The following is a copy of Jim Gray’s speech to the Explorers and Producers Association of Canada (EPAC) awards held on March 10.

Ladies and gentlemen:

I wish to separate my comments into two sections:

1. Crises are Opportunities — the Canadian Hunter Example
   
2. The World Won’t Wait for Canada — some observations on the challenges and opportunities impacting our industry and our country.
   

Crises are opportunities

The birth of Canadian Hunter was an excellent example of this axiom at work:

• 1973 – OPEC starts to dominate supply and flex its muscles.
  
• Wellhead prices start to increase and the governments of Alberta and Canada were at war over the division of the increased revenues.
  
• The resulting instability in the industry drove many players to dramatically reduce their Canadian operations — many left the province altogether.
  

John Masters and myself concluded that 1973 was a good time to start a new Exploration and Production company (our employer at the time, Kerr McGee Corp., hastened our decision by dramatically cutting our Canadian budget).

Our strategy: 

• Increased price when combined with proven U.S. experience, particularly in clastics, would convert previously valueless resources into valuable reserves.
  
• Opportunities could be mapped from available control.
  
• Deals were available.
  

We decided, rather arbitrarily, that we needed $5 MM/year for 5 years. Obviously, we needed to locate contrarian investors. We believed then, and I believe to this day, that contrarian investors always exist.

• Limited our funding efforts to Canadian corporations.
  
• We were determined to meet and describe opportunity only with CEOs, EVPs or other very senior executives. We always found a way to meet the key people. The tales of how we schemed to meet many of them is quite entertaining.
  
• Sixteen of the first 17 target investors turned us down.
  
• Noranda signed on and the rest is history.
  

Lesson — when others, i.e., the herd, are leaving and you can see a compelling reason to stay, i.e., contrarian thinking, that can result in opportunity.

Never quit.

Let me repeat: Crises are, or at the very least can be, opportunities.

The World Won't Wait For Canada

Our industry presently faces three important challenges:

1. Our costs, both capital and operating, are uncompetitively high.
   
2. We desperately need access for our production to world markets.
   
3. Our process for approving needed infrastructure is far too complicated and slow.
   

1. We Must Reduce Our Costs

We recently heard the Saudi OPEC oil minister declare in Houston that high-cost producers must either “lower costs, borrow cash or liquidate.” This challenge is particularly applicable to Canada for two reasons:

• First, we have northern and, often, remote operations.
  
• Second, we are the world's leading producer of bitumen and a leading producer of heavy crude oil. High costs at Fort McMurray have driven costs up throughout the province.
  

Both these operations combine to make our area one of the highest cost operating basins in the world. We must reduce both our capital and operating costs substantially, in the order of a minimum 30-50% across the board, to become sustainably competitive. There is evidence that our costs are coming down. That is a good thing.

We must, as others have observed, innovate and adapt on an urgent schedule. In this regard, little or no innovation was occurring at $100/bbl. Now, at roughly $35/bbl, everyone is innovating and working diligently to reduce costs and remain relevant. In this context, $30 oil isn’t such a bad thing.

2. Access to Global Markets

This hardly needs repeating: We are a natural resource producing country and those resources must have timely access to global markets. In our case, this means both new crude oil and bitumen as well as natural gas (LNG) pipelines.

Let me digress for a moment and briefly discuss another form of transportation that has attracted considerable misplaced criticism.

First, a disclosure. I, until a few years ago, was on the board of CN Rail where I served for almost 15 years. I remain an Emeritus Director — an unpaid, honourary position.

Contrary to the barrage of assertions by pipeline companies and others that pipelines are safer than rail, a recent study by the eminent global (26 countries) consulting firm, Oliver Wyman, clearly demonstrates that pipelines and rail have comparable safety records. Both are safe means of transporting crude oil.

In 2013, Canada’s two “Class I” railroads transported 99.9% of crude oil transported by rail. Findings:

• Between 2012 and 2014, Canadian pipelines and railways together transported 253 billion gallons of crude oil — 99.9997% of the gallons transported were done so without spillage.
  
• The ‘Incident Rate’, i.e., the number of incidents divided by the total volume times the total miles delivered for the years 2012 & 2014 are virtually the same for both modes of transportation.
  
• Note: The tragic Lac-Megantic accident involved a small, short line operator that used operating practices not employed by either CN or CP. That short line no longer transports crude oil.
  
• The 'Spill Rate', i.e., the total volume of crude spilled divided by the total volume times the total miles. Again, the data shows that the relative performance of pipe and rail varies slightly by year but both are comparable and both have excellent safety records.
  
