News Roundup By David Yager, National Leader, Oilfield Services
You can download the full PDF HERE.
CNRL Warns Alberta Government Jobs, Taxes and Success Entirely Based On Investment Economics
It would appear big oil is taking no chances with the outcome of Alberta’s royalty review currently
underway. In 2007 the industry was surprised when royalties were jacked up despite dozens of
corporate presentations to the review panel warning of the fragility of investment economics and the
damage increased royalties would cause.
Such is the case with Canadian Natural Resources Limited (CNRL) which made a slide presentation to the
new NDP Alberta government on August 20. The industry has clearly learned from the most recent
royalty review to never to assume politicians actually understand what makes the economy and oil
The presentation’s key messages were: CNRL was a responsible operator; jobs are created by
investment supported by a positive return on capital; Alberta needs a supportive environment which
creates jobs; Alberta is a high cost place to do business, and historic returns on investment have been
poor. That’s when prices were high. It is worse now.
CNRL has been very successful because it all business. Any oilfield service contractor working for CNRL
knows how much price matters to that operator The company’s Mission Statement reads, “To develop
people to work together to create value for the Company's shareholders by doing it right with fun and
integrity." There is little confusion about why CNRL is in business and what it is trying to accomplish.
The presentation ended with the message, “Share the contents of this presentation with your friends
and family”. So here we go.
You hope when CNRL talks somebody listens. The company is a made-in-Alberta success story. The
public corporate entity started life in Vancouver in 1973 as AEX Minerals Corporation, a junior miner
which explored for zinc and lead in the Yukon. In 1975 it was renamed Canadian Natural Resources
Limited and registered in Alberta 1982. The company has been on a breathtaking growth tear ever since.
At June 30, 2015 CNRL was Canada’s largest oil and gas producing company by any measure. Production
on a barrel of oil equivalent (boe) basis was 806,000 boe/day. Put into perspective, Imperial Oil Limited,
Cenovus Energy Inc. and Encana Corporation had combined production of only 1,008,000 boe/day.
Revenue for the quarter ended June 30 was $3.8 billion, all from the sale of oil, gas and liquids. All the
other companies with similar or greater revenues own refineries or downstream operations. CNRL is the
top well licensee so far in 2015 and to the end of June was the seventh busiest driller.
CNRL has 7,000 employees in Alberta living in 90 communities. Last year, the company created 74,000
person-years of direct and indirect employment in this province. This does not include operations in
B.C., Saskatchewan, North Sea, offshore Africa and South Africa. It spends heavily on R&D, investing
$450 million in 2014 alone, making it one of Canada’s largest spenders in developing new technologies
and processes. It works with 30,000 separate landowners and 55 Aboriginal communities. CNRL paid
$227 million in property taxes in Alberta last year and another $50 million to surface and mineral title
holders. More than $10 million was spent on community donations and sponsorships in 2014.
With the motherhood statements made, CNRL gets down to business. The company declares there is a
direct linkage between oil and gas investment, government revenues and jobs. It all ties back to Return
on Capital Employed, or ROCE. The higher the ROCE, the more money the company can and will invest.
The reward for governments that create an attractive economic environment is jobs and revenue. The
numbers are clear. In 2014 there were 74,000 person-years of employment in Alberta, a figure that will
fall to 57,000 this year. In the future, it can grow or shrink. Outside of commodity prices, how the
Alberta government manages and regulates the upstream oil and gas industry will be a major factor.
CNRL notes Alberta’s current royalty system is price sensitive and fair. If prices go up, the government
gets more and the opposite is true when prices fall. CNRL warns, “Adjusting this balance (between the
industry and government take) is very difficult and more often than not has unintended consequences.”
The drivers of ROCE are assets (geology), commodity prices, government fiscal terms, the regulatory
burden, capital and operating costs. Commodity prices are beyond anyone’s control. But the fiscal and
regulatory terms are entirely under the control of the Alberta government.
CNRL goes to great lengths to illustrate the oil and gas business as nowhere near as profitable as many
believe. According the company, in 2012 and 2013 “Canada / Alberta oil & natural gas” ranked behind
arts and entertainment and recreation, agencies / brokers, alcohol and tobacco, insurance companies,
construction, agriculture, forestry, banking, mining and pharmaceuticals in terms of ROCE. In those
years, the average price of WTI was US$94.19 and US$98.00 respectively.
