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Canada making the most of its resource wealth?

Jennifer Kwan
Fin - Balance Sheet - CA

Two juxtaposing headlines recently put Canada's energy industry in the spotlight: the final U.S. regulatory approval for the takeover of Nexen by China state-owned CNOOC and the arrests of prominent environmental activists over TransCanada’s Keystone XL pipeline.

While separate issues, the two events shine light on the challenge Canada faces in making the most of its resource wealth.

Take the first example. Canada needs foreign investment, most experts agree, as producers try to diversify the ways in which they raise capital.

The rules around just how much of a stake foreign players can have are clearer now that the federal government has laid down some ground rules when it comes to foreign state-owned enterprises in the country's oil sands. Those were unveiled late last year when Ottawa okayed the CNOOC-Nexen deal.

In a report released last week, Ernst& Young said it foresees a fair bit of divesting of global energy assets, including Canada's oil patch, making foreign pools of capital even more critical.

That's where the second headline factors as it is inextricably linked to the highly politicized topic of market access and why Canada is not making the most of its resource wealth, said Barry Munro, Canadian oil and gas leader at Ernst & Young.

"People would point out that Canadian crude oil is the cheapest priced crude in the world. From a Canadian context, the average person on the street should understand why would we do that," he said.

"If we really have a precious resource, why would we let that happen? It's a complex issue because it's balancing the environment and market access."

Resource wealth

Discounted oil prices in Canada have caught national attention, with coverage perhaps second in intensity only to household debt and home prices, said Earl Sweet, a senior economist at BMO Capital Markets.

The price gap has varied depending on the benchmark and in December rose to as high as 50 per cent, exacerbating the impact on Canadian producers due to the growing mid-continent glut of oil stemming from insufficient southbound pipeline capacity. Still, the situation is bound to improve.

"While Western Canada producers are currently struggling with low domestic oil prices, developments underway will expand the demand for heavy oil and facilitate its flow south to major refining hubs in the Midwest and the Gulf Coast," Sweet said in a recent note.

As well, both the discount of West Texas Intermediate (WTI) from Brent and the discount of West Texas Intermediate from WTI should narrow over the next year, boosting revenues of Canadian producers, he added.

Canada currently produces about 3 million barrels a day and could double that by 2030, said Travis Davies, spokesman for the Canadian Association for Petroleum Producers. Which is precisely why access to global markets is key.

"Like anyone that sells a commodity it makes good sense to have more than one customer so you can get the best price for your product," he said. Some 97 per cent of energy exports go to the U.S., and the federal government wants to diversify that.

But even if the current logjam over pipelines is not resolved quickly there's always going to be a way to transport the goods, said Martin Grosskopf, vice president and portfolio manager, Acuity Investment Management.

In the meantime, however, uncertainty remains.

"It clearly, in the short term, puts capital expenditure and investments at risk so they'll be delayed until you have that certainty you can get that oil to market effectively. It's really deferring that investment. I wouldn't say it's eliminating it," he said.

Managing the message

Still, industry experts hope that key pipeline projects will help close the oil price gap. They include projects including TransCanada Corp.'s Keystone XL, Enbridge's Northern Gateway and Kinder Morgan's Trans Mountain, as well as the reversal of the so-called "Line 9" pipeline that would allow oil to flow to the eastern part of the country.

Keystone has garnered a fair bit of attention. Last week, several prominent environmentalists including Michael Brune, executive director of the Sierra Club, and actress Daryl Hannah were arrested while protesting the pipeline from Canada.

The arrest was necessary to send a strong signal to U.S. President Barack Obama to reject a pipeline that "carries dirty, thick oil” that contributes to global warming, Brune said in an Associated Press report. It was first time a head of Sierra has been arrested in an act of civil disobedience.

On Sunday, thousands rallied on the Mall in Washington, D.C., urging Obama to reject the controversial pipeline.

The arguments over discounted oil are simply not true and forms part of a "propaganda war" by industry, said John Bennett, executive director of Sierra Club Canada. "That justifies taking a different kind of action in order to stimulate governments to move. They've decided that civil disobedience might be one of the ways to advance the case," Bennett said of Brune's arrest.

Given access to market barriers , Glen Hodgson, senior vice president and chief economist at the Conference Board of Canada, said industry must also be skilled at conveying its message in order to overcome key hurdles of market access.

"You have to be seen as legitimate. It's not a matter of corporate social responsibility where you take your profits and funnel them into good causes," he said. "You really have to be seen as looking for the very best practice."