Class 10: Canadian Oil Industry. Class 10:Canadian Oil Outcomes Expected Able to discuss the development of the oil industry in Canada The growth of the.

Class 10: Canadian Oil Industry

Class 10:Canadian Oil

Outcomes Expected

• Able to discuss the development of the oil industry in Canada

• The growth of the oil industry in Alberta and its implications to Canada

• Able to discuss the role and issues around foreign direct investment in Canada’s Oil industry

Final Exam

Tuesday December 11, 2012

7-10 PM

Rexall Centre

Closed Book

Whole Course

Worth 45%

Remainder of Term

Class 11 – Nov. 24th Wine in Canada – Group Assignment 3

– Group Assignment # 3 on the Wine Case Class 12 - Dec. 1st Financial Services – Confed. Life &

RBC

The World and Oil

6

Energy stocks account for approximately 25% of the TSE.

What is permanent and what is transitory? Oil is not as significantly relatively as it was 30 years ago. In

terms of power generation – its place has been taken by natural gas and nuclear

On the supply side there is an end point in sight to the Saudi Oil reserves – the largest being Ghawar.

The Athabasca Oil Sands are non conventional and costly to access but most of the international agencies [NOT BP] now recognize them. As a consequence Canada now has greater oil reserves than either Iran or Iraq.

There are major implications for Canada, both domestically and internationally, with the recognition of the eventual end of the Saudi reserves and the coming on stream of the Oil Sands.

The World Wants Energy

In 2010 global demand will exceed 2007 – developed world recovering and emerging market demand kept on growing – now up to 86.7 million barrels a day

7

\

Oil Supply And Demand

Proven oil reserves

http://gunn.co.nz/map/

9

Source:

Proved Oil Reserves by Country 2011

Country Reserves (bbl) World %

1 Saudi Arabia 264,100,000,000 19.78%

2 Canada 178,100,000,000 13.21%

3 Iran 150,310,000,000 11.10%

4 Iraq 143,100,000,000 10.60%

5 Kuwait 101,500,000,000 8.71%

6 Venezuela 98,590,000,000 7.37%

7 United Arab Emirates 97,800,000,000 7.25%

8 Russia 79,000,000,000 4.45%

9 Libya 46,000,000,000 3.24%

10 Nigeria 36,220,000,000 2.69%

11 Kazakhstan 30,000,000,000 2.22%

12 Qatar 27,190,000,000 1.13%

13 United States 21,320,000,000 1.58%

14 China 15,700,000,000 1.19%http://exploredia.com/oil-reserves-by-country-2011/

Overview of Current Oil Condition

Rank CountryOil

Consumption% of World

1 US 18686 21.7%

2 China 8625 10.4%

3 Japan 4396 5.1%

4 India 3183 3.8%

5 Russian Federation 2695 3.2%

6 Saudi Arabia 2614 3.1%

7 Germany 2422 2.9%

8 South Korea 2327 2.7%

9 Brazil 2405 2.7%

10 Canada 2195 2.5%

Source: BP Statistical Review of World Energy, 2010, In thousand barrels daily

Rank Country% of World Production

1 Russian Federation 12.9%

2 Saudi Arabia 12.0%

3 US 8.5%

4 Iran 5.3%

5 China 4.9%

6 Canada 4.1%

7 Mexico 3.9%

8 Venezuela 3.3%

9 Iraq 3.2%

10 Kuwait 3.2%

The Elusive Goal of Capitalist States

• To simultaneously achieving high employment and stable prices.

• Oil and price shocks limit that as a possibility.

Oil Prices since WWII

Price of Oil

Oil and Gas Economics 

Operation Costs Value Gross Margin Net Margin Percent

Exploration 2.97 16.33 16.33 13.36 36%

Production 17.78 49.00 32.67 14.89 41%

Transportation 1.00 51.96 2.96 1.96 5%

Refining 3.70 60.46 8.50 4.80 13%

Distribution 1.90 63.69 3.23 1.33 4%

Marketing 0.80 64.85 1.16 0.36 1%

Pump Taxes 19.15 84.00 0.00 0.00 0%

        36.70 100%

http://www.petrostrategies.org/Learning_Center/oil_and_gas_value_chains.htm 15

In 2009, the GDP of Canada’s energy sector – i.e. industries involved in the production, transformation and transportation of energy – reached $80.2 billion (in 2002 constant dollars), accounting for 6.7 percent of Canadian GDP. The oil and gas extraction industry accounted for about half of this amount, while the electric power industry accounted for about one third.

