PPT - Rahman Khanani - CNBA

Rahman Khanani

The Canadian and the Norwegian Oil Clusters: A Comparative Study

2

AGENDA

1. Introduction and Theory

2. Norwegian Oil Industry

3. Canadian Oil Industry

Canadian Onshore Industry

Canadian Offshore Industry

Canadian Oil Field Services

4. Comparative Analysis

5. Moving Forward

3








5. Moving Forward

Cluster Theory

4

“geographic concentrations of interconnected companies, specialized suppliers, service providers, firms in related industries, and associated institutions in a particular field that

compete but also cooperate”

Definition

• Critical mass of actors along the value chain

• Knowledge spillovers and rapid learning process

• Strong innovation pressure and • Rapid commercialization process• Local customers, competitive

suppliers, and intensive rivalry

Cluster Characteristics

5








5. Moving Forward

Consistent Policies

Norway’s Success StoryFocus on value creation

6

Step wise opening

Licensing method

Goodwill agreement

R & D

Globally Competitive OFS Industry

Access to Capital

Collaborative environment between companies

7








5. Moving Forward

Canadian Industry

8

Factor conditions

Natural ResourcesSoundness of banks

x Availability of venture capitalx Labour shortagex Low number of PhD students

Demand conditions

Large North American market

x Strong export and import dependency on the U.S

Strategy, structure & rivalry

Efficient markets

x Company spending on R&D and innovationx Low capacity of innovationx Provincial trade barriers

Related and supporting

industries

Quality of local suppliers

x Local supplier quantity

Canadian Oil Industry

9

172.4

3.6

Location of Oil Reserves

Alberta

Rest of Canada

4.14

169.3

Type of Oil Reserves

Conventional

Unconventional

Unconventional production in 2013: 2250 kbbl/d

Source: Rystad Energy UCubeFree, version 04/07/2014

Production (kbbl/d)

Countr

y0

500

1,0

00

1,5

00

2,0

00

2,5

00

3,0

00

3,5

00

United States

Canada

Venezuela

Colombia

Mexico

China

Brazil

Cuba

Albania

Ecuador

Argentina

Turkey

Egypt

Italy

India

Russia

Peru

Estonia

Trinidad and Toba..

Ukraine

Nigeria

Australia

Guatemala

United Kingdom

Syria

Poland

Netherlands


Production (kbbl/d)

Countr

y0

500

1,0

00

1,5

00

2,0

00

2,5

00

3,0

00

3,5

00

United States

Canada

Venezuela

Colombia

Mexico

China

Brazil

Cuba

Albania

Ecuador

Argentina

Turkey

Egypt

Italy

India

Russia

Peru

Estonia

Trinidad and Toba..

Ukraine

Nigeria

Australia

Guatemala

United Kingdom

Syria

Poland

Netherlands


Production (kbbl/d)

Co

untr

y0

1,0

00

2,0

00

3,0

00

4,0

00

5,0

00

6,0

00

7,0

00

8,0

00

United StatesCanada

VenezuelaMexico

ColombiaBrazil

United KingdomArgentina

ChinaEcuador

IranJordanBrunei

PeruRussia

IndonesiaAlbaniaOman

IndiaSaudi Arabia

UkraineIraq

AustraliaEgypt

TurkeyFrance

GermanyEstonia

New ZealandPoland


Production (kbbl/d)

Co

un

try

01

,00

02

,00

03

,00

04

,00

05

,00

06

,00

07

,00

08

,00

0

United StatesCanada

VenezuelaMexico

ColombiaBrazil

United KingdomArgentina

ChinaEcuador

IranJordanBrunei

PeruRussia

IndonesiaAlbaniaOman

IndiaSaudi Arabia

UkraineIraq

AustraliaEgypt

TurkeyFrance

GermanyEstonia

New ZealandPoland

Forecasted unconventional production in 2025: 4500 kbbl/d

10








5. Moving Forward

Porter’s Diamond, Onshore Cluster- Factor Conditions

11

High Production Costs

Oil• 20% of the oil is extracted via

mining• 80% of the oil is extracted via

drilling• Heavy oil → requires investment in

upgrading and refining + diluents when being transported via pipeline

Inputs• Shortage of labour expected to

increase due to baby boomers retiring

• High unemployment in Ontario and Quebec → Tighter restrictions for foreign workers

• Average wage at McDonalds is north of $15 an hour in Alberta

Lack of Market Access


12

Keystone XL Pipeline

Production expected to double

Pipeline capacity expected to stay stable

Over supply to the Midwest

Northern Gateway Pipeline

Rail

99% of Canadian oil being sold at discounted rates – differential b/w WTI

and WCS was 21% in 2014


13

RAIL

Faster delivery

Increased market access

Weight limits

2 x higher cost

Backhaul productsincome

Negative effect at other industries

The infrastructure has recently grown at record rates with increased EPS among rail transportation companies.

