7 Factors to Succeed in Canadian Energy Sector
With the ramp up of the crude prices, rush to the Canadian oil sands accelerated in 2006. The market observed multi-billion dollar upstream deals mainly driven by Asian NOCs taking over a complete corporate or an asset. Often the takeover indicated premium price uptick that fueled the speculation that the buyers must have a different price forecast and/or must have a different discount factor in their economic analysis. There are several factors that are required to make the market entry into Canadian energy sector – and in particular oil sands – a success.
With higher heavy oil differential and the issues around the transportation capacity, the 2013 seems to be the lowest in terms of transactions since 2008 (only $2.1M for the 2H-2013 up to date of this post, read more). It seems that the time has come for the new owners to have a review and re-position for the best strategy for the next 3-5 years.
Here is the list of the key factors which could help to frame this strategic review.
Strategic Business Objectives – Acquisition of upstream assets may aim to satisfy one or multiple strategic objectives such as supporting production and growth (rates and NPV), improving Reserve Life Index (RLI) and Reserves Recycle Ration (RRR), business development (position, develop, divest), or a mix. A clear understanding of the main strategic business objective would enable the buyer to formulate the best entry strategy for example, should the buyer take the operatorship, or it be left to the Canadian partner. It would also help to rank the choice of the partner. An example of a poor entry plan is when an Asian NOC chose to leave the operatorship to an IOC with limited oil sands experience.
Oil sands is a fast evolving cluster; the asset base is land locked and the high development and operating cost leaves little margin, therefore it is vital to choose an operating partner who has proven track record in low cost development. There is a need for a thorough due diligence covering the key areas such as HSE track record, company culture, and their performance in developing challenging assets. A Canadian partner who has gone up the learning curve could also help to optimize and reduce the project execution cycle to improve the economics. The due diligence (more on this on my next post) can include but should not be limited to Canadian based engineering houses and iBankers.
Corporate & Community Social Responsibility – There is a need for a social license to be able to operate in Canadian energy sector. Few NGOs promote environmental resource preservation. In addition, several Metis and First Nation groups form an important stakeholder front that usually is not in favor of upstream projects, often against oil sands development. The operators are expected to reduce environmental impact of the oil sands projects through technological advancements. No surprise that Cenovus’s TV advertisement highlights that how the company’s 3rd generation of SADG pads have 30% less footprint comparing to the initial designs, or they heliport the rigs for winter-evaluation-program (WEP) to minimize need of access road (and of course access to the spud locations year round.
Clear understanding and appreciation of the need and micro-drivers of these stakeholder is the cornerstone in staging projects to execution. Formulating of a Sustainable Development Strategy based on integrity, transparency and effective communication is the best approach in establishing a long term relationship with these stakeholders.
Canadian Workforce Development – One of the key strengths of the Canadian Energy cluster is access to world-class expertise. Moving the expatriates in can likely introduce the challenge of learning curve and additional cost imposed to the projects. Successful operators in the oil sands cluster are the ones that have been focusing on attracting, developing and retaining local talent in order to develop the core competency and retain/grow the know-hows within the organization. This strategy can later support development of heavy oil assets that the company may have in their International portfolio.
Government and Regulatory Relationship – The Canadian energy sector and in particular the oil sands cluster is heavily regulated. Several regulatory bodies (AER, EPEA, BoE, etc.) need to be involved and satisfied about the integrity and soundness of the development plan before they can receive a green-light to start the construction. There are several industry taskforces (such as OSLI) that act as centers of collaboration. In order to ensure incorporation of the latest technological advancement of the cluster, participation in these taskforces is highly recommended.
Local & International Supply-Chain Management – Operating in an unconventional play means high Capex, and low margins. Given the fact that about 60-70 per cent of the Capex is usually spent on the execution phase – i.e. material, fabrication, and construction – it is vital to have a solid strategy for procurement, contracting and supply-chain. Conocophillips and Imperial Oil looked South to built some of their modules in US where they have access to better unit rates and lower labor cost (see more). CNOOC who acquired Nexen Inc plan to revisit their procurement strategy in order to maximize the procurement and fabrication in Asia. Many operators have already moved the engineering activities to offshore to benefit from lower rates. Overall, based on the resources at disposal, it is clear that a mix of local and global procurement and supply-chain is one of the strategic success factors in the Canadian energy sector.
Effective Communication – For foreign investors in Canadian market, building a consistent and reputable brand is crucial. This is an important factor to attract and retain the top talent, as well as building the relationship with the regulatory bodies, First Nation and local communities, vendors and other key stakeholders.
I have left the 7th factor for your to comment. What other factor(s) do you think should be added in here?