Importance of Oil to Canadian Economy

Establishments in Canada by Type and Region: 2010 Oil and Gas Extraction (NAICS 211)

Provinceor Territory

EmployersNon-

Employers/Indeterminate

Total% of

Canada

Alberta 1,424 2,202 3,626 78.4%

British Columbia 118 207 325 7.0%

Manitoba 22 45 67 1.4%

New Brunswick 5 2 7 0.2%

Newfoundland and Labrador

7 7 14 0.3%

Northwest Territories

2 1 3 0.1%

Nova Scotia 9 23 32 0.7%

Nunavut 0 0 0 0.0%

Ontario 50 130 180 3.9%

Prince Edward Island

0 1 1 0.0%

Quebec 14 17 31 0.7%

Saskatchewan 128 209 337 7.3%

Yukon Territory 1 2 3 0.1%Source: Statistics Canada, Canadian Business Patterns Database, December 2010.

Direct Employment in Oil and Gas Extraction

Employment, payroll employment, by industry (Mining and oil and gas extraction)

  2006 2007 2008 2009 2010

  number

Mining and oil and gas extraction

180,993 192,237 202,436 181,501 186,460

Oil and gas extraction 48,677 54,035 56,283 54,652 51,665

Mining (except oil and gas) 48,830 52,877 58,506 52,429 52,532

Support activities for mining and oil and gas extraction

83,486 85,325 87,648 74,420 82,262

Oil & Gas Employment Other

The energy sector, excluding service stations and wholesale trade in petroleum products, provided direct employment for 257 462 people in 2009, or 1.8 percent of employment in Canada. In addition, service stations and wholesale trade in petroleum products provided direct employment for 96 199 people (0.7 percent).

http://www.nrcan.gc.ca/statistics-facts/energy/895

Source: Statistics Canada, Canadian Business Patterns Database, December 2010.

Annual Capital Investment by Type of Asset: 2001-2010 Oil and Gas Extraction

Canada’s Exports by Segment

OIL REALLY EARLY CANADIAN HISTORY

CANADIAN OIL 1700 -2002

Timeline of Oil in Canada

Date Event

1715

•James Knight, Factor of Fort York, writes in a Hudson Bay Journal of a “gum or pitch that flows out of the banks of a river” (the Athabasca); first report by a European of the oilsands deposits in Western Canada.

1790s •Explorer Alexander Mackenzie reports first hand of “bituminous pools” along the Athabasca River.

1846 to 1853 •Abraham Gesner of Halifax develops a fractional distillation process to produce kerosene from coal for use as lamp oil.

1850 •Geological Survey of Canada geologist Sterry Hunt reports oil pools in swampy areas in Enniskillen Township, Lambton County, Ontario.

Date Event

1851

•Charles Tripp founds the first registered oil company in North America, the International Mining and Manufacturing Company, to recover the oil from pits dug in Enniskillen Township, and refine it using fractional distillation. •Tripp exhibits asphalt from his plant at the Universal Exhibition in Paris.

1855 •Tripp sells the oil company to James Williams

1858 •Williams digs a 15-metre well to improve the flow rate

1859

•First oil well to be drilled is completed in Pennsylvania by “Colonel” Edwin Drake. •James Williams also drills successful well in Enniskillen Township.

1862•John Henry Fairbank digs successful oil well on land purchased from James Williams. In the same year, Fairbank invents the jerker line system for pumping crude oil.

Timeline of Oil in Canada

Date Event

1867 •George Dawson reports oil seeps in Waterton area, Alberta.

1870s

•Through the 1860s and 1870s, almost 20 small refineries are set up in southern Ontario, chiefly to manufacture kerosene. Other products include paraffin, grease and lubricating oil. Gasoline, naphtha and benzene are regarded as by-products and are discarded. The industry goes into a decline in the 1880s as natural gas and electricity become the preferred sources of energy for lighting.

1880s

•Imperial Oil Company Limited is born through the amalgamation of 16 Ontario refining companies. •In 1889, Imperial Oil consolidates its refining operations in Sarnia, Ontario.

