Business of Energy - April 2020

Page 1

OF ENERGY

APRIL 2020

INVESTING

IN ALBERTA ENERGY MATCO INVESTMENTS’ MICHAEL TIMS IS STAYING THE COURSE



OF ENERGY VOL 2, ISSUE 2 | APRIL 2020

PUBLISHERS

Pat Ottmann & Tim Ottmann

Alberta Will Redefine Resiliency Yet Again in 2020 by David Yager

Cover: Investing in Alberta Energy

by Melanie Darbyshire

04 07 11 12

Canadian Energy is an Incredibly Persuasive Global Story 2019 FEBRUARY by Cody Battershill

The New Age of Data

by Chuck Bean

EDITOR

Melanie Darbyshire

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THIS ISSUE’S CONTRIBUTORS Melanie Darbyshire David Yager Chuck Bean Cody Battershill

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David Yager | Alberta Will Redefine Resiliency Yet Again in 2020

ALBERTA WILL REDEFINE RESILIENCY YET AGAIN IN 2020 by David Yager

T

he way that 2020 has started off, the time has come for Alberta to change its official bird from the great horned owl to the black swan. Black swan? When an unplanned severe economic phenomenon occurs – when a financial curve ball comes out of nowhere and wrecks everybody’s plans – economists, analysts and financiers call it a “black swan event.” While all swans were thought to be white for centuries, extremely rare and previously unimagined black swans were discovered in Australia in 1697. Online financial dictionary Investopedia reads, “A black swan is an unpredictable event that is beyond what is normally expected of a situation and has potentially severe consequences. Black swan events are characterized by their extreme rarity, their severe impact, and the practice of explaining widespread failure to predict them as simple folly in hindsight.” The definition is fraught with irony. First something unplanned changes things dramatically after which multiple observers are miraculously blessed with perfect 20/20 hindsight.

Alberta adopted the great horned owl as its official bird in 1977. But black swans have been breeding, laying eggs and hatching chaos ever since. That Albertans have always found ways to regroup, recover and forge onwards is the reason the province has long called itself, “next year country.” Alberta has been forced to bounce back so many times it has become a synonym for resiliency. And in 2020 we get to do it again. This year started with three major events affecting the economy that nobody foresaw. The worst was coronavirus which has clobbered oil and stock markets. No business planners put a serious contagious disease outbreak and potential global pandemic in next year’s financial forecast. “Revenue and profits for 2020 look pretty good, unless of course people can’t leave the house for fear of contracting a fatal disease.” The second was the decision by Teck Resources to abandon its Frontier oilsands mine before the federal government rendered its decision. Lots of people predicted it would never be built. But after investing 10 years and a billion dollars, nobody imagined Teck would throw in the towel only days before Ottawa made an official pronouncement one way or the other.

4 • Business of Energy • April 2020


Alberta Will Redefine Resiliency Yet Again in 2020 | David Yager

The combined impact was somewhere between awful and devastating depending on your job, company or economic sector. As cases of coronavirus infections and deaths grew, world stock markets lost $US6 trillion of value in a week. Because of air travel restrictions, it was soon clear oil demand was falling fast. WTI, which opened the year above $US60 a barrel, had lost 25 per cent of its value by early March. Not knowing when and where this would end, the expanded oilpatch capital budgets that had spurred so much optimism to begin the year were in doubt only weeks after 2020 began. “Only a matter of time” the world’s disease-expert pundits sagely observed. The Teck decision was more psychological than economic. Frontier had been hyped as a major positive turning point for the economy of Alberta if it was built and the fragmentation of the country if it was rejected by the Trudeau government. Teck’s unexpected withdrawal precipitated endless rounds of commentary, none of it good. As Investopedia observed, everyone who ever had a doubt about Frontier was able to say, “I knew it.” Oilsands haters rejoiced, and endless columnists opined that the era of Alberta’s economy being driven by new bitumen development was officially dead. The blockades clobbered everybody. Following the RCMP entering Wet’suwet’en to arrest people restricting access for Coastal GasLink construction activities, all manner of people across the country seized the moment to participate in civil disobedience by blocking railways, roads, public buildings and whatever else they could think of that would irritate the most people with the lowest personal risk. The issues were indigenous rights, fossil fuel development, climate change and “power to the people”; not big governments and big companies. “No wonder and totally justified,” progressives cried, given the appalling treatment of First Nations by Canadian “colonials.” Pollsters asked Canadians for their response to the statement, “Right now, Canada is broken.” Nearly 70 per cent agreed with the main issue being the blockades and the failure of governments to remove them. Discontent in Alberta, also stung by falling oil prices and shelved oilsands mega-projects, was at 83 per cent. Prime Minister Justin Trudeau’s response, or the lack of it, saw his approval sink below 30 per cent. For Albertans, having plans, careers, ambitions, investments and companies derailed or destroyed is hardly new. Since 1977, when Alberta clearly embraced the wrong provincial bird, there have been multiple unplanned black swan hatchings. But we’re still here. And we will be next year. That high oil prices always come down is well understood today. Modern electronic commodity markets wiggle continuously in both directions. Price volatility is part of the modern oil business. But this was all new 40 years ago after the national energy program was introduced in 1980. With oil prices 10 times what they were seven years earlier, federal professional extrapolators