Porter’s Diamond, Onshore Cluster – Demand Conditions

14

Sluggish US Demand

• The Keystone XL pipeline linking Alberta to the Gulf Coast is under debate

• The US could be an energy exporter by 2020 – 2025

US Shale Revolution

• Likely to make the US a leading oil & gas producer → oil resources in Canada could be obsolete, unless Canada can provide access to the Asian markets

Porter’s Diamond, Onshore Cluster – Firm Strategy, Structure and Rivalry

15

Future global competiton – Onshore production

• 2025: US was expected to be the largest player → a cause of concern for Canada as the US is its largest customer

CondensateCrude Oil

Source: Rystad Energy UCube, version 2015-02-11

Production(kbbl/d)

Coun

try

02

000

4 00

06

000

8 00

010

000

12 0

0014

000

United States

Russia

Saudi Arabia

Canada

Iraq

Brazil

Iran

UAE

China

Nigeria

Venezuela

Norway

Kuwait

Angola

Mexico

Kazakhstan

Qatar

United Kingdom

Libya

Algeria

Porter’s Diamond, Onshore Cluster – Demand Conditions

16

Productionin Alberta

Technological Enhancement: Radio Seismic Technology allows producers to drill deeper into the oil sands → better understanding of the geology

Success Rate:Current rate around 70 - 80 % compared to a global 10 – 20 %

Cost of Drilling:Time frame required

from decision to drilling to market is

short – Making small fields more attractive

Low start-up costs, improved technology and well explored geology is enhancing oil production.

Porter’s Diamond, Onshore Cluster - Firm Strategy, Structure and Rivalry

17

Local Content and Ownership

Foreign Ownership

Requirement

25 % Foreign Branch Tax

Provincial Trade barriers

National Security Requirement

Canadian Director Requirements

Canadians Prioritized for

Labour

Canadian Onshore Diamond

18

Factor conditions

Significant reserves and production Private investment Enhancements in rail infrastructure

x High production costx Labour shortagex Access to markets

Demand conditions

Sophisticated customers

xSluggish U.S demand, and increasing U.Sproduction


High number of producers, which illustrates critical massIncreasing investment

x High breakeven costsx Significant local content requirements

Related & supporting

industries

Strong OFS industry

19








5. Moving Forward

Atlantic Accord

Porter’s Diamond, Offshore Cluster – Firm Strategy and Rivalry

20

Required to conduct R&D in the province

Provincial tax on offshore resources Preference given to regional content

Prevented collaboration between the NS Shipyards and NL oil industry

Porter’s Diamond, Offshore Cluster - Firm Strategy and Rivalry

Cyclical Offshore Oil Industry

• Number of construction phase peaks and valleys

Lack of Critical Mass

• Six operators: Huskey Energy, Statoil, Shell, BP, Suncor, ExxonMobil

Lack of Skilled Labour, Minimal Knowledge Retention

Porter’s Diamond, Offshore Cluster - Demand Conditions

22

Harshest operating climate in the world

High costs

Access to Markets

Shell, BP have invested $ billion in exploration

Expecting a massive find in Atlantic Canada

«Most promising market in North America»

Norwegian OFS Firms: Invest in Atlantic Canada

Canadian Offshore Diamond

23

Factor conditions

Expecting large finds

x Low productionx Labour shortagex Availability of capitalx Expensive operating environment x High production cost

Demand conditions

Demanding operating conditions


Significant recent investment in exploration

x Lack of critical mass of firmsx Cyclical industryx High local content requirement


industries

Deep ocean technology cluster

x Lack of subsea expertise in OFS

24








5. Moving Forward

Canadian OFS Firms

25

$852,5%

$12689, 77%

$1018, 6%

Revenue Distribution of Canadian OFS Companies by Regions

2013 (MUSD)

Australia Asia

Middle East Africa

America S America N

Europe Russia

Unknown N/A

Revenue of Canadian OFS by region

• Revenue of Canadian OFS firms: $16.5 billion

$0

$500

$1,000

$1,500

$2,000

$2,500

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Air

Canadian OFS Companies Abroad2013 (MUSD)

Porter’s Diamond, OFS - Demand Conditions

26

International Sales – Canadian OFS Firms

• Large 4 Canadian OFS firms earn most of the industry revenue abroad• 10 firms earn in excess of $500 million in revenue from international operations

Canadian OFS firms struggle in the commercialization phase and are acquired

27

Labour Shortage

Strong & Profitable North American

Market

Lack of Operational Scale

Risk Averse Canadian Culture

Lack of Access to Capital

Short Term Outlook (Revenue

Squeeze)

