CANADA 2015: LESSONS LEARNT SINCE THE OIL PRICE DROP. VISION OF THE PRODUCERS AND INVESTORS
A REALITY CHECK
On a macro scale, the industry expects to see contract reductions of up to 40% from the original 20% predicted in March 2015. There isn't a single person working for E&Ps in Canada who will earn what they earned last year and debt reduction will become even harder towards the end of the year. On a positive side, market demand has kept up creating opportunities, especially within the Canadian midstream. While investments into growth/developing regions are slowing down significantly, safe and risk-averse projects are attractive turning a lot of global industry leaders towards Canada. Western Canada comes out very strong due to its democratic and stable structure and developed infrastructure as well as a great talent pool. A collaborative and commercially driven industry environment with clear fiscal structure is critical in 2015. This will be key to taking advantage of the current situation and set Canada apart as a competitive player in the global market.
IF YOU WANT TO SURVIVE - KEEP A STRONG LEADERSHIP TEAM
People are even more important than quality assets in the distressed market of 2015. Companies with leadership development programs are coming out strong while short-term visionaries struggle to keep their assets alive. A committed, experienced leadership team that “understands the rocks” is the best asset you can have as an E&P. While strong balance sheets and at least a 10-year vision are essential for success, they will inevitably become more challenging and expensive to maintain.
WHERE TO FIND $ IN 2015?
Investors warned that oil and gas operators should forget about the ways they used to find the capital. It is "thinking outside the box" that will get the next asset into production. Creative financing mechanisms and new regions will fund the next projects. Quite a few found their future partners in China and see the Chinese market as a much stronger investor in 2016. Investors also advise to monetise non-core assets and get rid of as much debt as possible. It is not easy to be a small-cap company in this environment, they admit.
Investors also adapt:
- · Family funds are visibly getting more cooperative
- · Private equity firms aggressively invest into energy and there is a lot more room for them in the future
- · Stock Exchange is getting involved in the private market
What do investors look for in 2015? Most are agnostic to the regions, geology or a commodity, and concentrate only on the history and experience of the management team. It is no longer just a commercial agreement or a transaction and a lot more personal interaction is needed.
Investor advise overall is to "look under every stone and in every country. You never know where and when you will find the capital".
LESSONS FROM THE USA
USA has been better at cost-reduction due to several reasons including overcapitalization. On the other hand, USA’s debt is higher. Canadian gas can easily compete with Marcellus but requires government support to achieve this efficiently. Canadian can deliver gas to Tokyo harbour at $10.5 to be competitive with US Gulf Coast - that's a $1,5 cheaper than the Gulf. Gas might be the cheapest in some African countries but without an appropriate infrastructure it will never be commercially viable.
CLEAR GUIDELINES ARE KEY
Change of government was a major point of discussion with largely positive and enthusiastic opinions from the participants. The most important points made were a clear plan and a collaborative formation of policies where the industry is not a passive contributor to the economy but an advisor.
- · Royalty reviews didn't seem to scare the players - it is, however, important to understand how they will benefit the people of Alberta, local employment and the region's social projects
- · SOEs are curious to know exactly how the royalties will change in order to adapt. It is the “wait and see” approach which is detrimental, not the policy itself. You cannot put a “pause” on foreign investment – they will inevitably start looking somewhere else
- · One of the most important lessons from the discussions: action needs to take place now. Western Canada is already ahead of many countries in environmental and safety procedures, such as the law on frac chemicals. It needs to continue being in front of the challenges, not reactive to them. The longer the government waits, the more reactive the industry will get in the future
- · A few commented that there is a presumption that the industry will try to pick a fight with the NDP. In contrast, open communication and urgent communication is required and much anticipated
- · Gas production is very important to the economy at this stage but requires the lowest cost of supply which is where the government needs to help the industry
- · There are a few gaps in the regulatory processes which need to be worked on, including the government’s help with cost-cutting, environmental compliance and creating of the government body to deal with First Nations
- · The industry also needs a proper application of the word “social license” and its regulatory application. What exactly does it mean? What steps need to be taken to achieve the required transparency and acceptance?
- · Midstream projects need a lot of government support if Canada is to remain energy competitive. Not all LNG projects will happen and the government needs to step in and be decisive (see below in Future of Midstream in Canada)
THE FUTURE OF MIDSTREAM IN CANADA
Continuous pipeline issues will have a profound effect on the sector, so a key is to secure access to additional markets. With the demand in the U.S. flattening, Canada is near pipeline and processing capacity for present exports with no infrastructure for increased oil production to the south, west or east.
There are far more projects than LNG demand, so the industry needs to concentrate on the ability to deliver to the markets.
Rail can cover some crude capacity needed for the time being but it should be a temporary solution to pipeline expansion. Rail is the reason that NGL prices are currently negative with propane differential as negative for the first time in 30 years.
A trend for operators to own more infrastructure to control the costs is evident. On the other hand, midstream companies want to purchase underutilized producer facilities and get them up to speed – which they believe will make Canada more competitive and help solve long-term issues.
WHERE DO THE OPERATORS CUT THE COSTS?
The whole operating chains are under scrutiny right now but more specifically the following:
1. Time-efficiency tools: IT and drilling
2. Computer-controlled top drills
3. Deciding on frac size and frac spacing
4. More lateral reach before going horizontal
5. Deal structure
SO, WHAT’S THE ANSWER?
1. Have a long-term plan with many variables. If you had a 3-year plan before – this is the time to double it!
2. Look into an efficient hedging program
3. Focus on the highest quality/value resource and what you own
4. Communicate more, not less. Have open and honest discussions with your banks, stakeholders, communities and the government
5. Look for investment globally – Canada has a good reputation and is seen as a safe environment
(Content is taken from the panel discussions during the Canada Assembly 2015, May 28, Calgary, held under The Chatham House Rule. This document does not represent the views of any one organization or an individual but contains analysis of a series of discussions taken over the course of the day)