5 • Business of Energy • April 2020

Alberta Will Redefine Resiliency Yet Again in 2020

The last was nationwide blockades of railways and roads, allegedly in solidarity with the Wet’suwet’en hereditary elders opposed to the Coastal GasLink pipeline from northeast B.C. to Kitimat. LNG Canada is the only good news natural gas has enjoyed in 13 years. LNG is supposed to help Asia use less dirty coal. No other country in the world has or will ever experience mass protests of this type of project for this reason.


David Yager | Alberta Will Redefine Resiliency Yet Again in 2020

concluded this would continue forever and therefore legislated massive wealth redistribution from oil and gas producers to consumers.

Alberta’s economy retooled to oilsands creating an economic boom that rivalled anything experienced in prior years.

The ink was barely dry on the hard-fought 1981 federal/provincial revenue-sharing agreement between Ottawa and Edmonton when oil prices started to slide. By 1985, they had collapsed entirely and didn’t start to rise in real terms for nearly 20 years.

Hundreds of billions of dollars were committed and invested in oilsands production and upgrading. Export pipeline capacity expanded and more was planned. When the NDP and Liberals introduced higher corporate taxes, carbon taxes and aggressive climate policies in 2015, Canada had four export pipelines in the works to haul away up to two million of additional oil production.

As a result, Alberta was introduced to resiliency in ways it had never previously imagined. House prices collapsed, businesses went broke, banks failed, deficits skyrocketed and income from the Heritage Fund – the built-to-last safety net from 1970s oil boom money – was drained to support general government revenues. The spectacular oil boom of the 1970s became the spectacular bust of the 1980s. The next major black swan that would clobber Alberta’s economy and finances was the unlocking of shale gas using extended-reach horizontal drilling and hydraulic fracturing. This began about 2007 in the Barnett Shale of Texas. The 21st century started with a natural gas boom of unprecedented proportions. During the 2005 hurricane season in the Gulf of Mexico, Henry Hub gas peaked at over US$13, nearly 10 times current levels. LNG import terminals would be required to supply North America with gas because of falling domestic production and rising demand. That natural gas would one day be abundant and worthless by comparison was not predicted. This is evidenced by the investment in billions of dollars in wells, gas plants and specialized oil service equipment, much of which is either gone or valued at a fraction of what it cost to create. The technology-driven gas price meltdown devastated and completely changed the Canadian oilpatch. Climate change activism and its impact on the oilsands was a huge black swan that took 15 years to incubate and hatch. In the period 2004 to 2006, Alberta experienced a one-time oilsands leasing boom that had never been seen before or since. As natural gas tanked,

Then the biggest, baddest black swan of all descended in the form of collapsed oil prices – again – and the unforeseen and fundamentally irrational selection of oilsands and oil pipelines as the greatest threat in the history of mankind to the world’s climate. Not one of 2015’s four pipelines are in operation five years later. Tens of billions of dollars in oilsands and pipeline development capital has fled Alberta. And here go again. Incredibly resilient Alberta. Not particularly happy, but ready to do whatever it takes to make things go. We’re routinely advised to do something different. We will. Just wait a minute. And as challenging as events appear when the world throws us another black swan curve ball, the default behaviour of focusing on the negative while taking the positive for granted does not serve us well. Combined oil and gas production are at record levels. Enbridge Line 3 will be carrying additional oil soon. LNG Canada and the Coastal GasLink pipeline will get completed, blockades be damned. Trans Mountain is under construction. Keystone XL will not die. The world still runs on oil and gas and will for the foreseeable future. We’ll bounce back. We always do.

B O E

David Yager is a Calgary-based writer, author and oil service executive. He is currently president and CEO of Winterhawk Well Abandonment Ltd.

