Sept. 11 is one of those (thankfully) rare events that change the world. Already it has altered the way many people—in power and in ordinary life—look at airport security, skyscrapers, Disney World and unsolicited mail. It has transformed George W. Bush's foreign policy from laid-back to deeply engaged. Among the nations towards which the U.S. is revising its relationships and attitudes are Pakistan, Russia, Muslim states of the former Soviet Union, the oilproducing Arab countries—and Canada.
Canada didn’t even make it to Bush’s list of reliable allies in his call-to-arms address to Congress. That will change. Apart from the reality that 24 Canadians were among the victims in the World Trade Center, a sudden transformation of the American national agenda is of major significance to the Canadian economy. The decline in the share price of autoparts giant Magna International as the revolving-door U.S.Canada border suddenly got jammed was surely noticed in Ottawa, even if the candlelight vigils Canadians held could somehow be ignored.
Something else happened. Shares of Canadian gas producers have soared since the attack. In part, this represents the reallocation of profits by holders of Canadian Hunter Exploration Ltd. after Houston’s Burlington Resources Inc. signed a takeover bid of $53 a share for the company on Oct. 8—Thanksgiving Day for those of us who had loaded up on shares of Hunter (and other gasoriented Canadian producers) in anticipation of such an event.
More—much more—is involved. U.S. policy-makers and oil companies are rethinking their longer-term strategies in light of what Bush warns is a lengthy war on terrorism.
Natural gas shares had been languishing since the price of gas plummeted from an all-time peak of $ 10 (U.S.) to $2 per thousand cubic feet. Gas reserves in storage in the U.S. had climbed above seasonal norms at a time when demand was slumping due to recession and unusually cool early summer weather in California and the Midwest.
The collapse in gas prices proved to be a boon to strategic thinkers in the U.S. gas industry. They saw that a recent 40per-cent increase in gas drilling had created just a one-per-cent increase in production, because the decline rate in output from new wells in the Gulf of Mexico—the last area for major new gas finds in the lower 48—is 39.7 per cent after the first year. Like Alice’s Red Queen, the industry has to run fast to stand still. Lower gas prices meant lower share prices for Canadian producers, even though Canada and Alaska had become the industry’s big hopes to meet future growth in gas demand.
It’s sad that Canadians are letting their energy firms go to U.S. strategic buyers at bargain prices. The world has changed.
Until Sept. 11, there was only one alternative to drawing on Canada for the large-scale supply needed to meet the intensifying U.S. shortage: liquefied natural gas, or LNG. Oilmen were telling me LNG was competitive with regular gas at $3.50 per thousand cubic feet. There’s lots of gas available for liquefaction in the Middle East and Indonesia. So huge are those reserves that Mobil’s Indonesia operations are said to have produced 20 per cent of that company’s profits in the year before its takeover by Exxon in 1999.
That gas was shipped to East Asia. Or it was until rebel attacks forced Exxon Mobil Corp. to shut down its operations for four months this year. Any deficit could ultimately be made up from production in Qatar and Abu Dhabi.
Big Oil planned to get the U.S. on to LNG in a big way in coming years, because of declining production in the lower 48 and the delays in bringing on gas from Alaska and the Mackenzie Basin. I was told in Houston in June that by 2006, as much as seven per cent of U.S. gas consumption would come in tanker-borne LNG (up from just under one per cent now). In other words, the biggest contributor to meeting growth in demand over the medium term would be the liquefied product.
Fleets of LNG tankers entering U.S. ports may no longer look like godsends for the gas-strapped. Already, one plan to bring more LNG into Boston Harbor has been put on hold. Taking out a harbour by blowing up gas-filled tankers is a lot easier than hijacking and flying jet planes, and bin Laden’s agents would be thoroughly familiar with the technology of those tankers and storage facilities because of the massive operations in the Gulf states.
So there could be a real squeeze on gas in coming years. As if that weren’t big enough news for Canadian producers, the U.S. is rethinking its relationship with Saudi Arabia and other oil sheikdoms, and is getting much more interested in Alberta oilsands and heavy oil deposits. Expect Dick Cheney to lean on Big Oil to accelerate development of those fields as a strategic offset to the American dependence on the increasingly fragile Middle East regimes. And expect more U.S. bids for Canadian energy companies.
Frankly, I think it’s sad that Canadians are letting these firms go to U.S. strategic buyers at bargain prices. The world has changed: so should the valuations of Canada’s leading oil and gas stocks.
Donald Coxe is chairman of Harris Investment Management in Chicago and Toronto-based Jones Heward Investments
The story you want is part of the Maclean’s Archives. To access it, log in here or sign up for your free 30-day trial.
Experience anything and everything Maclean's has ever published — over 3,500 issues and 150,000 articles, images and advertisements — since 1905. Browse on your own, or explore our curated collections and timely recommendations.WATCH THIS VIDEO for highlights of everything the Maclean's Archives has to offer.