BETWEEN 2005 AND 2015, foreign direct investment in Canada's oil industry more than doubled to $130 billion from $50 billion, according to Statistics Canada. But if you have any doubt that Canada's energy sector has fallen out of favor with international oil majors since then, you need look no further than the financial headlines to see that some big names have been walking away from Alberta’s oil sands.
ExxonMobil Corp. and Conoco Phillips became the latest majors to bail, writing off nearly five billion barrels of oil-sands reserves between them in February, which wiped roughly $250 billion in value off their books. And they’re not the only ones. China’s CNOOC-owned Nexen shut down its oil sands upgrader. Royal Dutch Shell took a $2-billion write-down and abandoned its 80,000 barrel per day Carmon Creek project. Statoil ASA sold its oil sands interests to Calgary-based Athabasca Oil.
Developing oil sands costs billions of dollars. The payoff is that the wells and mines provide consistent output for years. But the international majors don’t necessarily want to tie up that kind of capital when there are cheaper alternatives such as shale oil readily available.
In Calgary, “it’s a been bit of a dose of reality,” says Shawn Denstedt, an energy lawyer and national co-chair of Osler Hoskin & Harcourt LLP, adding the oil sands had become overheated in recent years. “At the height of the boom, if you had the name ‘oil sands’ in the name of your company, you were off and running on the stock market because it was the flavour of the month. It’s not anymore.”
No kidding. A year ago this month Imperial Oil bucked the trend and announced it had applied for regulatory approval for a $2-billion project that would see it produce 50,000 barrels a day by from the Alberta oil sands by early in the next decade. In late February, though, the energy giant didn’t just postpone that project; it “de-booked” its 3.5 billion barrels of Canadian oil sands reserves –– about 15 per cent of its total proven reserve base –– deeming it cheaper to simply walk away and leave the oil in the ground.
ExxonMobil Canada has made that decision for now, at least, says Vivek Warrier, a partner and head of the oil and gas group at Bennett Jones LLP in Calgary. While companies like ExxonMobil and Conoco Phillips may judge there are better places to use their capital at this time, “we haven’t seen a run for the exit door.”
In other words, Warrier says, the de-booked oil sands reserves haven’t been put up for sale. “I think the resource is too compelling for them to walk away from it completely. I think ultimately what they’re doing is waiting for a better per-barrel price that improves their net back before they start reinvesting capital in the oil sands.”
Brock Gibson, chairman of Blake, Cassels & Graydon LLP, who often acts on large energy deals, says some of the recent de-booking likely have to do more with the US Security and Exchange Commission’s requirements on reserve accounting, which differs from Canada’s, than it does with confidence in the oil patch.
When ExxonMobil refused to remove the reserves from its books during the worst price downturn, it prompted an SEC investigation into the firm’s accounting practices and an inquiry by New York’s attorney general. There was speculation that regulatory scrutiny was behind last month’s oil sands write-down.
“In the US, the SEC has very strict rules on what commodity values you can use, and the application of those rules drive reserves, and the accounting of that is the law,” says Gibson. “Companies have to follow the law.” Where international majors have exited, “I would really encourage people to look at whether it is just accounting and disclosure, or are assets actually moving? When assets move there are buyers and sellers: a market. In at least one or more of [these] companies … , they’re not exiting, they’re doing financial reporting.”
That and the favourable Canadian-US dollar exchange rate may explain why so many energy lawyers in the oil patch describe the mood as surprisingly good.
“Interestingly, the mood’s one of cautious optimism,” says Alicia Quesnel, an energy lawyer at Burnet Duckworth & Palmer LLP in Calgary, noting that legal work in the energy field has been picking up even though the deals are not blockbusters. She is expecting more consolidation in the oil sands, along the lines of Suncor Energy’s move last year to acquire Western Canadian Oil Sands’ and Murphy Oil’s interest in Syncrude Canada, one of the country’s largest oil-sands producers.
Consolidation — through existing majors buying up smaller players — will be the key to growth as opposed to new projects, she predicts. Several senior energy lawyers say they see the deals in the near term coming from large Canadian players such as Suncor Energy and Cenovus Energy.
Quesnel doesn’t see the internationals rushing back to Canada’s patch; “No, goodness no. I don’t think the international actors are going to be in the oil sands for a while. I think we’ll need to see oil prices much, much higher before the international majors come back, because they have so many [other] options when they’re looking for growth.”
That said, oil-sands companies have been working hard to develop new technology to make extraction of bitumen cheaper and, with so much consolidation and contraction in the sector, labour prices have gone down as well. All that is helping to make the oil sands more competitive.
And not all oil-sands reserves are created equal, points out Osler’s Denstedt. Some areas on the fringes of good-quality reserves are of marginal quality, for example, with a layer of sand, silt, clay and shale sitting on top of the bitumen which itself is mixed with clay and silt, making it expensive to extract.
“The shadow of the boom that was cast over the oil sands is only now lifting, and people are only now looking underneath the shadow and saying a lot of this is uneconomic,” says Denstedt. “It looked like there was going to be lots of development in fringe areas, but that’s not going to happen and never was going to happen.” He believes oil would need to hit the US$120 or US$130 a barrel mark to make those marginal-quality reserves profitable.
But for existing producers with good-quality projects, the decreased cost of production means they can be “very profitable” at US$55-$68 a barrel, attracting interest again, he says.
Does Bennett Jones’s Warrier expect to see the ExxonMobils and the Conocos coming back? “I absolutely do,” he says. While some companies are looking to exit Canada, that’s not because of “systemic problems in our industry,” and even at current prices there is still interest, he says, adding that “Our firm’s working on a couple of transactions now related to the oil sands.”
Brock Gibson of Blakes also expects the international majors to put the shut-in reserves back on their books under the right conditions. “Absolutely,” he says. “Every year they have to update their reserves. Things go down, things go up. … US$30 oil, which we had in the last year, was concerning to everybody in the industry; US$55-US$60 is better. As to how much better and how that affects reserve disclosure, investment decisions and strategy, it’s not a one-answer-fits-all proposition. Each company makes its decisions based on its own individual circumstances, plus the macro environment.”
It’s a bit like Monty Python’s famous skit about the parrot: is it dead or merely sleeping? In the oil patch, and among energy lawyers, ‘sleeping’ seems to be the verdict. Oil prices rising over US$55 will tell the tale.