6 • Business of Energy • April 2020


Investing in Alberta Energy | Melanie Darbyshire Michael Tims, vice chairman, MATCO Investements.

INVESTING

IN ALBERTA ENERGY MATCO INVESTMENTS’ MICHAEL TIMS IS STAYING THE COURSE

M

by Melanie Darbyshire

ichael Tims has spent his career investing in Canadian oil and gas. Currently the vice chairman at MATCO Investments, he previously spent 33 years at Peters & Co., the Calgary-based investment firm specializing in oil and gas, oilfield services and energy

infrastructure, where he served as president and CEO, and latterly as chairman. He’s lived through highs and lows in the market, enjoyed the bounty of booms, survived the merciless busts; his perspective today is seasoned with the benefit of this experience.

7 • Business of Energy • April 2020


Melanie Darbyshire | Investing in Alberta Energy

That perspective predicts fairly modest growth in Alberta’s energy industry for the foreseeable future. “You have to look at all the sub-segments,” he advises, which include oilsands, conventional light and heavy crude oil, condensate and natural gas liquids, and natural gas. “The majority of Alberta’s oil production comes from the oilsands,” Tims continues, “and I’ve thought for some time that the combination of economics (the oil price in the US$50/ barrel range) and politics make large-scale, mega-mining projects much less likely to be built.” He notes the decision in February by Teck Resources to withdraw its application for its Frontier mine. “Projects like Teck’s were predicated on the assumption of higher oil prices – $80/90/100 oil. There aren’t many mining oilsands projects that appear on the cusp of proceeding. Capital spending in the oilsands is now fairly low.” Indeed, a number of non-Canadian companies – Shell, Total, ConocoPhillips – have sold Canadian oilsands assets, predominantly to three Canadian players: Canadian Natural Resources, Suncor and Cenovus. “And we don’t see, for the most part, any large amount of non-Canadian money coming in that wasn’t here already,” Tims says. While mining projects may be less economical, Tims does see the potential for incremental growth of steam-assisted gravity drainage (SAGD) projects, which are more modular and don’t involve such large commitments of capital. “Very often these projects are added onto existing infrastructure,” he explains. “So, the economics at the margin of incremental additions to these projects will continue at a moderate pace. But again, at US$50 oil, nobody has a huge incentive to be super aggressive about it.” The conventional light and heavy producers, he says, seem to have enough capital spending to sustain themselves, but are not growing dramatically. “The Canadian independents are continuing their activity, but are hampered by the fact that there hasn’t been much capital raised or available,” Tims says. “There’s only a few of them that you would call vibrant. What it really takes now are very high-return projects and a decent amount of internallygenerated capital, because it’s so hard to access outside capital.”

Oil pipeline capacity is needed, Tims says. “The first key towards reducing the imbalance between production and transportation, which has taken longer than everybody expected, is Enbridge’s Line 3 replacement and expansion. ABOVE: FRASER INSTITUTE FOUNDERS’ AWARD HONOURING MICHAEL J. TIMS, OCTOBER 4, 2018. PHOTO SOURCE: LEBLOND STUDIOS

8 • Business of Energy • April 2020


Noting major protests and blockades against the CGL pipeline, Tims points out the environmental upside to LNG. “Natural gas has half the emissions of oil. It can displace oil and coal elsewhere in the world, which is a good development. Maybe it’s not what the purists want, but it’s a major step forward.”

It appears to be coming through. The big question with the Trans Mountain expansion (TMX) is the risk of disruption and whether or not there will be the resolve to see it through. I think we’d be naive to think there won’t be some of the same kinds of protests [as with Coastal GasLink]. Industry and governments need to be ready for that.” The market for natural gas remains weak, with solely gas-focused drilling activity almost nil. “The economics don’t support it,” he says. “When you take the drilling and completion and tie-in costs, plus the transportation costs, it doesn’t make sense.” In the first quarter of 2020, the price of natural gas stayed around $2. Liquefied natural gas (LNG), however, is a good opportunity for Canada. “I think there has been relative consensus – among the provinces, federal government, First Nations, and companies and the public – about LNG,” Tims offers. There is currently just one LNG project moving forward in Canada: LNG Canada, a joint venture between Shell, Petronas, PetroChina Company Limited, Mitsubishi Corporation and Korea Gas Corporation. “There is a strong hope that they’ll double the size of it, because the economics actually get better on a per-unit basis,” he continues. “It appears to be proceeding, assuming we can get the Coastal GasLink (CGL) pipeline actually constructed and then the project itself constructed.” Noting major protests and blockades against the CGL pipeline, Tims points out the environmental upside to LNG. “Natural gas has half the emissions of oil. It can displace oil and coal elsewhere in the world, which is a good development. Maybe it’s not what the purists want, but it’s a major step forward.” Another bright spot for the industry is large-scale petrochemical projects. “To the extent that these projects have good economics, we should definitely be encouraging them,” he says. “It’s nice to see more finished and upgraded products being made here. It makes a ton of sense for everybody.”

