Investment pours into energy sector, despite challenges

Special to Globe and Mail Update



By sheer numbers alone, Canada’s oil and gas sector is huge. Its public companies account for about one-quarter of the value of the TSX/S&P index, and it is attracting an international flood of investment, estimated to be $55-billion in new capital investment this year, to feed an energy-starved world. Canada has the third-largest oil reserves on the planet.

For all its size and wealth, however, the industry is faced with a host of challenges, old and new. They include the perennial issue of distribution (how to get remotely located oil and gas to far-off markets), regulatory and environmental questions around the oil sands and, most recently, hydraulic fracturing drilling technology (fracking), as well as rising shortages of skilled labour.

And the oil patch is not the only part of Canada grappling with these issues.

“It is no longer just a Western Canadian industry, this is going from the offshore basins in Atlantic Canada through to the discussions going on in Ontario and Quebec right now,” said Greg Stringham, vice-president of oil sands and markets with the Canadian Association of Petroleum Producers (CAPP).


Much of the billions in new investment are coming from outside of the country’s borders, as Canada represents one of a shrinking number of energy-producing countries where the resource is not controlled by state entities. American companies have long invested in the industry and, more recently, CAPP has identified “waves” of investment from Europe in the past decade and, most recently, from Asia.

This foreign interest in Canadian flagship companies can cause national nervousness, such as when Ottawa blocked BHP Billiton Ltd.’s attempt to take over Potash Corp.

But government ownership of resources can act to limit nationalist tendencies, said CAPP’s Mr. Stringham. “[Provincial governments] regulate how it is developed, they put the environmental standards in place, they put the labour standards in place, and even foreign companies that come in here and invest have to pay the Canadian and provincial royalties and taxes and then if you want to take it out of the country you actually go through an export licensing permit process. Even to the U.S.”

And foreign investment can inject much needed capital for development.

One of the most recent direct foreign investments was Japanese industrial giant Mitsubishi Corp.’s multibillion-dollar purchase of a stake in Encana Corp.’s Cutback Ridge natural gas project in British Columbia. The deal gives Calgary’s Encana the financing it requires to develop the resource and secures an upstream source of natural gas, which could ultimately make its way across the Pacific in tankers once pipelines, ports and terminals are constructed across Alberta and B.C.

“This is another strategy that companies like ourselves are using to not only accelerate our opportunities but help work through this period of low [natural] gas prices until demand increases and we see the commodity price increasing,” said Richard Dunn, vice-president of regulatory and government relations with Encana. “This is a good thing for North America, getting this foreign direct investment at this point in time.”


While U.S. investment is still critical to Canada’s energy sector, some of that capital has been diverted to the U.S. shale gas development boom. Deemed by some to be an energy revolution, the marriage of hydraulic fracturing technology and horizontal drilling techniques has allowed producers to tap into shale gas deposits and “tight” oil deposits that were not readily accessible before.

But hydraulic fracturing, or fracking, has drawn opposition from communities concerned about the spread of toxic chemicals used in the process and water use and disposal issues that are slowing development in parts of Canada and the U.S.

The new technology has also flooded the North American market with natural gas, sending prices to all-time lows and revealing a distribution network of oil and gas pipelines that are straining to keep up with production.


Increasing supplies of crude oil from western Canada and rising suppliers such as North Dakota are now competing for pipeline space with bitumen generated by Alberta’s oil sands. Lack of pipeline capacity could choke off oil sands growth by 2015, according to a report from the Canadian Energy Research Institute (CERI) released earlier this week.

“In the short to medium outlook, definitely infrastructure constraints are a big issue,” said Dinara Millington, CERI’s research director. The planned Alberta to Gulf Coast Keystone XL line has been shelved indefinitely by U.S. politicians, and other pipeline projects, such as Northern Gateway to Kitimat, B.C., face regulatory hearings and delays.

Western Canada’s current pipeline capacity of 3.5 million barrels per day is sufficient for current and future oil sands projects that have gained approval or awaiting approval. Future oil sands development will not go ahead without more pipeline capacity, CERI predicts.


The other major issue for oil and gas producers is the growing shortage of skilled labour to build and maintain growing infrastructure. The industry finds itself competing for the same workers with natural resource companies in industries such as mining.

“As the oil sands is entering what has been called the ‘second boom,’ labour shortages are already being experienced and what is making this worse is the development of shale gas in British Columbia, which is direct labour competition for oil sands producers,” said Ms. Millington.

The competition for labour can be seen in average wages in Alberta rising from $16 an hour in 2000 to about $25 today. “It could create its own bubble where it becomes basically unsustainable. You can’t continuously raise wages to attract labour but that is what has been going on in the short term.”

Special to The Globe and Mail