Tertzakian: Oilsands being claimed by cash-rich and resource-hungry Asia
By Peter Tertkzakian, Calgary Herald November 29, 2010
Alexander Dumas, 19th century French author of classics such as The Three Musketeers, offered a simple MBA formula, “Business? It’s quite simple. It’s other people’s money.”
Canada with its rich endowment of natural resources has long been a magnet for foreign investors. Flip the calendar back three hundred years and you’re back to when European explorers were drawn to our country’s trade in furs, the resource of choice in its day. In the late 1870s, the Klondike attracted tens of thousands of American prospectors to Yukon gold. And this century, black gold as opposed to yellow attracted more American dollars to fuel industrialization and mobilization, especially after World War II. Many other Canadian resource industries have pulled in foreign dollars over the years, but the most notable in the past 18 months is the rush of Asian capital into our oilsands. Last week two more big deals were announced that further solidified a trend that’s been gaining momentum. The latest deals reinforce the worth of the oilsands to energy-deficient countries such as China, Japan, Korea and Thailand.
The deals announced last week totaled about $2.4 billion. The dominant transaction came from a new player to the region: PTT Exploration and Production. Hailing from Thailand, PTT bought a 40% stake in Statoil’s oilsands project in Alberta for $2.3 billion. On a much smaller scale, the Korea Investment Corporation loaded up Osum Oil Sands Corp. with $100 million through an equity private placement. In both cases, deep-pocketed partners have once again entered the oilsands fray to help develop these capital-intense projects.
The tally of Asian capital targeting the oilsands over the past 16 months is now about $11 billion. To put Asia’s recent interests into perspective, companies in the oilsands collectively spent $11 billion in 2009, a down year. This year expenditures are expected to increase modestly to $13 billion, and then step up to $15 billion next year.
One important factor to consider is that the money that’s coming in is not being used to stake claims. Figure 1 shows that land purchases ramped up quickly in 2005, peaked in 2006, and have since dropped to almost nil. As in the aftermath of any Klondike rush, all the valuable properties have now been claimed. New interest in the region is mostly horse trading for an equity stake or partnering at the project level; in both cases the focus is now on development.
For those companies in the oilsands region that have already staked good leases the news of flush foreign investors coming in and paying up is positive, much like owning beachfront property when no more is left to buy. It’s hard to believe that too much money can spoil a beach party, but in the oil and gas business it can cast a negative pall over the industry without a lot of difficulty.
Problems always arise when large volumes of capital enter a constrained area with limited labour, especially when it happens over a relatively short period of time. The potential for runaway cost inflation – as was experienced between 2005 and 2008 – is the number one concern in the oilsands right now.
A slowdown in spending over the last couple of years helped to moderate costs, but Figure 2 shows that Alberta wages paid to oil and gas workers have already crept back above where they were before the financial crisis hit in late 2008.
A ramp up of capital expenditures in the oilsands, aided in no small part by foreign capital, suggests that costs in the Fort McMurray region are poised to rise again in 2011 if capital expenditures rise too fast. On the surface, inflating costs for goods and services, especially wages, are not necessarily a bad thing for they imply greater local economic prosperity. But there is an important consideration: higher wage costs must be met by offsetting increases in labour productivity. Oilsands barrels are already among the highest cost in the world; making the barrels more expensive only makes the business more vulnerable and less attractive.
Foreign investors are coming to Canada’s oil and gas industry for a number of important reasons, including the broad pursuit of real assets in a world where holding paper wealth is becoming increasingly tenuous. Canada’s energy resources have special appeal because they are sheltered under an umbrella of political stability, rule of law, market sophistication, established infrastructure and experienced workforce, among other attractive things not easily found elsewhere. For sure all of these qualities are worth a premium, but the industry should be careful about relying too heavily on the “they need our oil” or “we have what others don’t have” type arguments. We shouldn’t lose sight that Canada’s oil must remain globally competitive if it is to continue to attract more foreign investment dollars on attractive terms.
Maintaining and encouraging access to new sources of capital, especially from cash-rich and resource-hungry Asia will be essential over the next decade if Canadians want to continue fueling prosperity, whether its from oilsands, conventional oil or natural gas (or any other commodity for that matter). Let’s hope Dumas’ simple formula isn’t spoiled by localized inflation that could price oilsands producers out of the global market.
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Peter Tertzakian is a Calgary-based economist, investment strategist, author and public speaker. He is chief energy economist and managing director at ARC Financial Corporation, an energy-focused private equity firm.
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