9 • Business of Energy • April 2020

Investing in Alberta Energy

Investing in Alberta Energy | Melanie Darbyshire


Melanie Darbyshire | Investing in Alberta Energy

At MATCO, Tims and his team are working on the belief that another positive cycle will occur. MATCO is invested in approximately 60 companies, the bulk of which are Canadian oil and gas, oilfield services, and oil and gas infrastructure companies. Taken together, the various sub-segments of Alberta’s energy will likely provide for a modest rate of growth for the next stretch. “But it’s not likely to be overly buoyant,” Tims offers. “A slight improvement over the last five years.” The best indicator of where things are going is what the companies are spending their money on. “Both in the oilsands and in conventional oil and gas they’re down roughly 60 per cent from peak levels in 2014,” he advises. “So, things have fallen off significantly. I think they feel flat right now. It’s not falling dramatically further, but they’re certainly not rebounding vigorously either.” Given weak natural gas prices, Tims predicts a large reduction in capital spending for natural gas in the U.S. as well, which could in turn lift prices. “There’s an old saying in the oil and gas industry that the best cure for low natural gas prices is low natural gas prices. Because it removes the incentive for new drilling and then the decline rates will set in and bring it back to a level that the market will actually demand.” The price of oil, he predicts, will not go up dramatically in the near term, absent the small possibility of major disruption in the Middle East. “Right now, it’s particularly weak because of the coronavirus scare,” he says. “And it depends on how disciplined OPEC and the OPEC plus members want to be. It’s dependent on geopolitical considerations – Libya’s got production problems, Venezuela has production problems. And we do see various parts of the world, especially in Europe, where there’s a greater drive to get away from fossil fuels, which is clearly not going to help oil demand in the long run.”

In the short term, Tims believes prices might still rise if capital spending drops off enough. In addition, the movement to transition off fossil fuels to other sources of energy might have an unintended effect on prices. “It is highly likely to take quite a long period of time for this transition, but if people anticipate it happening more quickly and they stop spending on oil and gas projects, it could actually boost the price in the near term. Because that transition just can’t happen overnight.” He doesn’t discount the anti-fossil fuel movement, or that renewable sources of energy will continue to grow. “But we will need hydrocarbons for probably decades to come,” he says. “We don’t know the rate of growth in consumption, or how much of the growth can be picked up by other sources. But in 10 and 20 years from now, I think Alberta’s oil and gas industry will be OK, though I don’t think we’ll go back to a boom town. That was predicated on large-scale additions to oilsands capacity, and I’m having trouble seeing that happen right now.” At MATCO, Tims and his team are working on the belief that another positive cycle will occur. MATCO is invested in approximately 60 companies, the bulk of which are Canadian oil and gas, oilfield services, and oil and gas infrastructure companies. “Prices will probably improve over time,” he predicts. “But in the near term, they can be buffeted by many factors, including the ones we’re seeing right now. So, it’s not a super bullish statement, but we’re not exiting the picture either. We’re trying to create value out of the B investments that we have.” OE

10 • Business of Energy • April 2020


Canadian Energy is an Incredibly Persuasive Global Story | Cody Battershill

CANADIAN ENERGY IS AN INCREDIBLY PERSUASIVE GLOBAL STORY by Cody Battershill

L

et’s get back to basics and take a closer look at the case for Canada maintaining its strong position as a global oil supplier.

According to some analysts, the industry must invest several trillion to meet future oil demand through 2040, with that increased future demand pegged at more than 14 million barrels per day. The International Energy Agency puts growth in global energy demand at 32 per cent by 2040. Given Canada’s strong reputation for responsible resource development and its rigorous regulatory regime, it makes sense we play a central role in meeting that demand. I’ve stated this before, but it’s worth repeating: of the world’s top 10 oil exporters, Canada ranks number one globally in ESG metrics in every single one of the following rating indexes: Resource Governance Index 2017; Environmental Performance Index 2018; Democracy Index 2018; and Sustainable Development Index 2019. Canada also ranks first among oil top suppliers in the following indexes: Global Cleantech Innovation Index 2017; Women, Peace, and Security Index 2018; Rule of Law Index 2019; and Global Peace Index 2019. But Canada’s global market access is largely blocked due to, among other things, a lack of pipeline capacity. Non-democratic national actors with inferior environmental and human rights records are free to meet growing global oil demand while Canada is forced to sit on the sidelines. Meanwhile our human rights, environmental and worker and community safety standards are the global gold standard. Next to competitors like Saudi Arabia, there is no comparison.