• Consider (2012 data)
  
• 93.3% of derailments involving the release of products involved only a single car.
• 38.7% of rail spills involved less than one gallon; in some cases as little as half a cup.
• 86.7% of spills for rail were less than 25 gallons.
• The average pipeline spill, 2004/14, was 2,140 gallons.

Summary

Rail has more spills than pipelines but they are each much smaller.

On an overall basis, the data for each form of transportation are comparable and both are safe. And further, both pipe and rail are continuously improving their safety performance.

Clearly, we have a critical need for new transportation capacity to move our products into the international marketplace. Pipelines and rail have complementary roles to play in this strategy.

Pipelines, once in full operation, are a somewhat cheaper mode of transportation than rail. In this regard, it should be noted that longer trains and more efficient operations when combined with diluent backhaul capacity narrows the cost differential considerably.

Unfortunately, it can take as much as four to six years — often longer, much longer — for new pipelines to be approved and constructed in this country. This timeframe must be shortened if we are to capture international opportunities.

One immediately available way to shorten this timeframe is to expand the use of rail transportation.

Rail can transport crude to new destinations and increase volumes to present destinations in months, not years.

In this sense, rail can ‘pre-build’ new pipelines — starting deliveries years earlier. Earlier deliveries substantially increase the present worth of the crude oil being shipped.

It isn’t an issue of one or the other form of transportation. Given their excellent — and comparable — safety records of delivery, we must use both to our advantage.

3. The World Won't Wait for Canada

Of the three challenges our industry faces, this is the one I find the most troublesome — the most worrying.

Global supply options, including both new conventional and unconventional production of crude oil and natural gas, are increasing while the demand for energy supplies is moderating due to technical advances in the market and the pressures of new environmental and other regulations. In addition, of course, we have watched, with anxiety, the volatility in the global economy with resulting changes in energy demand.

There is a growing consensus that global consumption of crude, presently 93 MMBOD, may peak in the 100 MMBOD range, far lower than estimates made in recent decades.

For we Canadians to be sustainable players in this increasingly complex and competitive global market, we simply have to improve our recent performance.

As stated earlier, we must have expanded access to global markets. And, most importantly, we must have the capacity to make decisions on the necessary internal infrastructure to access those markets on a timely basis. Such is presently not the case.

Our competitors around the world are speeding up their decision-making on new infrastructure. We Canadians, on the other hand, are slowing ours down with increasingly complex and time-consuming processes.

Further, local and regional considerations are, with frightening frequency, trumping national interests.

Too often, we hear local and regional leaders arguing: “What’s in it for me in my area?” Less so do we hear leaders voice support for “What’s in it for our country, for all Canadians?” Unless this regional attitude and thinking recedes, I fear for the continued weakening of that which we hold dear, a proud, national vision for Canada. It would be virtually impossible to build the Trans-Canada Highway or the CPR in present circumstances. I find this very, very troubling.

To prevail as a global energy player, we have to be in this game together. We must appreciate that the global market for energy is very dynamic and, for the most past, quite efficient. Politics too often interferes with market mechanisms — witness the demise of Keystone XL.

Market opportunities occur but if they are not promptly captured, our competition will move quickly and capitalize. The windows of opportunity do not remain open for very long.

Consider our record:

• The Mackenzie Valley pipeline project was conceived to address an export market in the U.S. We studied and debated the opportunity for years. Result: other market solutions were found and the opportunity was lost.
  
• I’m concerned that the same process, interminably kicking the can down the road, will result in the loss of LNG markets off the West Coast.
  
• Energy East is a truly pan-Canadian vision. Here again, never-ending hearings combined with a focus on local issues and a lack of national leadership from Ottawa threatens this vital project.
  

And the list goes on. In Kinder Morgan there is reason for hope but I worry that interprovincial squabbling could again threaten this opportunity.

With roughly 2 1/2% of the world’s GDP and with our dependence on heavy hydrocarbons, Canada is neither a big player nor are we seen as a critical player in the future global energy market. At the recent Houston conference on future LNG supplies, for instance, Canada was hardly worth a mention.

We ignore the changes in the global energy markets at our peril. It is up to us, to all Canadians, to defend our products in that marketplace. No one else will do it for us. And we must understand … the world will not wait for Canada.

Surely, it is time to decide: Is Canada determined to be a player out on the field — or are we satisfied to simply be a spectator up in the stands and let others play the game?

Summary

We all produce our best results when we are under pressure and when the consequences of failure are unacceptable or intolerable. I believe these are the circumstances we are presently in. It is imperative that we communicate this stark reality to our fellow Canadians. We desperately need assertive leadership, particularly at the federal level.

If we will do this on an urgent and effective basis, there is considerable hope for a better future for Canada and for Canada’s energy industry.