There is a distinct chill in Alberta these days and it is not just the onset of winter.
The mood about foreign investment is cool as a result of growing uncertainty about what kind of investments are now likely to gain Ottawa’s approval. In the wake of explicit constraints attached to the favourable decision on CNOOC and Petronas one year ago, many now see the decision-making process on foreign investment in Canada as a “black box” of unknowns. Those keen on gaining a foothold in the development of the province’s resource base are now wary about the warmth of the welcome mat, or whether there is any welcome at all. It’s not just investment in the oilsands, but the resource sector as a whole.
The numbers are distressing. Inbound foreign investment in Canadian energy dropped from $27 billion in 2012 to $2 billion in 2013. Mergers and acquisitions have also dropped dramatically to new lows – $8 billion in 2013 compared to $66 billion in 2012. Not surprisingly, in the wake of Ottawa’s signal curtailing control acquisitions by SOE’s of oilsand companies, investments from China, which is currently the second-largest net importer of oil after the US and will soon surpass it, have completely stopped.
Canadian majors and some international companies who are longstanding players in the oil patch continue to do well. But that is not sufficient for long-term growth. Smaller Canadian oil companies do not have access to the capital they need for developing the resource. They represent roughly 15 per cent of the industry and all rely on foreign capital. (U.S. tight oil deposits in the neighbouring Bakken field require less capital up front and have quicker payback periods). Many of the Canadian “juniors” will be forced either to divest capital-intensive assets or conclude foreign joint ventures.
What is clear is that continued development of the world’s third-largest oil reserves (some 174 billion barrels) will require a much more transparent foreign-investment regime. Plans to double production from 3 million to 6 million barrels per day by 2030 hinge on our ability to strike the right balance in ground rules.
Earlier this month, the Prime Minister stated bluntly that “it would be foolish for Canadian rules on foreign investment to be too clear because Ottawa needs a certain amount of discretion when considering takeover bids”. That may be an understandable basic principle but, as Alberta Premier Alison Redford subsequently retorted: “There is too much uncertainty now …. The rules are changing so often, and so unilaterally, that they are deterring foreign investors.”
That is why the current mood in Alberta is so somber.
It does not make sense to embark on “comprehensive economic and trade” negotiations with Asian countries in order to expand market access for Canadian producers if, at the same time, we narrow the prospects for investment in companies that develop exports for those markets.
Systemic delays in authorizing the construction of infrastructure – pipelines, LNG terminals, etc. – that will make possible exports beyond North America heap more uncertainty on investors and producers alike, whether foreign or Canadian.
For many in the international business community, Canada is attempting to suck and blow. Its governments are sending mixed signals on investment and infrastructure approvals. None of this is conducive to advancing economic prosperity, which the government insists is its overriding priority.
Alberta is not the only casualty. The recent decision by Cliff Resources to abandon a $3.3 billion stake in Northwestern Ontario’s “Ring of Fire” signals similar frustration about the inability of government, in this case provincial, to match its need for employment and economic growth with concerted action.
Slumping commodity prices were obviously a factor for Cliff Resources, but the lack of certainty on necessary infrastructure and endless, inconclusive consultations with aboriginal communities were clearly the major reasons why the company pulled the plug on a chromite mine in the poorest part of the province. The loss to the region is an estimated $30- to $50 billion over the lifetime of the project.
If we expect to reap the benefits of our massive resource base, we are going to need some degree of clarity from Ottawa on foreign investment – an informal sounding board or filter would be a good start. If nothing else, it might spare some from the embarrassment of rejection – a particular concern for Asian investors. We also need a more concerted approach from both levels of government and their respective regulatory agencies to act on infrastructure proposals in a timely fashion.
Most of the new demand for oil — and LNG — after 2020 will come from emerging markets. Accordingly, we need to align our trade negotiating strategies with investment and infrastructure approvals that will enable us turn our most obvious, natural endowment to our advantage in such negotiations.
The term “national energy strategy” may be anathema to some, but we do need a measure of coherence.