Canada’s oil sands under siege
A scarcity of investment options is compounding the rapid exodus of international firms
The Canadian oil sands industry has been hit repeatedly since the middle of the last decade. International crude prices collapsed between 2014-16 and again this year, while Western Canadian oil prices slumped in the second half of 2018. The latter was due to a lack of takeaway capacity from the region, courtesy of an anti-oil sands campaign to slow development of new pipelines from Western Canada.
The global environmental movement has successfully painted oil sands as being ‘black as coal’ over the past decade. This, along with lower oil prices, has contributed to an exodus of IOCs and major financial institutions from the resource.
On 29 July, France’s Total, one of the few remaining IOCs in the sector, wrote down the value of its oil sands assets by a massive C$9.3bn (US$7.1bn) and cancelled its membership of the Canadian Association of Petroleum Producers (Capp) due to a “misalignment” with its climate change position.
Total says it now considers high-cost, high-carbon resources, such as the oil sands that were to be produced post-2040, to be stranded assets.
Even major Canadian producers appear to have lost confidence in oil sands as an economic resource, preferring to buy producing assets on the cheap from fleeing foreigners rather than spend on capital investments to grow the resource.
A long list of IOCs and other foreign oil companies have offloaded their oil sands assets to domestic producers since 2016. Norway’s state-owned Statoil—now known as Equinor—sold acreage to Athabasca Oil Corp for up to C$832mn in December 2016. In March 2017, Shell and US independent Marathon Oil sold assets to Canadian Natural Resources (CNRL) for C$7.2bn and C$5.5bn, respectively. ConocoPhillips divested to Cenovus Energy for C$17.7bn less than a month later. And US firm Devon Energy sold all of its Canadian assets to CNRL for C$3.8bn in May 2019.
C$7bn – Capex decline in 2020
At the same time, the global financial boycott of the oil sands industry is gaining momentum among major financial institutions and institutional investors. On 27 July, Frankfurt-based Deutsche Bank said it would no longer finance oil sands-related projects, joining other major banks such as the UK’s HSBC, France’s BNP Paribas and Switzerland’s UBS.
On 12 May, Norway’s Oil Fund announced plans to stop making equity investments in Canada’s top four oil sands producers—CNRL, Cenovus, Imperial Oil and Suncor Energy—on environmental grounds. The $1tn fund is the largest sovereign wealth fund in the world.
To make matters worse, a year-long environmental campaign to encourage insurance companies to drop liability coverage on the Canadian government-owned Trans Mountain pipeline system is beginning to bear fruit. On 22 July, Swiss firm Zurich, the lead insurer, announced it would be dropping coverage as of the end of August. It has been reported that two smaller German insurers within the 27-company consortium, Munich Re and Talanx, are planning to do the same.
The appetite of Canadian companies to acquire oil sands assets from foreign companies has failed to translate into strong capital spending. Oil sands capex has declined every year since 2014, when it peaked at C$34bn and accounted for 42pc of Canadian upstream spending. It is expected to drop again in 2020 based on Capp’s latest forecast (see Fig. 1).
It appears oil sands capex will decline to little more than C$7bn this year, a collapse of almost four-fifths compared with 2014, while losing 11 percentage points to conventional oil and gas resource.
Ominously, Canadian oil sands producers chose to pay down debt or make further acquisitions rather than increase capex in 2019, with Alberta’s crude curtailment programme returning the industry to profitability. Despite the recent rebound in crude prices, Canada’s top four oil sands producers have all indicated they have no plans to increase capital spending in the second half of the year, following large cuts when prices collapsed in March and April.