Comfortable in North America

Unsuccessful prior ventures

Lack of globally competitive Canadian Oil

Field Service Firms

Low spending on R&D

Declining funding for research

programs

Porter’s Diamond, OFS- Related and Supporting Industries

Offshore Cluster

Strengths• Project development and operations

Weaknesses• Small labour pool, shortage of skilled

labour• Lack of Subsea companies → work

is outsourced to foreign firms• Local OFS firms lack the capital and

machinery required for most capital intensive projects → most of the machinery in Atlantic Canada is from overseas

• Not a comprehensive value chain

Onshore Cluster

Strengths• Comprehensive value chain • Onshore drilling equipment and

technology• Multistage fracturing and horizontal

drilling

Weaknesses• Spill response• Technology in metal fabrication –

especially leakage detection in pipelines

Canadian OFS

29

Factor conditions

Increase in patents from 2003 to 2013

x Availability of capitalx Lack of investment in innovation x Labour shortagex Lack of upper management talent

Demand conditions

Harsh operating conditions Significant onshore demandAccess to large U.S market

x Lack of demand in offshore oil & gas


High profitabilityMany SMBs Large players within drilling and tubing Competencies in hydraulic fracturing and horizontal drilling

x Conservative firms with a lack of international revenues or operations


industries

Comprehensive value chainwithin onshore OFS

x Lack of subsea expertise x Lack of companies with capital equipment for offshore production

30








5. Moving Forward

Comparative Analysis

Fiscal Environment

Licensing

Canada

Offshorecluster

Onshore cluster

Norway

Offshorecluster

Alberta has the most favourable fiscal environment, while Norway has a higher tax on net profit, and offers lucrative R&D tax credits, which drive innovation

Norway awards licenses to the most suitable operators, onshore Canada solely focuses on the bid.

Canada has protectionist policies, while Norway was deregulated in -94 resulting in leading local OFS firms

Onshore Canada requires no R&D investments, offshore Canada requires a percentage of revenue and exploration expenditures. Norway has an R&D agreement with operators

Protectionist Policies

R&D Requirement

Industry Promotion

Industry Sexiness

Canada has no specific organization which promotes the industry internationally, while Norway has INTSOK

The Norwegian cluster is perceived as «very sexy» due to its’ impact on the country. The onshore cluster is perceived as the least «sexy» due to its’ environmental impact

Government


Capital Markets

Access to Markets

Canada

Offshorecluster

Onshore cluster

Norway

Offshorecluster

Calgary referred to as the hub of energy finance. TSX and TSXV referred to as the “Junior Mining Boards”. Weak capital market for oil technology firms. No local stock exchange in Atlantic Canada. Significant access to capital in Norway.

Alberta is landlocked. Atlantic Canada has access to the U.S East Coast and Europe. Norway has access to Europe

Reduction in grants and R&D spending in onshore Canada. Low industry investment in innovation in offshore Canada. Significant innovation in Norway – the state, operators, education and research institutions drive innovation

Innovation

Factor & Demand Conditions


Collaboration

Supporting Industries

Canada

Offshorecluster

Onshore cluster

Norway

Offshorecluster

77% of revenue comes from the North American market, while revenue of the big four outside NA is 15%. Norwegian firms are market leaders in multiple segments of the value chain, and earn 40% of their revenue internationally, while international revenue of the big four is 68%

Firm Strategy, Structure & Rivalry

International OFS Firms

Shipping industry in NS does not have significant access to the OFS industry in NL – Atlantic Accord. Strong supporting shipping industry in Norway.

Minimal collaboration in Onshore Canada. Some collaboration within offshore Canada (Joint projects/RFPs) but not much interaction with the government. Significant collaboration in Norway

34








5. Moving Forward

The oil industry was very profitable

35

Industry focused on growth, not efficiency

Entered into costly projects

Rushed to get projects completed

Accepted less productive inputs

Unclear how the oil price sustained itself over $100 for two years

Short Term

Balance sheets under pressure

Greater focus on smaller fields

Focus on conventional oil

Reduction in investments in the oil sands

ImpactA reduction in the oil price is

beneficial

Investments in Tech Innovation

Reduce price of inputs and cost

drivers

Understand importance of the oil industry

Focus on operational efficiency

Lower inflation

Will drive the competitiveness of smaller firms

The oil price will stay stable Reduction in production costs for

unconventionals Access to markets for onshore oil Eventual discovery in offshore

Canada Supply of offshore oil outside of NA

Canada will be come a major player in the oil industry Canadian oil will be available outside

NA Will ensure the oil price does not

skyrocket Will ensure there is minimal or no

differential b/w the WCS and WTI

WRAP-UP

37

Increasing production, but lack of markets – pipeline access to Asia is key

Expecting a discovery in Atlantic Canada – has access to markets

Increase in innovation spending is required

Collaboration between industry, academia and government is essential

Local content requirements are not beneficial for the industry as it hinders competition

Oil companies – Offshore Canada is a Gold Mine! Especially for Norwegian firms

Rahman Khanani: [email protected]

Thank You – Questions?

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