Presentation on theme: "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."— Presentation transcript:
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 Canadas Oil industry
Final Exam Tuesday December 11, PM Rexall Centre Closed Book Whole Course Worth 45%
Remainder of Term Class 11 – Nov. 24 th 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 9
Source: Proved Oil Reserves by Country 2011 CountryReserves (bbl) World % 1 Saudi Arabia 264,100,000, % 2 Canada 178,100,000, % 3 Iran 150,310,000, % 4 Iraq 143,100,000, % 5 Kuwait 101,500,000, % 6 Venezuela 98,590,000, % 7 United Arab Emirates 97,800,000, % 8 Russia 79,000,000, % 9 Libya 46,000,000, % 10 Nigeria 36,220,000, % 11 Kazakhstan 30,000,000, % 12 Qatar 27,190,000, % 13 United States 21,320,000, % 14China15,700,000, %
Overview of Current Oil Condition RankCountry Oil Consumption % of World 1US % 2China % 3Japan % 4India % 5Russian Federation % 6Saudi Arabia % 7Germany % 8South Korea % 9Brazil % 10Canada % Source: BP Statistical Review of World Energy, 2010, In thousand barrels daily RankCountry % of World Production 1Russian Federation12.9% 2Saudi Arabia12.0% 3US8.5% 4Iran5.3% 5China4.9% 6Canada4.1% 7Mexico3.9% 8Venezuela3.3% 9Iraq3.2% 10Kuwait3.2%
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 OperationCostsValueGross MarginNet MarginPercent Exploration % Production % Transportation % Refining % Distribution % Marketing % Pump Taxes % % 15
In 2009, the GDP of Canadas 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) Province or Territory Employers Non- Employers/ Indeterminate Total % of Canada Alberta1,4242,2023, % British Columbia % Manitoba % New Brunswick5270.2% Newfoundland and Labrador % Northwest Territories % Nova Scotia % Nunavut0000.0% Ontario % Prince Edward Island % Quebec % Saskatchewan % Yukon Territory1230.1% 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) number Mining and oil and gas extraction 180,993192,237202,436181,501186,460 Oil and gas extraction 48,67754,03556,28354,65251,665 Mining (except oil and gas) 48,83052,87758,50652,42952,532 Support activities for mining and oil and gas extraction 83,48685,32587,64874,42082,262
Oil & Gas Employment Other The energy sector, excluding service stations and wholesale trade in petroleum products, provided direct employment for 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 people (0.7 percent).
Source: Statistics Canada, Canadian Business Patterns Database, December Annual Capital Investment by Type of Asset: Oil and Gas Extraction
Canadas Exports by Segment
OIL REALLY EARLY CANADIAN HISTORY
Timeline of Oil in Canada DateEvent 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 to 1853 Abraham Gesner of Halifax develops a fractional distillation process to produce kerosene from coal for use as lamp oil Geological Survey of Canada geologist Sterry Hunt reports oil pools in swampy areas in Enniskillen Township, Lambton County, Ontario.
DateEvent 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. 1855Tripp sells the oil company to James Williams 1858Williams 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 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
DateEvent 1867George 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. 1892The diesel engine is developed by Rudolph Diesel. Timeline of Oil in Canada
DateEvent 1898 Imperial Oil is acquired by U.S. oil conglomerate Standard Oil 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 The Dingman #1 well sparks the first oil boom in Turner Valley in southern Alberta, moving the Canadian oil industry west 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 Imperial Oil discovers oil at Norman Wells, Northwest Territories. Timeline of Oil in Canada
DateEvent 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 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 Oil is discovered at Daly, Manitoba. The Interprovincial Pipeline is built to transport oil from Edmonton to Superior, Wisconsin 1953Oil is discovered at Midale, Saskatchewan and Pembina, Alberta. 1957Oil is discovered at Swan Hills, Alberta. 1965Oil is discovered at Rainbow Lake, Alberta. Timeline of Oil in Canada
DateEvent 1972 The federal and BC governments impose a moratorium on West Coast drilling The Panuke-Cohasset field is discovered offshore Nova Scotia and produces from 1992 to 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. 1977Oil is discovered at West Pembina, Alberta 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
DateEvent 1981The Hebron-Ben Nevis field is discovered offshore Newfoundland The Terra Nova field is discovered offshore Newfoundland, with production beginning in Oil is discovered offshore Newfoundland at White Rose Production begins at Terra Nova. Timeline of Oil in Canada Source:
Alberta Oil 33
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. 34
Imperial Oil Imperial Oil founded 1880 Purchased by J.D. Rockefellers 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 60s 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 6 th 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 Sands Alberta oil not 'foreign,' U.S. official tells premiers Alberta oil not 'foreign,' U.S. official tells premiers US-Canada oil pipeline - water source threatened US-Canada oil pipeline - water source threatened 52
Oil Sands History I Athabasca 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. 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 m 3 /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 ConocoPhillipss stake in oil-sands producer Syncrude Canada Ltd. for $4.65 billion 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 In Canada
Exhibit 27.) Outward and Inward FDI, (in $millions)
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 Greys Foreign Investment in Canada Report (1972) 1. Resulted in the Foreign Investment Review Agency (FIRA) 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 Greys 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 Canadas 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
75 Oil is Changing National Demographics
Alberta In/Out Migration
Oil Directly Affects the Economy 77
Oil Directly Affects the Economy 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): ements/topics/536/ ements/topics/536/ ?PgNm=TCE&Params=A1ARTA ?PgNm=TCE&Params=A1ARTA Case: The Challenging Years, pp AND Wine Industry, pp