The private equity industry is in a hurry to leave Canada’s tar sands, once a lucrative investment, but not anymore, as reducing emissions is a priority. According to a Reuters report citing anonymous sources, at least a dozen of these companies are currently for sale. And that could be good news for other oil producers.
In fact, it could improve their chances of survival.
Now is a good time for sellers: Canadian crude rebounded strongly from lows of last year and even the year before, when the industry was hit by a shortage of pipelines making exports more expensive. Yet this time is also perfect, in a sense, for other Canadian energy companies looking to scale up their operations and make them more economical.
Despite improving prices, Canadian oil companies are not in the best place as the country’s federal government makes more climate commitments. As a result, capital expenditure decreases. Soon, production will follow.
The Financial Times reported last month that Canadian crude production reached 3.5 million barrels per day in the first half of 2021 as the industry recovers from the worst effects of the pandemic in its first year. This is a record, which is a bit ironic considering the issues the Canadian oil sands industry has had with regulators, government and its biggest export buyer over the past few years. years.
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The Canadian oil sands are a particularly energy-intensive means of extracting crude oil. For this reason, oil sands producers are subject to strict environmental regulations. At the same time, the Trudeau government has big ambitions when it comes to reducing carbon emissions, including setting a carbon price of $ 16 (C $ 20) per tonne, which should drop to $ 134 (C $ 170) d ‘by 2030. Meanwhile, the US administration is banning Canadian pipelines and, what must have hurt the most, is calling on OPEC + to increase oil production to help make gasoline at stations Americans cheaper rather than turning to Canada’s ally and friend.
Leaving aside the sting of President Biden’s controversial call to OPEC earlier this year, which the cartel turned a deaf ear, Canada’s oil industry may well be facing an existential crisis. It may take a while, but if this federal government and future federal governments stay the course on emission reductions, Canadian oil risks a slow but sure demise.
“If governments take their net zero goals seriously, [then] expensive and ESG-sensitive supplies like the Canadian tar sands cannot grow, and their continued existence is in question, ”said FT, citing Al Salazar of consulting firm Enverus.
This is where consolidation comes in and why the private equity rush to exit the tar sands could not have come at a better time for businesses that want to survive.
“Everyone wants to see more size, more scale, more security. This is one of the reasons we are seeing more consolidation,” Scott Barron, head of banking services at Reuters, told Reuters. investment in Calgary at TD Bank.
Safety in synergies appears to be the currency of consolidation, made possible by the rebound in the price of oil, which has given potential buyers the means to afford an acquisition or merger. Already, according to IHS Markit data cited by Reuters, private equity firms have sold $ 2.6 billion in oil assets in Canada, which have been bought by players in the local sector.
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The time may be ripe for consolidation, but the future remains uncertain, even with a more consolidated oil industry. Big Oil left the tar sands of Canada, and now the private equity is leaving too. These two facts could easily be interpreted as examples of the proverbial rats – and, to be fair, any other life form that wants to survive – leaving a sinking ship. On the other hand, they could be interpreted as examples of a shift in priorities between industries as emission reduction takes center stage from energy to healthcare.
It’s unfortunate for Canadian oil, but there is still hope for the future. Oil is still one of Canada’s top exports, generating export earnings in dollars. It is also the largest foreign source of oil for the world’s largest consumer, the United States. And these exports have not decreased lately, quite the contrary. They have remained strong despite the cancellation of the Keystone XL pipeline and despite other pipeline projects which are contested every moment by regulators and organized protesters.
“The Biden administration begging OPEC to increase oil production to save the United States from high fuel prices months after the Keystone XL pipeline cancellation smacks of hypocrisy,” said Alberta’s minister of ‘Energy, Sonya Savage, following the US call for the cartel to increase production. Meanwhile, Canada’s emissions have continued to rise despite the Trudeau government’s stated goal of drastically reducing them. The question for Canada’s tar sands seems to be whether hypocrisy could bring down an entire industry.
By Irina Slav for Oil Octobers
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