Canada's oil industry strains to go forward while government holds it back

The Lord may not yet have answered the prayers of a thousand Alberta bumper stickers but a rising oil price suggests he is listening at least.

The plea for a divinely-inspired oil boom, in exchange for the assurance that this time it wouldn’t be “pissed away,” is bearing fruit. There has been a nine-month run-up in the oil price, from around US$50 a barrel of West Texas Intermediate to around US$68 — a surge that, if sustained, will create stronger revenues and $20 billion of cash looking for a home this year.

In times past, that might spark an investment boom, as the money was recycled into new projects. But such is the disillusionment with Canada’s competitive position, many companies have been finding other uses for the spare cash.

Rich Kruger is chief executive officer of Imperial Oil, Canada’s oldest and second-largest integrated oil company. He said Imperial resolved the conundrum of what to do with its relative bonanza by giving $400 million back to shareholders, in the form of share buy-backs and enhanced dividends, lifting the share price from a five-year low.

But in a lengthy interview about the parlous state of the oil and gas business in Canada, the Minnesotan explained why the appetite to plow profits back into the oil patch is so weak

To be clear, there is no sense that happy days are here again. While WTI has risen substantially, the price heavy oil producers receive for West Canadian Select has remained stable at around US$35-40. Kruger said the industry in Canada has not received the same benefits as other parts of the world from the rise in light oil prices because of a range of bad public policy choices.

In no particular order of iniquity, they include limited pipeline capacity to get product to market; a regulatory regime riddled with risk and uncertainty, and a fiscal package that cumulatively is not competitive with other countries

Kruger is a 37-year ExxonMobil veteran and is fluent in the polite, indirect and diplomatic language of the well-travelled business executive. But were his frustrations to be translated into everyday discourse, his message to federal and provincial politicians might read: “It’s time to move forward and you are holding us back.”

Kruger is more circumspect. “This is not a place where Canada has been historically. We all shy away from risk, beyond the technical and operational risk we accept. And today there is more risk and uncertainty,” he said.

Imperial is investing — in fact, it will spend $1.5 to $1.7 billion this year. But that is “to care for and feed” the existing asset base, Kruger said, rather than spark major growth.

Yet, the company has a major development proposal in the regulatory process — the 150,000-barrel-a-day Aspen in situ project in Alberta that would require a $4-billion investment over two phases.

The problem is that Aspen was first submitted for regulatory approval in December 2013 — four and a half years ago.

The advanced steam-assisted gravity drainage technology was in development for a decade before that, yielding 25-per-cent reductions in greenhouse gas emissions intensity and similar reductions in water use intensity, according to Kruger.

But the company is still waiting to get a green light from the provincial government – and if it does, market conditions have changed so much from a time when oil was over US$100 a barrel that it cannot be taken for granted that it will proceed.

“We think it’s a winner … I would have expected a project like this would have been welcomed with open arms. Will we go forward? When we get the final approval, we’ll look at the conditions attached to it and the market conditions and make a judgment at that time,” Kruger said.

Rather than those pressures easing, the federal government’s major environmental regulation bill, currently before the Commons, goes in the opposite direction to what Kruger would like to see.

“It’s our assessment that the current bill is likely to increase costs and timelines,” he said. “We have significant concerns about it.”

But he is encouraged by Ottawa’s acquisition of the Trans Mountain pipeline. “It shows a clear recognition and resolve at the federal level, and from the industry standpoint, that’s a good thing,” he said.

Yet at the end of the day, confidence will be restored only when pipe is placed in the ground and operations are commenced. “That’s when discounts evaporate.”

Today there is more risk and uncertainty

While the feds have shown resolve on pipelines, they have shown no inclination to move on cutting taxes in response to the Trump administration’s moves on corporate income tax rates. The Liberals have been stubbornly resistant to tax cuts they claim industry doesn’t need.

Yet Kruger said competitiveness is relative and the fiscal position is judged in the aggregate — federal, provincial, municipal and carbon taxes. He pointed out the American accelerated expensing of investments enhanced the relative economic attractiveness of a competing jurisdiction.

“What we are seeing is that capital is flowing, it’s just not flowing here,” he said.

None of this is a surprise. The World Economic Forum tells us we are the 14th most competitive economy; the OECD says our tangled regulatory requirements and growing tax burden hinder private sector productivity; the World Bank’s Doing Business survey ranks Canada 34th out of 35 developed economies for the time it takes to get regulatory approval through the system; Royal Dutch Shell, Total and Conoco Phillips have all sold out of the oil sands, as pipelines failed to get built.

Direct investment dropped 26 per cent in 2017 and will likely fall again this year. If things don’t change, more investment will go to operations south of the border.

Ottawa might take comfort in the fact that Imperial only operates in Canada. But that does not make it captive — the jump in its share price suggests it will simply give its surplus cash back to its shareholders, rather than piss it away on projects that don’t make sense financially. What the Lord gives, he can also take away.