Amid Dearth Of Activity In Canada, Companies Urged To Venture Abroad

“Flat is the new up for Canada,” is how the president and CEO of the Petroleum Services Association of Canada (PSAC), chose to describe the level of oil and gas activity in Canada in the years ahead — prompting more and more companies to look abroad as they never have before.

Speaking to the Going Global (Phase 3) launch in downtown Calgary on Tuesday, at which JWN’s latest Going Global report was released, Tom Whalen reiterated the challenges facing the industry in Canada, which has not fully recovered from the collapse in the price of oil in 2014. Other speakers offered recommendations for companies looking for greener pastures, which a PSAC survey showed are on the rise.

“There are a number of things that obviously are impairing our ability to grow this business in Canada,” Whalen said, pointing to Alberta’s inability to get oil and gas to new markets amidst increased competition from the country’s largest market, the U.S.

“We have got the expansion of the U.S. shale, which is great for Canadian companies that are participating in that, but if you are not participating you are probably not growing. We’ve got the U.S. tax reforms that we have all heard about, which is real — you can feel it if you go into the U.S., where activity is up and they are putting more people back to work and it is impacting our ability to compete,” he said.

“All of this creates tremendous uncertainty here in Canada for investment and we are really starving for capital. If you are a small or mid sized company, it’s quite difficult to actually get any cash to actually grow your business, or even in some cases sustain it.

“We have a lot of headwinds, and that’s why we think it’s critical to start looking at what else we can do. It looks obvious that we have developed somewhat of a [flat] trend. I think what we are going to see going forward, when it comes to drilling activity, is we probably are going to be able to add another couple of years onto that flat 7,000 wells [drilled], because I really don’t see anything on the immediate horizon that is going to change that. So that’s another reason we need to look outside [of Canada].”

Looking abroad

In a survey of PSAC membership, nine per cent of respondents said they are looking outside of Canada for opportunities, Whalen said. “These are people who have never done any work outside of Canada in the past. We have another eight per cent who said that they are looking to go to the U.S. Again, these are companies that haven’t been in the U.S. before.”

And most alarming, he said, were the 14 per cent of respondents who said they are looking for an exit from Canada. “Now if we asked this question two years ago, even when the market was at the lowest, we wouldn’t have gotten more than one or two per cent. That’s a drastic change. I think that’s why today we have got so much interest in looking at exporting.”

The options, he said, are to adopt, innovate and reinvent oneself in this market; to do nothing, “and either die and go out of business or get taken over or merge with someone else”; to exit from Canada; or to “stay in Canada, keep operations here, and diversify geographically, and look for that upside outside of Canada.”

He conceded there are challenges to diversifying geographically as well, naming issues such as taxation, repatriation of funds, local content requirements, logistics, visas, the Foreign Corrupt Practices Act and geopolitical threats. He advised companies to become knowledgeable about foreign markets they intend to target and plan ahead.

“All of these things can be mitigated if you create a plan ahead of time. Knowledge is power — making that plan before you get there [is key]. What we hear repeatedly is that when you are going into these new markets, you can’t just go there a couple of times — fly in, have a few meetings and fly out. You really need to go into a community and be a participant, not unlike the way it is here in Canada — they really want you to be part of that community.”

Destination unknown

For those taking the leap into foreign markets for the first time, knowledge about where to go is also essential. There are about 120 countries worldwide that produce hydrocarbons, noted Bemal Mehta, senior vice-president, energy intelligence with JWN.

Going Global, published in partnership with industry associations and government to assist companies taking the first steps in entering foreign markets, focuses on 16 major producing countries representing prime target markets for Canadian companies. The 16 countries account for 80 per cent of oil and gas activity and about 65 per cent of service and supply spend, Mehta said.

The report also considered the expertise offered by the Canadian oil and gas industry in areas such as heavy oil, shale oil and gas, and enhanced oil recovery. “These are places where Canadian companies have outstanding technologies, have worked in these specific resources, and have the experience to take their work global,” he told the launch event. “The reality is the people who know how to exploit that resource are actually sitting in this city and we have a great opportunity to get into those markets.”

