The Changing Nature Of The Canadian Oil And Gas Business

Abstract

Introduction The international petroleum industry ranks as one of the most important industries in the world. In 1989, the value of total world trade in crude oils and refined products alone exceeded US$2.0 trillion. More than 11 billion barrels of crude and products were traded internationally. In addition, more than 10 Tcf of natural gas crossed international boundaries (Fig. 1). Over the last 20 years, the industry has gone through a series of unprecedented changes. The structure of the industry has evolved from an ordered world managed by the majors, through a transitional period in which OPEC controlled prices, to the uncontrolled and highly volatile world of commodity pricing today. Over this period, oil has also become less important to the industrialized economies as an energy source. Between 1973 and 1988, the OECD countries cut their energy use as a proportion of output by 25%. Their oil use as a percentage of output fell by 40%. These changes have had a profound impact on the North American industry. For instance, in the U.S., one half of the 25 largest oil companies in 1950 were no longer in that grouping by 1980. Of the 25 companies listed in 1980, only 17 exist today. In Canada, concentration of reserves ownership increased. The largest companies controlled 68% of total oil reserves and 53% of total gas reserves in 1984. By 1988 these figures had increased to 80% and 63%, respectively. The two price shocks in 1973/74 and 1979/80 gave the North American upstream industry a boost. In the U.S., higher prices perpetuated oil exploration in a region which ranks as one of the highest cost producing areas in the world and is the world's most drilled up geological province. In Canada, exploration expenditures and reserves increased. The oil price collapse of 1986 again changed the business fundamentals. In a "low-price world ", it forced industry to change once more and embark on a long and painful process of restructuring, asset rationalization and cost cutting. The considerable challenge for the North American industry is that the bulk of world proven reserves can be produced profitably at US$15.00/bbl or less. This sets a target long-run cost ceiling for the North American oil industry. This is a tremendous challenge. Both oil finding costs and the cost of doing business generally are higher in North America relative to the rest of the world. Thus, the main challenge facing the North American oil industry is how to prosper in a low oil price environment. In Canada, the policy response to the two oil price shocks during the 1970s was a sharp rise in industry regulation. The federal government followed a policy of "made in Canada" pricing (i.e. an oil price lower than the world price). This generated bitter disputes over fiscal transfers between the producing provinces which owned the resource and the consuming provinces, and between the federal and provincial governments. It also discouraged exploration and development investment in conventional areas.