1892 •The diesel engine is developed by Rudolph Diesel.

Timeline of Oil in Canada

Date Event

1898 •Imperial Oil is acquired by U.S. oil conglomerate Standard Oil.

1905 •Automobiles powered by gasoline engines begin to gain wide popularity, providing a market for a byproduct of refining that previously had often just been discarded.

1914 •The Dingman #1 well sparks the first oil boom in Turner Valley in southern Alberta, moving the Canadian oil industry west.

1914 to 1918

•During the First World War, the use of gasoline-powered cars, trucks, tanks and motorcycles as well as ships fueled by bunker oil increases the demand for refined products not just on the war front but also domestically.

1920 •Imperial Oil discovers oil at Norman Wells, Northwest Territories.

Timeline of Oil in Canada

Date Event

1924•The Royalite #4 well sparks a second oil boom in Turner Valley, Alberta with flow rates of 21MMcf/d of natural gas and 600 bbls/d of white naphtha.

1947

•Imperial Oil makes the giant Leduc discovery near Edmonton, Alberta after drilling 133 unsuccessful wells. Leduc is the largest find of its time, and produced continuously until the 1990s. It made Western Canada the centre of the Canadian oil industry and prompted an exploration surge.

1951 •Oil is discovered at Daly, Manitoba. •The Interprovincial Pipeline is built to transport oil from Edmonton to Superior, Wisconsin

1953 •Oil is discovered at Midale, Saskatchewan and Pembina, Alberta.

1957 •Oil is discovered at Swan Hills, Alberta.

1965 •Oil is discovered at Rainbow Lake, Alberta.

Timeline of Oil in Canada

Date Event

1972•The federal and BC governments impose a moratorium on West Coast drilling.

1973•The Panuke-Cohasset field is discovered offshore Nova Scotia and produces from 1992 to 1999.

1974 •Panarctic makes Bent Horn oil discovery on Cameron Island. It is the only oil field to be commercially produced in the Canadian Arctic, with oil shipments from 1985 to the late 1990s.

1977 •Oil is discovered at West Pembina, Alberta.

1979

•The Hibernia field is discovered offshore Newfoundland.

In 1997, Hibernia goes into production. To July 2002, 33 producing oil wells, gas injection wells and water injection wells have been drilled from the Hibernia gravity based structure.

Timeline of Oil in Canada

Date Event

1981 •The Hebron-Ben Nevis field is discovered offshore Newfoundland.

1984 •The Terra Nova field is discovered offshore Newfoundland, with production beginning in 2002. •Oil is discovered offshore Newfoundland at White Rose.

2002 •Production begins at Terra Nova.

Timeline of Oil in Canada

Source: http://www.centreforenergy.com/AboutEnergy/ONG/Oil/History.asp

Alberta Oil

33

Leduc 1

On Feb 13 1947, on the sleepy Alberta farm of Mike Turta, 15 km west of Leduc and about 50 km south of Edmonton, Imperial Oils Leduc #1 well blew in. Before that date, Canada had to rely almost fully on oil imports from other countries. Some crude had been found in Western Canada at Turner Valley Alberta, but nothing big enough to spark a new oil boom.

34

Imperial Oil

Imperial Oil founded 1880 Purchased by J.D. Rockefeller’s

Standard Oil 1898 By 1900 dominated Canadian

Market In 1907 started chain of gas stations 1907 Standard Oil in US and

Imperial Oil in Canada controlled 90% share

35

Imperial Oil

1911 Standard Oil broken up US anti-trust legislation

In Canada market share droppd to 50% by 1940

Oil Industry had become an Oligopoly

Oil Production In Canada dropped and had to start importing oil

36

Oligopolies and Monopolies

Oil Industry has an Early history of Monopoly and a late of Oligopoly

Product branding Entry barriers Interdependent decision-making Non-price competition (service-based) Low Oil Prices in early 60’s drove out independents By 1970 almost all oil and gas controlled by major foreign

owned oil companies – Dome petroleum the exception

37

Oligopolies

Founded initially on the scale and scope elements of production and distribution.

Secured by scale and scope distribution, research, marketing and development.

Oligopolies

Giants can, however, and do stagnate.

Flexibility and innovation can falter in the face of the needs of the dominant brand.