CNRL pegged its ROCE in 2014 at 10% and this year at -1.9%. Notes to the slide read, “At high crude
prices, just made cost of capital. At low oil prices, destroyed capital.” Regardless, CNRL invested heavily
in 2013 and 2014. But the company asks itself the question, “If the industry is doing so poorly, why does
there seem to be so many high paying jobs across Alberta?”
The answer is very interesting, and not what you might expect from a giant oil company. CNRL says the
oil business is like a horse race, where only the top three ponies make money with a win, place and
show. All the others lose. But the entity that always make money is the race track, which is the Alberta
government. And if one race track isn’t paying out enough money to winners, the bettors and horses go
elsewhere. Such is the case with oil and gas investment in Alberta.
To emphasize the point the oil business has more winners than losers (thus supporting the low ROCE
case for oil versus other industries) CNRL lists the top 30 producers from 15 years ago. Only 43% of the
companies still exist. The rest have sold their shares or assets to others because they could not achieve
an attractive ROCE (companies with a high ROCE and share prices are rarely taken over because there is
no upside for the new owner).
On the issue of high paying jobs, CNRL’s slide notes read, “...having a few winners is what keeps
investors investing in Alberta, and investment creates and maintains jobs. If the conditions are right
both Alberta and Canadian Natural can win. This competition has been good for workers in Alberta. In
the oil and gas business, companies compete to get the best people from geologists to finance folks to
the operators in the field. In recent years there has been a shortage of skilled people and as a result
compensation for people throughout the industry has gone up dramatically. The individual prosperity
created by this competition for talent is a benefit for all Albertans.”
Alberta has several advantages, including a large resource base with low decline rates, proven ingenuity
and technology and a skilled workforce. But CNRL says the world has changed. Technology has allowed
the U.S. to re-emerge as a major oil producer. There is more oil available than the world needs and
Alberta is an expensive place to do business. Two more slides show how oil from the Middle East and
Russia is substantially cheaper than oilsands and shale oil from Alberta and the marginal cost of shale oil
from the U.S. keeps coming down as technology improves. CNRL also has a chart showing Alberta’s
current royalty rates are already higher than in B.C. or Saskatchewan.
CNRL wraps up by warning about the negative impacts on ROCE and Alberta’s prospects, should the
province proceed with raising corporate taxes, carbon taxes and royalties. The first two have already
been announced. The company cites examples like the United Kingdom’s sector of the North Sea which
jacked up royalties in 2011, saw investment disappear and production decline, then lowered them again
to get back in the game.
In closing, CNRL wrote, “Alberta is facing significant challenges due to capital and operating cost
increases that have occurred in the past 10 years, including escalating regulatory and policy
requirements. Therefore, CNRL is attacking costs in six key areas: reductions in costs related to
contractors; improved productivity; material cost reductions; right scoping; technology and innovation
adaptation; and improved regulatory process and fiscal policy outcomes.”
One can only hope the government policy makers across the table were listening and understand the
Alberta Announces Royalty Review Panel, Freezes Rates Until 2017
On August 28, Alberta Energy Minister Marg McCuaig-Boyd announced the other three members of the
royalty review panel who will be joining the chair, Alberta Treasury Branch CEO David Mowat. They are
Peter Tertzakian, the respected head of economics for ARC Financial of Calgary; former deputy minister
of finance Annette Trimbee and Leona Hanson, the mayor of Beaverlodge. At the same time, the energy
minister announced that regardless of the recommendations of the panel later this year, Alberta’s
royalties would not change before January 1, 2017. This was clearly meant to assuage industry concerns
about the uncertainty the royalty review has created against the already difficult background of
collapsed crude oil prices.
Only three days before these announcements, the royalty review was in the news for all the wrong
reasons. A Calgary Herald headline blared, “Alberta drilling rig count decline linked to NDP’s royalty
review.” Canadian Association of Oilwell Drilling Contractors figures showed Alberta’s drilling rig
utilization rate was below that of other provinces. The articles stated, “The reason for the bigger decline
in activity in Alberta is likely evenly split between oil prices and uncertainty caused by the Alberta NDP
government’s royalty review, Tim McMillan (Canadian Association of Petroleum Producers president
and CEO) told the Herald’s editorial board Tuesday...”
