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Hard Times Hit Canada’s Oil Patch, Again

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As if the downturn in oil prices that began in October 2014 and last year’s devastating Fort MacMurray fires weren’t enough, last week’s decision by Shell and Marathon Oil to sell off all oil sands assets in Alberta – a reported $9.5 billion – has certainly turned heads.

The departure follows a long list of companies that have decamped Canada’s oil scene and, with them, import investments that are the lifeblood of Alberta’s economy. Last year, Shell sold off its Deep Basin and Montney properties for $1.4 billion while Koch Oil, citing red tape and recently imposed Alberta carbon taxes, cancelled the state-of-the-art Steam Assisted Gravity Drainage (SAGD) project which was seen by many as the next generation of technology to release tight shale and heavy bitumen more cost effectively. The decision followed several others, including Conoco Phillips, Murphy Oil, Devon Energy, EOG Resources, Apache and Chevron who have all either traded away or cut back on further plans to proceed with their projects.

While some have attributed this exodus to declining oil prices, the reality is that other international plays are seeing a rise in interest and investments. For global resource investors, the higher cost of bringing Canadian oil to markets is proving an insurmountable challenge: higher wages, less developed infrastructure, a colder climate and a lack of pipeline access account for nearly half the cost of the realized sale price barrel of a barrel of crude at 47%. By comparison, the Permian and Eagle Ford Basin’s in West Texas cost about 30%, making investments and profits far more lucrative.

Compounding the low crude price environment and higher costs to draw and deliver Alberta oil is the lengthy regulatory review and approval processes in Canada. Bickering between Canadian provinces on new or expanded pipelines, a regulatory review process that is subject to public demonstration and pressure, lengthy reviews of major projects and uncertain or evolving regulations around climate change policies, make the work of successful completing it daunting to the goal of cost effectiveness.

For Canadians and policymakers, the country’s abundant natural resources and marketability are at a crossroads. Transformation of its economy to a low carbon jurisdiction is becoming increasingly incompatible with the realities of lower valuations for those resources. What had helped Canada achieve its prosperity is now at serious risk of decline. No matter how many feel-good speeches the country’s Prime Minister may give to audiences in Texas about the imperative of selling oil while embarking on costly carbon reduction initiatives aimed at Canada’s oil industry, the prospects for Canadian oil are dimming. Investors are voting with their feet and walking away from the Canadian oil scene.

Senior Petroleum Analyst, Canada

Dan is a skilled and noted bilingual (French and English) consumer advocate specializing in energy and current affairs. Known as Canada's “Gas Guru,” he founded tomorrowsgaspricetoday.com to better help motorists anticipate the price of gasoline in advance across Canada. He has over three decades of experience in the petroleum industry, as a parliamentarian and an analyst.

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