ARE SOME CANADIAN & EUROPEAN OIL COMPANIES LESS MONEY SAVVY THAN SOME OF THE US COMPANIES?

The present economic downturn has hit Canada too fairly badly, and jobs are evaporating by the day. The January job loss figures indicate that Ontario province suffered the most. This is understandable due to the contagion of auto industry ills crippling the big three American auto companies affected the companies to the north of the border.

But the province which till middle of last year was riding a wave of big investments is also suffering from increasing number of full time job losses – Alberta. Till last year Alberta’s economy was riding high, fuelled by big investments in oilsands projects. But suddenly a lightning bolt hit these projects in Q4 last year.

As per Canadian Energy Research Institute (CERI) its own 2008 forecast of oil sands production of 3.4 million billion per day by 2015 has been scaled back to 2.9 million billion per day, gathering pace to 3.7 million per day to 5.4 million billion per day by 2030, compared with its previous target of 5 million billion per day.

CERI further states that Canadian oil sands is going to stagnate, capital investment over the next 11 years will be cut 31% from a forecast made only 3 months ago and will need WTI prices above USD 70 per barrel to resume growth and expansion.

A number of mega oilsands projects have been put on hold, and almost all the projects are being reviewed from the point of view of CAPEX cost reduction. What is hurting the job market is the stalling of engineering work done in Calgary and Edmonton, and absence of new construction jobs related to oilsands.

But what is most curious is that the mega projects of some Canadian oil companies like Petrocanada and Suncor, CNRL have had to face major axing consequent to these companies hitting panic buttons. Their balance sheets and cash flow have suddenly come under such tremendous pressure that they have had to cancel large chunks of the projects, and mothball the remaining alive portions.

European player Shell cancelled its second upgrader expansion and put on hold their upstream expansion part. Other Europeans companies like Total and Statoil were chickening out even before the lightning struck the oilsands. These two companies had already been dithering for quite sometime.

Interestingly, on the other hand, Canadian oil companies developing their oilsands assets in collaboration with US based oil companies, like Encana (partnering with ConocoPhillips) and Husky (with BP) don’t seem to have run in to such panicky situation. Albeit, they also have had to scale back investment in some of their new projects but not in that drastic manner as Petrocan and Suncor have had to do.

But most interestingly, Imperial Oil whose majority shareholder is ExxonMobil (69.6%) didn’t have to press any panic button. Imperial is going ahead with their Kearl project, said to be a $7-8 billion Imperial Oil and ExxonMobil Canada project. Exxon are known to be notoriously conservative in their investment and economic rate of return analyses.

However, this can’t be said about another American company – ConocoPhillips – whose in-situ oilsands project in Surmont (in partnership with Total) has been put on a very slow track. It is not clear whether cash flow considerations were the only reason for slowdown or Total’s lack of enthusiasm was a contributing factor too.

At any rate, however, the above throws up a question: Why did the US based companies not have to drastically alter their oilsands project development plans? Why did they not seem to be pressing panic buttons and manifesting knee-jerk reactions? Are the US based oil companies better in their working out their investment strategies? Are their economic analyses models more stringent and powerful?

Surely, the world at large doesn’t get to know the details of project planning and investment decision making by various companies, therefore, one would not be in a position to provide conclusive answers to above questions. But then the folks losing their jobs in Alberta must be wondering why the heck the CEO’s of those companies, that went in to a paralytic limb late last year and started hacking down their oilsands projects, were paid the big bucks till recent past!!

It is the job of the top management to make sure that the investment decisions are rational, realistic and have been tried out for different scenarios. Why did some of the Canadian oil companies have to bite so much that they could not chew? If they didn’t have a US partner who could process their bitumen (if they went for bitumen only route) why did they not look for a partner before opting for the whole meal deal project implementation strategy, i.e., going all the way to upgraders in the first phase itself, or think of a safer project investment model?

One wonders what kind of intelligent thinking some of these companies did before committing such huge outlays! Do they realise that because of their unreasonable over-exuberance various engineering and construction companies in Alberta mobilised huge work forces, and now the same work force is being laid off in droves?!!

Some of those CEO’s will say in their defence that nobody in the world could predict the recession coming to US and the consequent slowdown in fastest growing economies like China and India, and hence their assumptions of oil price (we don’t know what they were) were justified. But that does not mean that they ought to have considered a high crude price and worked out their current and future revenues. Why were they not conservative in their assumptions and what prevented them to develop manageable portions of new projects – manageable with respect to revenue generation during project implementation phase?

May be there is lot to learn from the way ExxonMobil folks carry out their project development and economic analyses. It is not for nothing that this company has such a huge cash reserve that it could, if it wanted, buy any oil company in the world.

And, you know what, it is said that Exxon likes to implement new projects during economic downturns so that the project costs be kept relatively less. They can afford to do so –because of their strong cash position. So, you see – they set themselves up for making more money; because when good times return their revenues improve while their initial CAPEX had been lesser (because they set up their project during economic downturn). Makes sense, doesn’t it!

One feels sad to see so many engineers, tradespeople getting out of their jobs in Alberta only because some folks who in their own flawed wisdom – one can certainly they their wisdom was flawed – contributed towards huge growths in engineering and construction companies in Alberta. Currently, those companies don’t have projects to assign their folks to!

Now, all eyes are on US president’s visit. Will Mr. Obama’s visit on 19 Feb bring more bad news for oilsands projects, or, will he provide some words of comfort with regard to continued cooperation with Canada in developing this resource on a long term basis? Surely, US wishes to move away from dependence on foreign oil from ‘hostile regimes’. Be that as it may, the families of the jobless are praying for some good news – are the Gods listening?