And for indigenous leaders like Roy Fox, Makiinima, chief of the Kainai Blood Tribe, there’s growing support among First Nations for greater participation in the sector. Chief Fox acknowledges the causes of climate change. In fact, his tribe has invested in wind power as part of its transition to renewable sources of energy. But he wants his people to be able to develop their oil and gas resources at fair prices in order to generate revenues to improve the quality of life for community members. The same thinking has helped grow the support of almost every First Nation community located along the Trans Mountain pipeline’s right of way. Equally important, Canadians can be especially proud of the sector’s record of innovation. For example, innovation in the oilsands made steamassisted gravity drainage (SAGD) possible which removes oil from the ground and allows for a large geographic area to be developed with minimal impact to the land. While many Canadians have been led to believe Canada’s oil and gas sector is a high emitter of greenhouse gases, oilsands developments account for only about 10 per cent of Canada’s GHG emissions, and 0.15 per cent of global emissions. Even through these tough times, Canada’s industry has managed to reduce GHG emissions by 32 per cent per barrel since 1990. It’s a persuasive story, and we just have to keep B telling it. OE

Cody Battershill is a Calgary realtor and founder/spokesperson for CanadaAction.ca.

11 • Business of Energy • April 2020


Chuck Bean | The New Age of Data

THE NEW AGE OF DATA

by Chuck Bean

I

love data. I love the information it provides, and I love being able to take that data and use it to make smart decisions.

I also believe that very soon, most of our decisions will be data based and that we will not need a human to engage in the process. If the data says go left, then go left. There is no doubt that data-based business decisions are now starting to mainstream. Soon the roll of middle management will change from someone that interprets data and directs people, to someone who is a supporter and trainer, charged with ensuring that their people are energized to follow data-based directions. It is that time again when one of my favorite sources of data is published, The Edelman Trust Barometer. The 2019 edition has 78 pages of stuff all about who trusts who. Representing 27 markets with 33,000 participants, this is a rockstar report that tells the truth about who trusts who, why, how, where and when. Once again at the top of the list is Canada. In fact, this year, Canada was tied for first with Germany specific to this question; “Please indicate how much you trust global companies headquartered in the following countries to do what is right.” Now you may not be spitting out your Shreddies when you hear that statement, but I sure am. For me this information is golden and all of us who are engaged in the patch, should be thinking long and hard about how we can export our Canadian technologies, if for any other reason the fact that we are trusted and people will more likely engage commercially with us due to that trust. Out of 17 of the largest economies, the top five most trusted in order are, Germany, Canada (tied), Switzerland, Japan and the U.K. with the USA in the middle of the group of 17 and Mexico at the bottom of the list. This translates into a very distinct advantage to Canadian companies

especially if they are marketing high value or hightech products and services. Inside of the countries, NGO’s and family businesses have the greatest position of trust, and most importantly, Technical Experts rule the roost when it comes to the people that are most trusted within the corporation. This is also particularly fascinating. While so many of us believe that building a large business with a big footprint is the key to success, this data states that small family businesses with sharp technical people are the most trusted, and therefore most likely to engage and do business worldwide. Regardless of size I need to say - sorry CEO’s… the trust barometer states once again that senior executives such as CEO’s, COO’s and related executive roles are only mildly trusted. If you want to see international business growth, do your company a favor and cut your C-Suite travel budget and give it to the tech team. Another suggestion – dump C-Suite titles for your key people and replace them with titles that are more specific to what their job descriptions or outputs are. Do this and you will likely gain more engagement in the international market. What does all of this mean for us here in the Alberta Oil Patch? It means we need to leverage our global trust and take our technologies out of country where we are highly respected. It means we need to get out there, get international and get in the face of our potential clients with our technical folks leading the discussion. This sort of data paves the way and will be a significantly impactful path for growth. We can’t wait for anyone to do it for us, we need to take action and as Larry the Cable Guy would say, “get er done!” PS… do you want a copy of the trust barometer? Shoot me a note and I will send one over! B Cheers, Chuck. OE

12 • Business of Energy • April 2020


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