Going back to the 2007 royalty review and changes just prior to a global economic downturn, McMillan
said, “I think there’s an argument to be made that we saw drilling numbers around the world come off
but we did see a very clear trend of Saskatchewan’s investment go up, B.C.’s go up and Alberta’s go
down.” McMillan stressed in another Calgary Herald article CAPP would like to see the royalty review
completed as soon as possible.
Making the announcements, review chair David Mowat was quoted in the Daily Oil Bulletin as saying it is
important Alberta remain competitive with other oil and gas producing jurisdictions. “Investment goes
to the place it thinks it can find good results so our goal will be to understand the comparability of our
basis versus all other places that it would compete for capital.”
Oil Price Rise Credited to Short Sellers Covering Their Positions
It was only 10 days ago WTI was flirting with US$38 a barrel. On August 31 it was trading as much as $11
a barrel higher, a 29% gain. The next day the price plunged again, eliminating all the gains of the
previous trading session. What has really changed in little over a week?
News reports indicate the biggest single driver in the past few trading days were short sellers covering
their positions when they realized they had driven oil down too far to make any more money. In an
article on oilprice.com on August 30 partially titled “Blame the Speculators,” it was reported the day of
reckoning for the short sellers was predicted on August 17 by John Kemp, a market analyst with Reuters.
Kemp wrote “Hedge funds and other money managers hold short positions in WTI-linked futures and
options equivalent to more than 193 million barrels of oil, according to the U.S. Commodity Futures
After explaining the shrinking ratio of shorts to longs (those who believe oil prices will rise) Kemp wrote,
“But eventually, many of the short positions will have to be bought back and closed out, which will
probably cause futures to rise substantially when it happens in a short-covering rally. This is essentially
what happened between mid-March (the former lowest price in 2015) and mid-May, when WTI rallied
for US$42 to US$60, as hedge funds slashed their short positions from 209 million barrels to 82 million.”
Other analysts commenting on the recent crude price rally came to the same conclusion when they
realized there were no other major changes in the market in the past week. Global crude markets are
widely believed to be oversupplied to the tune of about 2 million barrels per day, just over 2% of world
The price gains coincided with August’s month-end then September started with the price plunging
again. Those who believe today’s oil price dynamics have more to do with financial markets than crude
oil markets appear to be correct.
Oilsands Production Down With Operational Problems
Two oilsands operations are experiencing production problems due to operational issues.
Nexen Energy received an order from the Alberta Energy Regulator to shut down 95 pipelines associated
with its Long Lake in-situ thermal bitumen recovery project south of Fort McMurray. This follows a
breach and significant oil spill on a single pipeline on July 15. News reports indicate the order is due to
Nexen being unable to produce certain records and documentation related to pipeline monitoring,
inspection and maintenance as required by the Alberta government. While nobody has commented
specifically on Long Lake’s output, one can only assume it must be greatly reduced if not stopped
entirely if this many of its pipelines carrying oil, steam, and emulsion (produced oil, steam and hot
water) are closed.
North of Fort McMurray Syncrude’s Mildred Lake facility halted upgraded bitumen production after a
fire damaged equipment. According to a Reuters news report, “The fire happened in the piping between
the hydro-testing and environment units at the Mildred Lake upgrader...the company said the main
coker conversion units were not damaged and Syncrude continues to operate. However, it suspended
synthetic crude oil production and is currently developing a recovery plan.”
Interruptions in bitumen production of any kind are expensive because of the nature of the treating and
recovery process. Unlike conventional oil, this type of production cannot be simply shut down or started
up by opening or closing valves or turning pumps on and off.
Imperial Oil Seeks Mackenzie Valley Pipeline Extension
When Imperial Oil Ltd. finally received National Energy Board approval to build the Mackenzie Valley
natural gas pipeline in 2011, it required Imperial and partners to commence construction by the end of
2015. But with industry economics and gas markets being what they are, Imperial Oil has asked
regulators for a seven-year extension. The 1,200 km pipeline to carry gas from the Mackenzie Valley and
Beaufort Sea areas to Alberta was last expected to cost $20 billion.
