1. Class 10: Canadian Oil Industry

2. 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 2

3. Final Exam Tuesday December 11, 2012 7-10 PM Rexall Centre Closed Book
Whole Course
Worth 45%

4. Remainder of Term
Class 11 – Nov. 24th Wine in Canada – Group Assignment 3
Group Assignment # 3 on the Wine Case
Class Dec. 1st Financial Services – Confed. Life & RBC

5. The World and Oil 5

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. 6

7. 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 7

8. Oil Supply And Demand \

9. Proven oil reserves

10. Proved Oil Reserves by Country 2011
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%
Source:

11. Overview of Current Oil Condition
Rank
Country
Oil 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 10
Canada
2195
2.5%
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
Source: BP Statistical Review of World Energy, 2010, In thousand barrels daily

12. The Elusive Goal of Capitalist States
• To simultaneously achieving high employment and stable prices.
• Oil and price shocks limit that as a possibility.

13. Oil Prices since WWII

14. Price of Oil

15. Oil and Gas Economics Operation Costs Value Gross Margin Net Margin
Percent
Exploration
2.97
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%
36.70
100%

16. Importance of Oil to Canadian Economy
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.

17. Non-Employers/ Indeterminate
Establishments in Canada by Type and Region: Oil and Gas Extraction (NAICS 211)
Province or Territory
Employers
Non-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 14
0.3%
Northwest Territories 1 3
0.1%
Nova Scotia 9 23 32
0.7%
Nunavut
0.0%
Ontario 50
130
180
3.9%
Prince Edward Island
Quebec 17 31
Saskatchewan
128
209
337
7.3%
Yukon Territory
Source: Statistics Canada, Canadian Business Patterns Database, December 2010.

18. 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

19. 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).

20. Annual Capital Investment by Type of Asset: 2001-2010 Oil and Gas Extraction
Source: Statistics Canada, Canadian Business Patterns Database, December 2010.

21. Canada’s Exports by Segment

22. Oil Really Early Canadian History

25. Canadian Oil

26. 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.

27. Timeline of Oil in Canada
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.

28. 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.

29. 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.

30. 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.

31. 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.

32. 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.
Source:

33. Alberta Oil

34. Leduc 1
On Feb , 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.

35. Imperial Oil 35 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 35

36. Imperial Oil 36 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 36

37. 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 37

38. Oligopolies
Founded initially on the scale and scope elements of production and distribution.
Secured by scale and scope distribution, research, marketing and development. 38

39. Oligopolies Giants can, however, and do stagnate.
Flexibility and innovation can falter in the face of the needs of the dominant brand. 39

40. 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.

41. Biggest oil and gas companies in Canada
After Leduc Find other companies began exploration
Texeco
Gulf
British Petroleum (BP)
McCall-Frontenac
Petrofina
Imperial Oil had 35-40% of Alberta production

42. Biggest oil and gas companies in Canada
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 42

43. Oil Industry Structure

44. Vertical and horizontal integration

46. Canadian Oil 1970’s-Today

48.
Alison Kemper ADMS 1010

49. http://www. eurasiareview

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

51. The Oil Sands 51

52. Oil Sands Alberta oil not 'foreign,' U.S. official tells premiers
US-Canada oil pipeline - water source threatened

53. 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.

54. 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.

55. Oil is a Big Trade Issue

56. Oil and Trade 56 56

57. 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

58. 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

59. 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

60. 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.

61. 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?

62. 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 billion
Source: Foreign Affairs and International Trade Canada

63. 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

64. FDI In Canada

65. Exhibit 27.) Outward and Inward FDI, 1950-2001 (in $millions)
Statistics Canada: Bilateral Investment Table 65

66. Argument For FDI in Natural Resources
Provided needed capital for exploration and development
Provided technology
Encouraged exploration
Diversified Markets (China)

67. 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

68. 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

69. Herb Grey’s Foreign Investment in Canada Report (1972)
Resulted in the Foreign Investment Review Agency (FIRA) 1974
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.
A foreign firm would be questioned about the nature of the technology to be employed in comparison with technology available in Canada.
Served for 40 years and was the longest serving member of the House when he retired in – From Windsor

70. Herb Grey’s Foreign Investment in Canada Report
A foreign firm would be questioned about employment opportunities.
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.

71. When Should Government Act?

72. 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

73. 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

74. 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.

75. Oil is Changing National Demographics

76. Alberta In/Out Migration 1980-200776

77. Oil Directly Affects the Economy77 77

78. Oil Directly Affects the Economy78 78

79. 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):
Case: The Challenging Years, pp AND Wine Industry, pp