In 2012, Canada sent some pretty clear signals that portend the shape of things to come for that country’s energy and mining industries. From entertaining controversial foreign investment in oil and gas companies to slowing investment in the mining sector, Canada seems to have taken a sobering look at its prospects and made significant decisions to set the country on a path to increased profitability and stability.
Inviting Foreign Investment?
Among Canada’s most noteworthy and controversial actions in 2012 was its approval of China National Offshore Oil Corp.’s (CNOOC) bid to buy Nexen Inc. With 65 percent of oil and gas assets already owned by Canadian investors, experts aren’t looking to increased investments by Canadians; the CNOOC/Nexen sale underscores the importance of foreign investment to support further oil and gas development and production in Canada.
Whether the deal will go through remains to be seen, as the United States and United Kingdom weigh in as stakeholders in Nexen. Their decisions are expected in early 2013. If the Nexen deal is allowed to go through, it would be the first time a Chinese company has had an operating role in the United States.
Private vs. State ownership
One consideration is whether the deal poses a national security threat, as CNOOC is not strictly a private company, but is partly state-owned. With 20 percent of U.S. oil coming from Canada, the prospect of China having a say in whether oil is sent here or elsewhere is a serious concern.
Uncertainty over the CNOOC deal is keeping investors in a holding pattern, waiting to see what level of foreign investment will be accepted.
PetroChina, for example, may take full control of the Dover oil sands project it co-owns with Athabasca Oil Corp.; Malaysia’s Petronas has entered a bid to purchase Progress Energy Resources Corp.; and Exxon Mobile Corp is poised to begin exporting liquefied natural gas through its Canadian affiliate, Imperial Oil Ltd.
Supply Not a Problem
Canada is home to the world’s third-largest proven oil reserves and is the world’s third-largest producer of natural gas, promising a boom to rival some of the richest oil and gas regions. Experts look to the Beaufort Sea to produce at levels akin to the Gulf of Mexico, with exciting reserve plays in the Mackenzie Valley region along the same magnitude of the Bakken play in the United States.
New Markets for Canada
Along with an injection of capital from foreign investors, Canada is looking for new markets for unprocessed product, which means increased pipeline capacity — whether it’s the yet-to-be approved northern portion of the Keystone XL or the proposed Mackenzie Valley line.
The International Energy Agency’s projections for the United States to be a net exporter of crude oil by 2030, as well as estimates of Canada’s natural gas and oil reserves among the top in the world, put more pressure on Canada to increase pipeline capacity. Canadian crude is already experiencing bottlenecks from the North Dakota oil boom, which will only worsen as American production continues to rise.
There is no deadline for President Barack Obama’s decision on the Keystone XL pipeline, though March is the target. Keystone’s route through Nebraska is still problematic, awaiting a supplemental environmental impact assessment from the State Department. Even if the president approves the pipeline by March, oil won’t start flowing through it until 2015.
The Mackenzie Valley line is facing increased uncertainty as a result of unprecedented growth in U.S. shale driving down gas prices.
Proposals to reverse the flow of the pipeline to ship gas north to the coast for export to Asia have so far gone nowhere. In the meantime, the Enbridge Northern Gateway pipeline and the Kinder Morgan Trans Mountain pipeline expansion are both facing environmental challenges that are slowing progress toward growing Asian markets.
While the oil and gas sectors are heading into 2013 under the steam of aggressive moves like the CNOOC deal, the mining sector is cautiously enjoying the debt market while approaching the New Year with a stable but conservative stance. Canadian miners took full advantage of the attractive debt market terms in 2012, selling more than $15 billion in debt, compared to about $9 billion in 2011.
The volatility of the high-yield deals makes it unlikely that this trend will continue much longer.
Commodity prices have been strong for the past decade, though weakening global commodity prices have had some impact on Canada’s mining outlook, especially in the north. Experts look to construction of the Mary River iron ore and Meliadine gold mines to create a surge of 17 percent in the real GDP in 2013, but diamond mining has peaked and will be on the decline.
The Bi-Annual Mid-Market CFO Survey by GE Capital found that the majority (54 percent) of Canadian mining CFOs expect limited growth over the next several years. The CFOs expect the price of oil and gas to negatively impact their businesses, along with labor costs. Concerns over lagging investment capital have led many mining companies to reduce overhead costs, scale back on exploration and development, reduce marketing and investor relations budgets, lay off employees, and cut incentives. However, most report that these cost-cutting measures have peaked and do not expect further cuts in 2013.
Experts expect a natural gas investment surge in Canada that could surpass even oil sands investment levels, though those should remain strong. Watch for LNG investments, in particular. Though mineral exploration has weakened in 2012, the forecast is still cautiously optimistic, strengthening in the medium- to long-term.
Canada heads into 2013 under a cloud of uncertainty wrought by America’s contentious wrangling over the so-called fiscal cliff, a slow global economy, and pending decisions impacting critical trigger points for growth, especially in the energy sector. At the very least, 2013 should be an exciting year for those watching as Canada pushes to become one of the top energy exporters in the world.
Chris Faulkner is the founder, president and CEO of Breitling Oil and Gas, an independent oil and natural gas company based in Irving, Texas. Founded in 2004, Breitling Oil and Gas employs state-of-the-art petroleum and natural gas exploration and extraction technologies for the development of onshore oil and gas projects. For more information, visit www.breitlingoilandgas.com.