Imperial Oil Leduc 1

On May 10, 1947, Leduc No. 2 hit the much bigger Devonian Reef, and Imperial Oil began building the town of Devon for its employees. By the end of 1947, Imperial Oil and a group of small companies had drilled 147 more wells in the rich Leduc-Woodbend oilfield. Only 11 were dry.

40

Biggest oil and gas companies in Canada

41

After Leduc Find other companies began exploration

• Texeco

•Gulf

•British Petroleum (BP)

•McCall-Frontenac

•Petrofina

Imperial Oil had 35-40% of Alberta production

Biggest oil and gas companies in Canada

42

•Canada becomes 6th on world in Oil production

• Huge Oil and Gas pipeline system built – North-South orientation rather than east west

•Eastern Canada still imported oil from Venezuela and Middle East – Why?

•Economic Geography

• Interprovincial Pipeline to Sarnia Ontario

OIL INDUSTRY STRUCTURE

Vertical and horizontal integration

44

45

CANADIAN OIL 1970’S-TODAY

http://eprinc.org/?p=698

http://www.neb-one.gc.ca/clf-nsi/rpblctn/spchsndprsnttn/2004/ftrrlfthrgltr/ftrrlfthrgltr-eng.html 48 Alison Kemper ADMS 1010

http://www.eurasiareview.com/canada-energy-profile-worlds-third-largest-gas-producer-and-exporter-analysis-22042011/

49

http://www.parl.gc.ca/Content/LOP/researchpublications/prb0833-e.htm

50

The Oil Sands

51

Oil Sands

Alberta oil not 'foreign,' U.S. official tells premiers

US-Canada oil pipeline - water source threatened

52

Oil Sands History I

Athabasca tar sands, although there is no tar present)[3] are large deposits of bitumen, or extremely heavy crude oil, located in northeastern Alberta, Canada - roughly centred on the boomtown of Fort McMurray. These oil sands, hosted in the McMurray Formation, consist of a mixture of crude bitumen (a semi-solid form of crude oil), silica sand, clay minerals, and water.

The Athabasca deposit is the largest reservoir of crude bitumen in the world.

53

Oil Sands History 2

Commercial production of oil from the Athabasca oil sands began in 1967, when Great Canadian Oil Sands Limited (then a subsidiary of Sun Oil Company but now an independent company known as Suncor Energy) opened its first mine, producing 30,000 barrels per day (4,800 m3/d) of synthetic crude oil. Development was inhibited by declining world oil prices, and the second mine, operated by the Syncrude consortium, did not begin operating until 1978, after the 1973 oil crisis sparked investor interest.

54

Oil is a Big Trade Issue

56

Oil and Trade

International Trade

The exchange of goods and services between or among countries

Enables a country to specialize in those goods it can produce most cheaply and efficiently

Enlarges the potential market for goods of an economy

Major force of economic relations among countries

Is an extension of governmental policy

Reasons for Trade

Resources are not completely distributed across the globe.

The climate and terrain of a state.

The skills of its labor force.

The advantages of specialization

NAFTA

Article 605: Other Export Measures Subject to Annex 605, a Party may adopt or maintain a

restriction otherwise justified under Articles XI:2(a) or XX(g), (i) or (j) of the GATT with respect to the export of an energy or basic petrochemical good to the territory of another Party, only if:

a) the restriction does not reduce the proportion of the total export shipments of the specific energy or basic petrochemical good made available to that other Party relative to the total supply of that good of the Party maintaining the restriction

59

NAFTA - 2

Why has NAFTA become a destination rather than a point of departure?

Two reasons – American hostility, especially since 9/11 and the more recent credit crisis and the lack of a Canadian strategy.

Canada is a trading nation – more dependent on trade than any other developed nation.

60

NAFTA

John Turner in 1988 Debate asked, “Why did we get a situation where we surrendered our entire energy policy to the United States?”

But is it time to find another customer, e.g. China?

If so, what will U.S. attitudes be? What will Canadian attitudes be to

Chinese Sovereign Wealth Fund Investment?

