2Class 10:Canadian OilOutcomes ExpectedAble to discuss the development of the oil industry in CanadaThe growth of the oil industry in Alberta and its implications to CanadaAble to discuss the role and issues around foreign direct investment in Canada’s Oil industry2
3Final Exam Tuesday December 11, 2012 7-10 PM Rexall Centre Closed Book Whole CourseWorth 45%
4Remainder of TermClass 11 – Nov. 24th Wine in Canada – Group Assignment 3Group Assignment # 3 on the Wine CaseClass Dec. 1st Financial Services – Confed. Life & RBC
6Energy 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 nuclearOn 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
7The World Wants EnergyIn 2010 global demand will exceed 2007 – developed world recovering and emerging market demand kept on growing – now up to 86.7 million barrels a day77
10Proved Oil Reserves by Country 2011 Reserves (bbl)World %1Saudi Arabia264,100,000,00019.78%2Canada178,100,000,00013.21%3Iran150,310,000,00011.10%4Iraq143,100,000,00010.60%5Kuwait101,500,000,0008.71%6Venezuela98,590,000,0007.37%7United Arab Emirates97,800,000,0007.25%8Russia79,000,000,0004.45%9Libya46,000,000,0003.24%10Nigeria36,220,000,0002.69%11Kazakhstan30,000,000,0002.22%12Qatar27,190,000,0001.13%13United States21,320,000,0001.58%14China15,700,000,0001.19%Source:
11Overview of Current Oil Condition RankCountryOil Consumption% of World1US1868621.7%2China862510.4%3Japan43965.1%4India31833.8%5Russian Federation26953.2%6Saudi Arabia26143.1%7Germany24222.9%8South Korea23272.7%9Brazil240510Canada21952.5%RankCountry% of World Production1Russian Federation12.9%2Saudi Arabia12.0%3US8.5%4Iran5.3%5China4.9%6Canada4.1%7Mexico3.9%8Venezuela3.3%9Iraq3.2%10KuwaitSource: BP Statistical Review of World Energy, 2010, In thousand barrels daily
12The Elusive Goal of Capitalist States • To simultaneously achieving high employment and stable prices.• Oil and price shocks limit that as a possibility.
15Oil and Gas Economics Operation Costs Value Gross Margin Net Margin PercentExploration2.9716.3313.3636%Production17.7849.0032.6714.8941%Transportation1.0051.962.961.965%Refining3.7060.468.504.8013%Distribution1.9063.693.231.334%Marketing0.8064.851.160.361%Pump Taxes19.1584.000.000%36.70100%
16Importance 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.
17Non-Employers/ Indeterminate Establishments in Canada by Type and Region: Oil and Gas Extraction (NAICS 211)Province or TerritoryEmployersNon-Employers/ IndeterminateTotal% of CanadaAlberta1,4242,2023,62678.4%British Columbia1182073257.0%Manitoba2245671.4%New Brunswick5270.2%Newfoundland and Labrador140.3%Northwest Territories130.1%Nova Scotia923320.7%Nunavut0.0%Ontario501301803.9%Prince Edward IslandQuebec1731Saskatchewan1282093377.3%Yukon TerritorySource: Statistics Canada, Canadian Business Patterns Database, December 2010.
18Direct Employment in Oil and Gas Extraction Employment, payroll employment, by industry (Mining and oil and gas extraction)20062007200820092010numberMining and oil and gas extraction180,993192,237202,436181,501186,460Oil and gas extraction48,67754,03556,28354,65251,665Mining (except oil and gas)48,83052,87758,50652,42952,532Support activities for mining and oil and gas extraction83,48685,32587,64874,42082,262
19Oil & 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).
20Annual Capital Investment by Type of Asset: 2001-2010 Oil and Gas Extraction Source: Statistics Canada, Canadian Business Patterns Database, December 2010.
26Timeline of Oil in Canada DateEvent1715James 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.1790sExplorer Alexander Mackenzie reports first hand of “bituminous pools” along the Athabasca River.1846 to 1853Abraham Gesner of Halifax develops a fractional distillation process to produce kerosene from coal for use as lamp oil.1850Geological Survey of Canada geologist Sterry Hunt reports oil pools in swampy areas in Enniskillen Township, Lambton County, Ontario.
27Timeline of Oil in Canada DateEvent1851Charles 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.1855Tripp sells the oil company to James Williams1858Williams digs a 15-metre well to improve the flow rate1859First oil well to be drilled is completed in Pennsylvania by “Colonel” Edwin Drake.James Williams also drills successful well in Enniskillen Township.1862John 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.
28Timeline of Oil in Canada DateEvent1867George Dawson reports oil seeps in Waterton area, Alberta.1870sThrough 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.1880sImperial Oil Company Limited is born through the amalgamation of 16 Ontario refining companies.In 1889, Imperial Oil consolidates its refining operations in Sarnia, Ontario.1892The diesel engine is developed by Rudolph Diesel.
29Timeline of Oil in Canada DateEvent1898Imperial Oil is acquired by U.S. oil conglomerate Standard Oil.1905Automobiles powered by gasoline engines begin to gain wide popularity, providing a market for a byproduct of refining that previously had often just been discarded.1914The Dingman #1 well sparks the first oil boom in Turner Valley in southern Alberta, moving the Canadian oil industry west.1914 to 1918During 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.1920Imperial Oil discovers oil at Norman Wells, Northwest Territories.
