly dispatching money to destinations outside northeastern Alberta.
The reasons are many, key among them the torrents of money flowing to gleaming new U.S. oil plays, like the Eagle Ford in southern Texas–which is now sucking up more investment capital than Fort McMurray. At the same time, the oil sands have suffered setback after setback. Witness Total, which this spring walked away from its $11-billion Joslyn project, whose reserves weren't good enough to make the math work. Problems building and running complex operating plants have raised investor doubts and financial problems for companies like Sunshine Oilsands Ltd. and Southern Pacific Resource Corp.–the former now so cash-strapped that it faces 71 lawsuits from creditors seeking $94-million. Meanwhile, a series of fires and other glitches at a much bigger player, Syncrude, has sowed angst among its big-name foreign investors.
Add it all up, and the Fort McMurray forests that were once the hottest property on the global block are starting to look a lot more like moose pasture.
Are the oil sands "potentially going to slow down five or 10 years out because of an inability to attract capital? It's possible," says Peter Tertzakian, a Calgary energy economist. "Investors are saying, 'Put your money in places like Texas or North Dakota.' Because the cycle times are shorter, the production risks are much less, and actually the returns are pretty stellar if you get it right."
"We will have less growth than expected," says Peter Doig, an analyst with Matco Financial in Calgary. "We don't have pipelines to get to the West Coast. It's going to be years before we get a pipeline to take it to the East Coast. And the U.S. is less dependent on our oil; they're flush with it. So it's like–do you even need the oil sands any more? It's a question that people have to start asking."
None of the issues are new, of course. But they have gained urgency in Beijing, which has in recent years seen a blowout in the gap between returns from state-owned corporations and privately held companies. State firms now post half the profits of the private sector. Misadventures in the oil sands haven't helped.
Now, a Communist Party mandate for change has prompted capital expenditure cutbacks and a bid "to be more selective about what they buy. So the higher-risk lower-margin investments might go by the wayside," says Philip Andrews-Speed, principal fellow at the Energy Studies Institute in Singapore. "The tar sands in Canada, that may be one place where Chinese companies decide they don't need to be."
The shift is unmistakable in the Beijing law offices that once served to spirit Chinese billions across the Pacific. That era has, for now at least, largely vanished, says Robert Kwauk, managing partner in Beijing for Blake Cassels & Graydon. The deals that remain are largely between private Chinese interests and smaller Canadian firms seeking cash–occasionally for distinctly small amounts. "They don't engender any discussion," he says. The buzz, in other words, is gone.
It's a major shift. Were China to continue spending in Canada at its pre-Nexen rate, its banks and companies alone would pour in enough to fund 40 per cent of the money the oil sands need through 2020, according to a recent analysis by Wendy Dobson of the Rotman School of Management.
But it's unlikely that will come to pass. Though Athabasca Oil Corp. recently sold a stake in a property to PetroChina for $1.2-billion, Athabasca CEO Sveinung Svarte admits the "oil sands has fallen out of fashion a little bit." He blames poor execution on the ground by other players and, in some cases, capital constraints.
Svarte says some foreign interest remains. He is in touch with five companies looking to buy into the oil sands. But none of them is Chinese, and they aren't as bold as earlier foreign investors. "It will take them a bit longer time than before," Svarte says.
Waterous, the Scotiabank co-head, says other investment sources will help fill the gaps, too, such as pension funds with patient money and a desire for resources that can last.
There is, too, a counterargument: that today's oil sands are less reliant than before on foreign money. Some companies, like Cenovus Energy Inc., now spin off enough money to self-fund most of their growth. And the biggest of the megaprojects–new oil sands mines and costly refinery-like upgraders to accompany them–have lost favour, removing one major demand pull for foreign capital. What remains is smaller, cheaper and easier to fund.
Nathan VanderKlippe is The Globe and Mail's Beijing bureau chief. He previously reported from Alberta.