by Peter Tertzakian

28-05-05

Canada's influence on the world energy stage is huge, and most of us don't even know it. In any business environment, influence is exerted by those with low-cost products and ample productive capacity. Oil is no exception.

We have a lot of productive capacity. Our Western Canada Sedimentary Basin (WCSB) still ranks high as a prolific source of conventional crude oil and natural gas. Our non-conventional oil sands are now recognized as holding the second-largest source of recoverable oil in the world after Saudi Arabia. Our frontier regions, like the offshore East Coast, are more icing on the cake. Although our costs of finding, developing and producing ranks at the high end of the spectrum -- for example, compared with Middle Eastern reservoirs -- by any measure we are an energy superpower.

Our strength in energy is not just built on physical barrels of oil. We do not live under a perennial cloud of civil war or armed conflict. We don't have zealots blowing up our pipelines. We respect, uphold and defend our rule of law -- a signed contract can be trusted. Our governmental system, although tarnished in our own eyes of late, is still a bedrock of stability compared with some of the rogue authoritarians running a large fraction of the oil world.

Our highly developed capital markets and fiscal regimes catalyse entrepreneurial exploration like none other on the planet. And we are a marketer's dream, positioned right next to the world's largest consumer of oil. As Patrick Brethour pointed out in the Report on Business, contrary to popular belief, Canada, not OPEC, is the largest supplier of oil to the United States. Of the 12 largest oil exporters, only Canada has all these attractive qualities. And these characteristics are becoming more appealing as bringing new barrels onto the market gets riskier and costlier in other regions.

For example, Venezuela shredded contracts held with multinationals like ExxonMobil, “renegotiating” them with much higher royalties and taxes. In Libya, oil companies recently signed exploration and production-sharing agreements under extremely tough terms, with up to 87.6 % of the top line now going to the government. It goes largely unnoticed in the mainstream media, but fiscal regimes governing oil are changing worldwide as some major oil exporters extract more economic rent out of a $ 50 barrel of oil.

This type of behaviour is nothing new. Hawkish exporters have been “upping the rent” since the 1960s when OPEC was first formed. And let's not forget the Russians, who with their Yukos fiasco are not-so-subtly nationalizing their oil industry.

Political, legal and safety risks manifest themselves financially in terms of return requirements, or hurdle rate. The higher the risk, the greater the hurdle. Oil companies that invest in Canada use a hurdle of 8 % after tax. What independent oil company will risk going into Venezuela, Indonesia or Russia for a measly 8-% return? Imagine committing capital to Iraq for an 8-% return!

The polarized situation in the world today has produced a situation in which the cheapest oil to find, develop and produce is burdened with the most risk, while more costly oil like ours comes with the luxury of well-defined rules and safety. Who has the cheapest oil, net of all risks? You don't need a calculator to figure it out. The massive investment flowing into this country, including another $ 80-bn for the oil sands, should tell you the answer.

Geopolitical events around the world are making Canada the de facto low-cost producer of incremental oil barrels. On top of that, we have world-scale reserves.

And unlike the uncertainty surrounding how much OPEC producers can raise capacity, as discussed in Haris Anwar's article, there is no debate that we are steadily increasing our oil sands output. If we weren't so humble about our position in the energy world (and maybe so unaware), we might be inclined to exert some influence.

Peter Tertzakian is chief energy economist for ARC Financial Corp.

Source: The Globe and Mail