Schlumberger to Buy Cameron for US$14.8 Billion
The world’s largest oilfield service company, Schlumberger Ltd., is determined to become larger yet
when it announced on August 26 it was to go buy Cameron International Corp. for nearly US$15-billion.
The two companies have had a joint venture since 2012 called OneSubsea which married
Schlumberger’s reservoir capabilities to Cameron’s manufacture of subsurface wellheads and pressure
Cameron used to be called Cameron Iron Works and is yet another legacy American oilfield service
operation being acquired by larger consolidators such as Schlumberger and Halliburton Co. Cameron
Iron Works was founded in Houston in 1920 by Harry Cameron and a partner to manufacture pressure
control equipment such as valves, wellheads, chokes and blowout preventers. It became part of Cooper
Cameron Corporation in 1989 when it was acquired by Cooper-Bessemer Corporation, two companies
that had manufactured steam and later gas engines since 1833. The various corporate entities moved
into gas compression and acquired more companies that made valves and offshore drilling equipment. It
changed the name to Cameron International in 2006.
Analysts have commented by acquiring Cameron, Schlumberger was moving into oilfield equipment
instead of just services. However, Schlumberger has been in the drilling fluids business since 1999, with
both products and services and acquired rock bit and drilling tool manufacturer Smith International in
2010 for US$11.3 billion.
By consolidating another large oilfield equipment and services provider, the combined entity will be able
to reduce fixed operating and administrative costs per revenue dollar, an appropriate corporate
response to the competitive, low price market environment.
Fracking Causing Earthquakes in Northeast B.C.
Apparently the science is settled. The B.C. Oil and Gas Commission says hydraulic fracturing is causing
mild earthquakes in northeast B.C. The commission says two earthquakes in the past year are from
fracking, the same cause as a similar event in 2014. A Globe and Mail report on August 26 says the
events are not severe, are rare, and cause no threat to people or buildings. Other, however, are
concerned. The largest quakes attributable to hydraulic fracturing are in the range of 4.4 to 4.6 on the
The Richter scale is logarithmic, not linear. An internet dictionary definition says, “The more destructive
earthquakes typically have magnitudes between about 5.5 and 8.9: the scale is logarithmic and a
difference of one represents an approximately thirtyfold difference in magnitude.”
The Globe article reports most frack-induced earthquakes are not even noticed by humans but are
detected by seismic instruments. The recent quakes registering 4.4 to 4.6 are “among the first in the 4-
magnitude range to happen in Canada” from this source. Companies require fracs to be monitored and
operations to halt if readings of 4 or greater are detected.
Venezuela Wants OPEC to Meet With Russia
Clearly hurting from low oil prices, it was reported by Reuters on August 27 Venezuela has been
lobbying other OPEC members to organize an emergency meeting with Russia to discuss ways to
stabilize oil prices. While a meeting is not imminent, a Gulf OPEC official told the Wall Street Journal, “If
Venezuela and others like Algeria can get Russia to commit to an action then we could have a reason to
meet, but at the moment there is nothing that warrants an action.”
Selected North American Active Rig Counts
The rig counts in Canada and the U.S. are going in opposite directions, though not very quickly. On
August 31 in Canada, 190 rigs were reported active, down 31 rigs from 221 as recently as August 11.
This is likely caused by softening oil prices and possibly some uncertainty regarding royalty policy in
Alberta (see above).
Meanwhile, in the U.S. the number of rigs drilling for oil keeps rising, but very slowly. In the past four
weeks it has risen to 675 from 670. The week-over-week change from August 21 to August 28 was only
plus one, 674 to 675. Regardless, that lone rig garnered a Reuters headline on August 28 titled, “U.S. Oil
Drillers Add Rigs For The Sixth Week In A Row”.
Canadian Active Rig Count
U.S. Active Rig Count Drilling for Oil
Source: Baker-Hughes Rotary Rig Count April 21, 2015
North Dakota Active Rig Count August 31, 2015
Year 2015 2014 2013 2012 2011
76 194 185 192 201
Source: North Dakota Department of Mines & Resources
FOR FURTHER INFORMATION ON OILFIELD SERVICES CONTACT:
David Yager, National Leader, Calgary - Direct 403 648 4188 Cellular 403 461 8566