July 6, 2015
There is considerable uncertainty in the Canadian energy industry today due to a number of factors, including a precipitous decline in oil prices, the chilling effect of foreign investment rules, constrained access to markets and, most recently, a new political agenda in Alberta.
Although this downturn is different from previous ones, there are still positive indicators to be found. Where others see challenges, Alberta and the energy industry see opportunity, and this vision is generating innovative, creative and resilient strategies.
Some of the key innovative strategies we are seeing include:
Sale of royalty interests on existing oil and gas rights
This involves the sale of a royalty income stream to a buyer that has capital but wants to avoid risk associated with developing the underlying resource. Such transactions deliver capital that the seller can reinvest in other areas of its business, especially higher-return operations, and gives buyers ownership of a percentage of the production or production revenues generated from the lands. These transactions are particularly well suited for pension funds or other investors looking to cap their investment, avoid abandonment and reclamation liability and, if characterized as an interest in land, provide greater security against insolvency of the payor. It is also an easier transaction for investors who are new to the space to understand. This type of transaction is entrepreneurship in its purest form.
Midstream joint ventures
This involves a producer/owner of midstream infrastructure selling all or a portion of gas processing facilities (for example) to a midstream company in exchange for cash and a long-term processing arrangement. The producer receives cash it can use to pay down debt, acquire other assets or deploy in additional drilling activity, while securing long-term priority access to use the facility at negotiated rates. It may also require facility expansion so sufficient capacity is available to handle the producer’s anticipated additional production. Encana’s recent sale of gas gathering and compression assets to Veresen Midstream and Cequence Energy’s sale of an interest in the Simonette gas plant to Kanata Energy Group, are examples of this type of arrangement.
Energy companies continue to partner with First Nations. Native American Resource Partners is an example of a private investment fund which structures, finances and implements direct equity participation in resource projects with First Nations. This approach creates partnerships that jointly work on sustainable development of resources, provides First Nations with a seat at the table and makes needed capital available to the resource company.
Although not strictly new, Canadian energy service companies continue to be targeted by foreign investors consolidating access to certain fracking and other technologies that have been developed in the pursuit of Canadian unconventional resource development.
Given the volatility and cyclical nature of the industry, entrepreneurship has been and always will be a hallmark of the energy business. This has led to the creation of resource companies that are sophisticated, innovative and resilient.
It has also led to an unprecedented level of sharing of best practices among competitors, as evidenced by Canada’s Oil Sands Innovation Alliance, a collection of 13 companies representing almost 90 per cent of Canada’s oil sands production. Their focus on four environmental priority areas – land, water, tailings and greenhouse gases – allows them to share and build on the development and deployment or technologies most likely to achieve that objective.
Alberta’s energy industry continues to meet the challenges of its times. Survival and innovation techniques are well-entrenched in the patch.
Janice’s article was originally published in The Globe and Mail on July 6, 2015.
Let us help you stay up to date. Receive informative Energy sector updates by email.