61

Strategic Moves

Increasing Interests in Canadian Energy Sector Recent Investment

China Investment Corp. bought $1.7 billion stake in Teck Resources Sinopec holds a half share in the Northern Lights project, Alberta Penn West Energy Trust sold a 45% stake in an oil sands project

located in the Peace River area of northern Alberta to China Investment Corp for C$817 million

Sinopec agreed to buy ConocoPhillips’s stake in oil-sands producer Syncrude Canada Ltd. for $4.65 billion2009 % Change YOY

Canadian FDI in China ($millions) 3349 -2.40%FDI in Canada From China ($millions) 8854 69%

Source: Foreign Affairs and International Trade Canada

FDI

From National Policy Canada has encourage Foreign Direct Investment particularly in the Natural Resource Industry.

Government supported unfettered development Provided massive capital and technological expertise Alberta began to regulate in 1970 to maintain future

supply

Although CDIA lagged FDIC from 1960 to 1997, this trend has reversed since

63

FDI:1955-1980

0

10000

20000

30000

40000

50000

60000

70000

1955 1956 1957 1958 1959 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980

In

Out

FDI In Canada 1955-1980

Exhibit 27.) Outward and Inward FDI, 1950-2001 (in $millions)

0

50000

100000

150000

200000

250000

300000

350000

400000

450000

1950

1953

1956

1959

1962

1965

1968

1971

1974

1977

1980

1983

1986

1989

1992

1995

1998

2001

CanadianInvestmentAbroad

Investment inCanada

Argument For FDI in Natural Resources

Provided needed capital for exploration and development

Provided technology Encouraged exploration Diversified Markets (China)

Argument Against FDI in Natural Resources

Branch Plant Economy Supplier of Raw Materials Importer of finished goods No value added work being done in Canada

FDI

“Evidence of Canada “hollowing out” is mixed, with some actually suggesting that the opposite is true in the past decade” .

Federal Government engage in several reviews Should we be concnerned? What should we do?

68

Herb Grey’s Foreign Investment in Canada Report (1972)

1. Resulted in the Foreign Investment Review Agency (FIRA) 1974

2. A foreign firm would be questioned if it was contemplating the purchase or erection of a plant in Canada about the need for this particular plant.

3. A foreign firm would be questioned about the nature of the technology to be employed in comparison with technology available in Canada.

Herb Grey’s Foreign Investment in Canada Report

3. A foreign firm would be questioned about employment opportunities.

4. A foreign firm would be questioned about its plans for research and development, its product innovation in Canada and its plans for purchasing materials, components and services in Canada.

When Should Government Act?

National Energy Policy 1980

Petro-Canada created as Crown Corporation Canadian prices subsidized against world

prices Provided tax incentives to Canadian

companies Extra tax to fund Petro-Canada acquisitions

of foreign owned resources Provided grants to switch to energy

alternatives exploration – prices still below world market

Gave preferential exploration permits to Petro-Canad

National Energy Policy - Reaction

Alberta threatens constitutional challenge Claims of unfair competition by Petro-Canada FDI stopped Many oil companies left Canada Alberta unemployment rose dramatically Huge resentment in Western Canada Eventually Scraped by Conservatives in 1984 Petro-Canada privatized

Changing Canada

While there the changes in Canada’s international relations is just becoming apparent the changes within Canada are much clearer.

Ontario is growing faster than the national average because of international migration but Alberta is growing much faster than Ontario because of international and interprovincial migration.

Ontario has become a ‘have not’ province. Not only is Ontario losing population to Alberta, Toronto is

losing head offices, see next slides.

74

Net Ontario Interprovincial Migration: 1st decade of 21st century

-25000

-20000

-15000

-10000

-5000

0

5000

10000

15000

20000

25000

2000/2001 2001/2002 2002/2003 2003/2004 2004/2005 2005/2006 2006/2007 2007/2008

75

Oil is Changing National Demographics

Alberta In/Out Migration 1980-2007

76 76

Oil Directly Affects the Economy

77 77

Oil Directly Affects the Economy

78 78

Next Week

Group Assignment on Wine Industry Free Trade Agreement (FTA) and North American

Free Trade Agreement (NAFTA) Readings (to be done prior to class): http://archives.cbc.ca/economy_business/

trade_agreements/topics/536/

http://www.thecanadianencyclopedia.com/index.cfm?PgNm=TCE&Params=A1ARTA0003054

Case: The Challenging Years, pp. 243-260 AND Wine Industry, pp. 265-283