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 2

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 5

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

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

Oil Supply And Demand \

Proven oil reserves http://gunn.co.nz/map/

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% http://exploredia.com/oil-reserves-by-country-2011/ Source:

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

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

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.

Non-Employers/ Indeterminate Establishments in Canada by Type and Region: 2010 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.

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

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

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.

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.

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

Alberta Oil

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.

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

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

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

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

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

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.

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

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

Oil Industry Structure

Vertical and horizontal integration

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 Alison Kemper ADMS 1010

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

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

The Oil Sands 51

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

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.

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.

Oil is a Big Trade Issue

Oil and Trade 56 56

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

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.

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?

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

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

FDI In Canada 1955-1980

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

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) 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 2002. – From Windsor

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.

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.

Oil is Changing National Demographics

Alberta In/Out Migration 1980-2007 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