BUSINESS

Exodus of an industry

Canadian oil explorers are looking abroad

JOHN DeMONT November 6 1989
BUSINESS

Exodus of an industry

Canadian oil explorers are looking abroad

JOHN DeMONT November 6 1989

Exodus of an industry

BUSINESS

Canadian oil explorers are looking abroad

Most of the drill rigs were silent across Western Canada last week. In fact, only 179 of the 496 oil rigs in the

region were drilling for a gusher and, even then, a number of them were being operated at a loss by desperate owners in search of critical revenues. The boom-and-bust energy industry is accustomed to hard times, but the latest slump is different. In fact, a historic shift is occurring in the Canadian energy industry—oil exploration is moving away from Canada to foreign shores. Concluded Keith Caldwell, vice-president of exploration with Calgarybased Gulf Canada Resources Ltd.: “We are certainly not abandoning Canada, but if we want to continue to replace our oil reserves, we have to look abroad.”

The deep conventional oilfields that fuelled the energy sector’s growth, and supplied most of Canada’s critical crude-oil needs for four decades, are dwindling. There are still an estimated 3.6 billion barrels of conventional light oil to be found in Western Canada. But most of it lies in small, scattered pools that make it increasingly costly to find and develop.

The huge Canadian and multinational energy companies, which provide most of the investment and jobs in the industry, are slowly but steadily abandoning the hunt for conventional oil in the West, and as a result some analysts say that Canada will become increasingly dependent on less secure foreign supplies. Many companies, even government-owned Petro-

Canada of Calgary, are turning to regions such as Southeast Asia, Africa and the Middle East, where they hope to strike huge deposits at far lower cost. As well, companies are increasingly shifting funds out of the search for crude oil and into exploration for natural gas, a commodity that may soon boom in price.

The market-setting West Texas Intermediate crude was selling at only $23 per barrel last week, down from $36 a barrel in January, 1986, when oil prices suddenly collapsed under the weight of a massive international oversupply. Many smaller companies, facing minimal overhead costs and paying low government

royalties, can still earn a profit at current prices. But some major companies say that they cannot justify the high cost, and relatively small reward, for oil exploration in Western Canada. Said Paul Merki, Shell Canada Ltd.’s vice-president of exploration:

“With oil prices at depressed levels, the economics of looking for oil in Western Canada are extremely shaky for large companies with high overheads.”

The lack of conventional oil drilling in Western Canada and the shift in exploration focus have already cost the

industry 3,000 jobs. And they have also raised concerns about the source of Canada’s future oil supplies.

Even now, light crude from the massive geological formation known as the Western Sedimentary Basin can no longer meet national demand. Current daily production of 1.1 million barrels accounts for only 70 per cent of total refinery requirements. The remainder is imported from the North Sea, South America and the Middle East at a cost of about $4 billion annually.

And while Canada’s consumption of crude oil is forecast by Ottawa’s National Energy Board to remain relatively flat for the next

decade, conventional production is expected to decline—from about 400 million barrels in 1990 to 350 million in 1995. Concluded the Calgary-based Canadian Energy Research Institute in a recent report: “The current supplies from conventional light oil will exhibit a substantial decline over the next decade if no new major discoveries are made.”

Canada’s best bet for meeting future energy needs may lie in oil-sands megaprojects in northern Alberta, heavy oil in Saskatchewan and oilfields in the High Arctic and off the coast of Newfoundland. Yet many large Canadian firms think they may be better off searching for new oilfields outside of Canada, where exploration and production are cheaper and there is a better chance of finding a major new field.

In 1988, Canadian-based companies spent just seven per cent of their budgets abroad. But many analysts predict that the trend towards foreign exploration will grow, as more companies abandon the dream of making huge new finds in Western Canada.

As part of the push into foreign oilfields, Gulf Canada Resources Ltd., controlled by Toron-

to’s billionaire Reichmann family, in 1988 bought control of Asamera Inc., which already held significant oil interests in Indonesia. Gulf is also involved in an exploration program in the potentially oil-rich Gulf of Suez and in Malaysia. At the same time, Gulf plans to drill new wells in the Canadian Beaufort Sea over the next 12 months. And it remains one of the partners in the Hibernia project off the coast of Newfoundland.

The list of foreign players also includes Calgary-based Husky Oil Ltd. It signed a contract with the Libyan gov-

emment in August, 1989, to spend $42 million as part of $100 million worth of exploration and development of conventional light oil in that northern African country. Added Husky president Arthur Price: “We are also looking at plays in West Africa and the Middle East, and we have discussed possibilities in Vietnam with other partners.”

Petro-Canada is also part of the exodus. The Crown corporation was created by the Liberal government in 1976 with a mandate to explore in the frontier regions and to ensure a secure supply of energy for Canada. But in 1984, the new Conservative government began operating Petro-Canada like a fully commercial oiland-gas company.

Since then, it has negotiated exploration concessions in Pakistan, Malaysia and Colombia, and has reached agreements to jointly explore for oil in Thailand, Spain and China. Explained James Stanford, president of PetroCanada Resources, the exploration-and-production arm of Petro-Canada: “Like the other majors, we need big oil finds—wherever they are.”

Spending has also dropped dramatically on the heavy-oil megaprojects in Western Canada, and on expensive frontier oilfields in the Beaufort Sea and in the Atlantic Ocean off Newfoundland. And analysts say that today’s stagnant oil prices will likely mean that the already sluggish drilling activity in frontier regions will be scaled back even further.

Conventional oil exploration is also being cut back as firms switch to natural-gas development—a resource that is in dramatically increased demand because it is cleaner, environmentally more acceptable, and plentiful. Calgary-based Shell Canada Ltd., for one, is shifting its entire oil-exploration budget— about $20 million this year—into natural-gas exploration in 1990.

As well, Sceptre Resources Ltd. of Calgary, which now splits exploration expenditures evenly between oil and natural gas, plans to shift mainly to gas in the future. And Edmonton-based Numac Oil & Gas Ltd. is spending 50 per cent of its $30-million 1989 exploration budget on natural-gas prospects, compared with 20 per cent in 1988.

The outlook for Canadian gas exports to the United States was improved by the National Energy Board’s decision last month to award licences to export 9.2 trillion cubic feet, 10 per cent of known Canadian reserves, from the Mackenzie Delta Valley to the United States. And James Gray, executive vice-president of Calgary-based Canadian Hunter Exploration Ltd., predicts that exports will grow even more in the future. Said Gray: “Environmental protection is the highest legislative priority in both Canada and the U.S. New, mandated emission standards can only be met by the increased use of natural gas and electricity.” Clearly, the rush to explore for oil in foreign countries, and the growing use of natural gas, could keep the drill rigs silent in the West for a very long time.

JOHN DeMONT

JOHN HOWSE

ANN WALMSLEY