This year’s report also takes a deeper dive into the U.S. unconventional oil and gas market, which offers the biggest opportunity with the lowest amount of risk, said Mehta, who offered two takeaways from the study.

“Number one is, it’s not about the Permian [Basin] alone… For many exporters that’s a highly over served market, and you should be looking at some of the other markets. There are very successful Canadian operators operating in the Bakken today, in Montana, the Niobrara in Colorado and Wyoming, or the Marcellus or Utica in the Pennsylvania region. They offer a ton of advantages, they are not as over served as some of the other markets, and the weather and the types of resources are very much aligned with what we are used to here in Canada.”

Secondly, the U.S. is not necessarily an easy market to crack, he said. “It’s the most challenging market from a technology perspective, from an innovation perspective, and you are going to have to show up, bring your A game, and have something that clearly differentiates you in the market. This came up time and again through our research as well as the work with PSAC and others, that those who are thriving in the U.S. have come in with some competitive advantage that has allowed them to be successful down there.”

Trade uncertainty

In a panel discussion, some of the perils of international trade were examined. To be sure, world trading patterns have entered a period of uncertainty, as U.S. president Donald Trump threatens to tear up trade agreements, imposes tariffs on goods from allies and rivals alike — setting off retaliatory trade sanctions — and seeks to re-impose international sanctions against Iran after ending a nuclear truce with that OPEC nation.

Innova Global Limited (formerly ATCO Emissions Management), which undertakes projects around the world, mitigates risk with every project it enters into, no matter where it is, said Denise LeClaire, director, Marketing & International Business Development, at ‎Innova. “We are very careful. We have a very comprehensive risk matrix we go through.”

The company is careful in choosing partners within the countries it operates, for example. “Our partners tend to be front end type of groups and people that know permitting, that know the regulations, that have links to the key companies that you want to get into, but don’t compete in the same space, and know the culture and know all the players. I think that’s been a great strategy for us and has gained us entry to some major clients,” said LeClaire.

The situation in the U.S., however, which recently imposed tariffs on steel and aluminum, has created a great deal of uncertainty. “Our risk is in fabrication. We have two shops, one in Utah one in Massachusetts, and we have already noticed steel and aluminum pricing has gone up. It’s not only making Innova uncompetitive, it’s making American fab shops uncompetitive,” she said.

“But the big risk for us is, the rest of our shops are in Monterey, Mexico. We engineer in Canada and have our fabrication in Mexico, going out of Mexico worldwide or back into the U.S. So that is a huge risk for us, and we are keeping an eye on it. What are we going to do with Mexico is a good question. We only lease, we don’t own, so we have exit strategies, but we do own in the U.S., so we have to be very, very careful as we go forward.”

Iran offers another cautionary tale. Robert Hodges, lead, oil and gas, Export Development Canada, said that when sanctions were initially lifted in 2015 EDC fielded several calls about opportunities in the country. But interest has since dwindled, primarily because of the difficulty in getting money out of the country.

“Canadian companies are doing work over there — they are spending a lot of consultants time and money, and legal fees, to try to get the money out of the country. Right now it’s very difficult and cumbersome to do that. So while we are open for business in Iran, from a reality perspective, we haven’t really done a lot in Iran, because of the inability to repatriate the funds. I think that’s an issue that’s known now in the ecosystem if you will, because to be honest in the last 10 months I have not had one question about Iran and opportunities in Iran,” said Hodges.

Kevin Broger, vice-president, Canadian Global Exploration Forum, said companies should work with industry lobby groups within the countries they seek to engage in for on-the-ground intelligence. “You might get a whole earful in terms of pitfalls to be wary of — positive experiences, negative experiences — but it will be much broader than you could get just from a Canadian point of view. That would give you lots of insight,” he said.


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