In your travels around the world, what do you hear most often about Canada?
“It’s cold in Canada, isn’t it?” is the universal conversation opener. Responding to the stereotype becomes annoying after countless meetings abroad, but I don’t mind when put in a global context. At least I don’t have to answer to questions about civil war, corruption, political instability or other domestic nastiness that is so prevalent in other countries. People see us as a very safe place with a lot of integrity. Yet from a business point of view, those who sit on the other side of the table view Canada as an unknown expanse. They always want to know about Canada in the context of the United States – a free-market point of reference they understand.
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What does the Alberta oil industry need to do to sustain its appeal to investors?
The universal language of investors centres on competitiveness and returns. To attract and retain capital, Canada’s oil and gas industry has to be able to deliver returns on investment that are as good or better than other jurisdictions on a risk-adjusted basis. It’s a simple calculus, but complex to achieve. Our biggest risk factor is potentially escalating costs; not only the cost of labour and services, but also regulatory compliance and social acceptance. Half a dozen years ago, we had to compete for capital with places like Russia, West Africa and South America. That was easy. Now, we have to compete with the United States, which is a lot tougher.
Alberta oil has been getting a lot of criticism on the environmental front. Does this hurt Alberta’s image or reputation as an appealing place to invest?
Yes, the barrage of environmental criticism from abroad and from within has hurt Alberta’s appeal in the eyes of those who don’t know much about us. However, it hasn’t deterred those who are knowledgeable about our stringent regulations and other appealing qualities, especially when it comes to investing in oil and gas outside the oil-sands sector. The inflow of investment capital to non-oil-sands opportunities – a record $25-billion of debt and equity this year – would suggest the appeal of our jurisdiction has outweighed the criticism.
Morgan Stanley says that oil could fall as low as $43 a barrel. What’s your prediction?
There are many bears out there calling for doom and gloom oil prices in the near term. I can’t add a lot of value to predicting “heat of the moment” trading. Do I think the price of oil can go to $40 a barrel or less? Sure. But to me, to sophisticated investors, and to Canadians, the more important thought experiment is asking what the outlook is for the longer term. Anything less than $80 a barrel is unsustainable. And if the price stays less than $60 for any length of time, the price is going a lot higher than $80 in a few years.
What did the most to sink the price of oil? The shale boom in the U.S. or OPEC refusing to cut production? And did anyone see this coming?
I say to people that it’s simplistic to think that any one factor – lack of OPEC restraint, resumption of Libyan production, U.S. tight oil growth, a drop in Chinese demand or Canadian oil-sands expansion for that matter – torpedoed the price of oil this fall. There were many analysts that highlighted the risks of all these things individually, but it’s folly to think anyone could have predicted the convergence and timing of all the issues to create the current circumstance. There are many moving parts in the global oil economy, many more than even a few years ago. That’s why the timing of the recovery of oil prices is going to surprise many. And it’s going to cause people to ask, “Did anyone see this coming?”