It is the Business of the Future to Be Dangerous
The last 5 years have been a tough go for the Canadian oil industry. The sun has seemingly set for now on the “oil lands real estate rush” the brought the global players here from about 2008 until 2015. That latter year saw the Saudi price drop and resultant collateral damage to Canadian producers as Saudi unsuccessfully attempted to bankrupt Iran.
Since then, things have gotten tougher. The incremental increase in prices from 2015 to 2019 was largely offset by constitutional and political issues surrounding petroleum transportation and de-carbonization. 2020 then introduced the ugly twin sisters – a second politically motivated price drop by Saudi and Russia along with Covid.
Lots of companies – upstream, midstream and oil service – are looking at the shallow, gravel runway ahead and wondering what to do.
Where do we go from here?
Well, we diversify. A lot. While the answer is obvious, the paths to get there may be less so. In our view, the two broad avenues for diversification are by industry sector and geography. While CITO’s key focus is international market expansion, we thought it would be interesting to examine diversification by industry sector.
The Canadian pendulum traditionally swings back and forth between sector aggregation and sector focus. For example, during focused cycles companies were not just upstreamers, but rather oilsands, CBM or gas liquids specialists. The need for diversification is likely to push upstreamers back, way past aggregation into entirely different industry sectors – taking midstreamers and oil service players with them.
Big E Energy
Many upstreamers are now looking into Power generation to cut their costs per barrel and potentially generate carbon credits. These projects are either behind the fence, or grid-connected with excess Power volumes sold into the system. Not only would these projects de-risk the petroleum operation by cost-cutting and commodity diversification, they may prove an important way to secure funding in an otherwise tough finance market.
Upstreamers will also have to start looking at asset bases for methanol, helium and hydrogen production, or perhaps petrochemical opportunities.
These factors will build an entirely new business space in Canada between upstreamers, midstreamers, technology companies, independent power producers and market leaders for other minerals and gases, such as helium.
In short, Canadian petroleum companies will have to aspire to be “Big E energy” with each industry sector side-step hopefully bringing the cost savings and different commodity pricing. This will require a work force with broad project skill sets, and the differences between the various industry players will shrink.
As the nature of project work diversifies by industry sector, so too will the energy service market. Power facility EPCs will have to become more conversant with gas production operations to develop flare-gas power projects. Similarly, an EPC that can build modularized methanol production units, while be able to serve two markets at one time. An oil service company capable of doing O&M on power turbines will be less affected by oil price volatility. A drilling company that understands the subtleties of tapping nitrogen reservoirs will have a leg up on helium production.
Companies can either try to continue doing what they have been doing, hoping for a turnaround, or they can diversify their focus and skill sets. While the Canadian petroleum industry has hit the cross-roads, there is something exciting about building new patterns of commerce here out West.
As Alfred Whitehead said, "It is the business of the future to be dangerous; and it is among the merits of science that it equips the future for its duties”. We can include the merits of business adaptation in this too. Let’s get to it!