30Timeline of Oil in Canada DateEvent1924The 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.1947Imperial 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.1951Oil is discovered at Daly, Manitoba.The Interprovincial Pipeline is built to transport oil from Edmonton to Superior, Wisconsin1953Oil is discovered at Midale, Saskatchewan and Pembina, Alberta.1957Oil is discovered at Swan Hills, Alberta.1965Oil is discovered at Rainbow Lake, Alberta.
31Timeline of Oil in Canada DateEvent1972The federal and BC governments impose a moratorium on West Coast drilling.1973The Panuke-Cohasset field is discovered offshore Nova Scotia and produces from 1992 to 1999.1974Panarctic 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.1977Oil is discovered at West Pembina, Alberta.1979The 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.
32Timeline of Oil in Canada Date Event 1981The Hebron-Ben Nevis field is discovered offshore Newfoundland.1984The Terra Nova field is discovered offshore Newfoundland, with production beginning in 2002.Oil is discovered offshore Newfoundland at White Rose.2002Production begins at Terra Nova.Source:
34Leduc 1On 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.
35Imperial Oil 35 Imperial Oil founded 1880 Purchased by J.D. Rockefeller’s Standard Oil 1898By 1900 dominated Canadian MarketIn 1907 started chain of gas stations1907 Standard Oil in US and Imperial Oil in Canada controlled 90% share3535
36Imperial Oil 36 1911 Standard Oil broken up US anti-trust legislation In Canada market share droppd to 50% by 1940Oil Industry had become an OligopolyOil Production In Canada dropped and had to start importing oil3636
37Oligopolies and Monopolies Oil Industry has an Early history of Monopoly and a late of OligopolyProduct brandingEntry barriersInterdependent decision-makingNon-price competition (service-based)Low Oil Prices in early 60’s drove out independentsBy 1970 almost all oil and gas controlled by major foreign owned oil companies – Dome petroleum the exception3737
38OligopoliesFounded initially on the scale and scope elements of production and distribution.Secured by scale and scope distribution, research, marketing and development.38
39Oligopolies Giants can, however, and do stagnate. Flexibility and innovation can falter in the face of the needs of the dominant brand.39
40Imperial Oil Leduc 1On 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.
41Biggest oil and gas companies in Canada After Leduc Find other companies began explorationTexecoGulfBritish Petroleum (BP)McCall-FrontenacPetrofinaImperial Oil had 35-40% of Alberta production
42Biggest oil and gas companies in Canada Canada becomes 6th on world in Oil productionHuge Oil and Gas pipeline system built – North-South orientation rather than east westEastern Canada still imported oil from Venezuela and Middle East – Why?Economic GeographyInterprovincial Pipeline to Sarnia Ontario42
52Oil Sands Alberta oil not 'foreign,' U.S. official tells premiers US-Canada oil pipeline - water source threatened
53Oil Sands History IAthabasca tar sands, although there is no tar present) 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.
54Oil Sands History 2Commercial 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.
57International TradeThe exchange of goods and services between or among countriesEnables a country to specialize in those goods it can produce most cheaply and efficientlyEnlarges the potential market for goods of an economyMajor force of economic relations among countriesIs an extension of governmental policy
58Reasons for TradeResources are not completely distributed across the globe.The climate and terrain of a state.The skills of its labor force.The advantages of specialization
59NAFTA 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
60NAFTA - 2Why 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.
61NAFTAJohn 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?
62Strategic Moves Increasing Interests in Canadian Energy Sector Recent InvestmentChina Investment Corp. bought $1.7 billion stake in Teck ResourcesSinopec holds a half share in the Northern Lights project, AlbertaPenn 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 millionSinopec agreed to buy ConocoPhillips’s stake in oil-sands producer Syncrude Canada Ltd. for $4.65 billionSource: Foreign Affairs and International Trade Canada
63FDIFrom National Policy Canada has encourage Foreign Direct Investment particularly in the Natural Resource Industry.Government supported unfettered developmentProvided massive capital and technological expertiseAlberta began to regulate in 1970 to maintain future supplyAlthough CDIA lagged FDIC from 1960 to 1997, this trend has reversed since
65Exhibit 27.) Outward and Inward FDI, 1950-2001 (in $millions) Statistics Canada: Bilateral Investment Table65
66Argument For FDI in Natural Resources Provided needed capital for exploration and developmentProvided technologyEncouraged explorationDiversified Markets (China)
67Argument Against FDI in Natural Resources Branch Plant EconomySupplier of Raw MaterialsImporter of finished goodsNo value added work being done in Canada
68FDI“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 reviewsShould we be concnerned?What should we do?68
69Herb Grey’s Foreign Investment in Canada Report (1972) Resulted in the Foreign Investment Review Agency (FIRA) 1974A 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
70Herb 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.
72National Energy Policy 1980 Petro-Canada created as Crown CorporationCanadian prices subsidized against world pricesProvided tax incentives to Canadian companiesExtra tax to fund Petro-Canada acquisitions of foreign owned resourcesProvided grants to switch to energy alternatives exploration – prices still below world marketGave preferential exploration permits to Petro-Canad
73National Energy Policy - Reaction Alberta threatens constitutional challengeClaims of unfair competition by Petro-CanadaFDI stoppedMany oil companies left CanadaAlberta unemployment rose dramaticallyHuge resentment in Western CanadaEventually Scraped by Conservatives in 1984Petro-Canada privatized
74Changing CanadaWhile 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.
79Next 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