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Thursday, October 2, 2014

Prioritizing Canada's Energy Problem

Rising costs for labour and materials, market access issues, and limited pipeline access plague Alberta's oil sands projects. Norway's Statoil shelved the Corner project for three years. Statoil operates the 20,000 BBL/day Leismer project, but going forward with the Corner project, designed for 40,000 BBL/day is off the table for the next three years.

Statoil's Leismer Project - credit Helge Hansen - Statoil

In May, France's Total SA announced the Joslyn project would not go forward at this time. Partners Suncor, Occidental, and Japan's Inpex Corp. are also stepping back. Last year Total SA and Suncor stopped plans to build the 11.6 billion dollar Voyageur upgrader in hopes that it would be more profitable to ship bitumen.

Voyageur Upgrader - credit Ledcor

In the larger picture, estimates of 250,000 BBL/day annually by RBC Capital Markets place an estimated capital investment of 26 billion in 2014 and a peak of 33 billion in 2016, with deductions in place for projects that are getting shelved, those numbers shrink. Still, the number constitutes impressive growth, but it is far less than it could be with pipeline infrastructure to refineries and tidewater were in place.

The shelving of projects and retraction of investment in the oil sands mean other areas will receive the attention of those companies slowing or stopping their investment in Alberta's oil sands in order to invest in other areas where their return on investment will be higher. One of the potential areas is British Columbia's potential liquid natural gas industry. But once again, there are frayed nerves. Apache Corp. announced it is pulling out of the Kitimat liquefied natural gas project and is selling its 50 per cent interest while Malaysian energy giant Petronas is wavering on its LNG project in British Columbia because of the lack of fiscal clarity.

LNG Ships - Credit Qatar Gas
Encana has been into the United States for acquisitions in the Eagle Ford play from Freeport McMoRan and they've bought Texas-based Athlon Energy. Mexico's privatization means enormous amounts of shale drilling is going to take place in the Eagle Ford that stretches to the other side of the border. The CEO of Petronas has characterized Canada as being 40 years behind the rest of the world in terms of setting the stage for energy investment.

The issue of energy transportation, as the crux of the problem why companies are shelving projects, is an important reason why companies are concerned the economics are shifting away from Canada. I should not have to remind anyone that over half of our national foreign direct investment (54%) inflow comes into the energy and mining sectors, transportation (11%) is in second place. To combine energy mining and transportation issues, we see 65% of Canada's foreign direct investment inflow under pressure. With the price of oil dropping, more shale coming online, and the concerns of a global investment environment where Canadian product is being attacked across different forms of media, it seems to me a prudent government priority is to focus on solving product transportation bottlenecks quickly.

The government is responsible to be both offensive and defensive in their outlook. The offensive strategy is to quickly identify the pipelines that will not be viable and forget them. Move forward with the ones that will be viable in the short term. The defensive component is to consider what the strategy should be if oil sands projects continue to be placed on shelves. As of right now, it feels like we're going to need a good defense if we are to win the game.

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