News Analysis
Canada’s oil and gas industry has been in a slump for about five years now. Oversupply in the oilsands arose quickly due to technological advances, and a complex and lengthy adjustment is underway to reach a better balance of supply and demand.
The industry and government are grappling with technological disruption, similar to a number of other sectors like retail and newspapers. Issues such as having a favourable outcome in the October federal election, building pipelines, imposing production cuts, and fighting onerous regulation are all critical to reaching that new equilibrium sooner rather than later. But they are all akin to treating the symptoms of oversupply given that the “problem” of holistic adaptation to new technologies is not something that can be treated.
“The industry is undergoing some of the biggest changes technologically and structurally in 100 years, and this is even independent of the climate change, political, and regulatory issues—independent of all that,” said Peter Tertzakian, executive director of the ARC Energy Research Institute in Calgary.
“Everything is undergoing structural and radical change, so why would we think that oil and gas is exempt?” he added.
It really began less than 10 years ago, when oilsands operations in Canada and fracking in the United States started delivering dramatic amounts of new oil. The supply-demand equilibrium has been turned on its head in a relatively short period of time. Oilsands production has doubled in the past decade to 3 million barrels a day.
This puts into context the aforementioned industry and government initiatives. But the lack of political leadership on pipelines is the biggest hindrance, and it’s only lengthening the adjustment period.
Pipelines have a lot of supply to catch up on, and technological change waits for no one.
“The better the industry gets at being more productive—better by virtue of technology—the greater the propensity to be able to fill the next pipeline,” Tertzakian said.
Canada’s business climate is less competitive than that in the United States, and business investment in the oilsands has cratered. But Tertzakian says that for Canada, there is a silver lining to foreign players fleeing the oilsands.
‘Big Box Effect’
The industry is undergoing a transformation from within.
“The Canadian consolidation of foreign assets is not a bad thing, because we’re entering a new phase in this business where learning curve effects are kicking in and costs are coming down,” Tertzakian said. “These companies in the industry, especially on the oilsands side, are generating tremendous cash flow.”
As the industry starts to mature after years of capital investment, Canadian companies are demonstrating the ability to operate more efficiently. And if foreign players leave, Canadian firms are the ones reaping profits that would have left for foreign jurisdictions.
It’s essentially a manufacturing operation now, and costs per barrel have come way down since 2009, explained Steve W. Laut, executive vice chairman of Canadian Natural Resources (CNRL), on an ARC Energy Research Institute podcast.
Companies in the oilpatch can earn significant cash flow without the need for much more reinvestment, which should be appealing to investors, he added. CNRL has become Canada’s largest oil and gas producer after recent acquisitions.
But as the big Canadian players get bigger, the smaller players can get shut out. It’s the “big box effect,” says Tertzakian, where the industry power gets concentrated among the bigger players, who have massive scale.
