JOIN USIn recent years, oil production has increased significantly in North America, specifically shale gas oil in the US. Reversing a long trend of decline in extraction from conventional oil wells, US production increased from 50 lakh barrels per day in 2007 to almost 90 lakh barrels daily in 2014.
The rise is mainly from shale gas reserves and the fracking technology that is used to tap the reserves. In the same period (2007-14), the daily production from Canadian oil sands increased from just over 30 lakh barrels to close to 50 lakh barrels. The increases have dramatically changed the dynamics in the market and contributed to the slide in oil price in 2014.
The US and Canada are now firmly established as major energy powers with vast resources. The development has sparked interest in the rising Asian nations. China and Malaysia have made large investments in Canadian oil assets, followed by South Korea and India on a lesser scale. Developments in the energy sector are particularly important for India.Oil is India’s biggest import accounting for over a third of total imports. Evidently, dependence on imports is rising.
Domestic extraction rose marginally during 2000-2010, from 8 lakh barrels per day to 10 lakh barrels, but the level has since been static. Meanwhile, the daily demand went up from 21 lakh barrels in 2000 to 37 lakh barrels in 2013. In this background in 2013, then Petroleum Minister Veerappa Moily proclaimed a goal to make India self-sufficient in energy by 2030. This was reaffirmed by the present minister, Dharmendra Pradhan. Acquiring overseas oil resources is among the strategies included in the goal to attain energy independence.
Canada is relatively more welcoming to foreign investments in energy resources. The present government of Stephen Harper has been actively courting overseas investments. Harper hails from the province of Alberta which is the centre of Canada’s energy business. Until now, Canadian oil is mostly exported to the United States, but the future of this market is less certain because of rising shale gas production in the US. Canada is increasingly looking to Asia as the market. There are ambitious plans for developing terminals on the Pacific coast in British Columbia, which borders Alberta on the west. The terminal, named Northern Gateway, will facilitate export of liquefied natural gas (LNG) to Asia through the Pacific.
China, South Korea, and Malaysia, all net energy importing countries, also pursue foreign acquisitions as a part of their energy strategy. They have been active in the Canadian market and have purchased significant assets in recent years through government-owned oil companies. China’s CNOOC purchased Nexen Inc. for $15.1 billion and Malaysia’s Petronas acquired Progress Energy in British Columbia for $6 billion. Indian Oil Corporation (IOC) holds 10 per cent interest in Petronas’ project. More modestly, Korea’s KNOC bought Harvest Energy in Newfoundland for $1.8 billion.
A closer working relationship
Given the trend, the recent visit of Prime Minister Narendra Modi to Canada in April was presented as an opportunity to strengthen Indian presence in Canada’s energy sector. A report in the leading Canadian daily, The Globe and Mail, urged “a closer working relationship” between the two countries to “facilitate greater levels of co-investment in developing Canada’s rich oil and gas resources”.
The challenges in realising the potential of the energy sector are quite formidable. For one, there is the environmental dimension of extracting oil from the oil sands of Alberta. The process is water intensive and critics complain about the negative impact on the environment. However, this appears to be the less challenging issue at least for the present. The federal government in Ottawa as well as the provincial governments in Alberta and British Columbia strongly favour resource extraction and export, which means environmental issues will probably be manageable.
A more serious issue is with the construction of pipelines to carry oil and LNG to ports on the Pacific coast. The pipelines, traveling from Alberta to British Columbia, must pass through lands owned by aboriginal communities who oppose their construction. The legal position of the communities was strengthened by a recent ruling of the Supreme Court of Canada that requires consent from the aboriginals for any activity over the land owned by them. The difficulty was highlighted by the decision of the Lax Kw’alaams aboriginal community to reject benefits totaling $1 billion over 40 years and the promise of government land in exchange for support to build an LNG terminal for the Petronas project.
Despite the difficulties and challenges, there are clear upsides. Abundant supplies and the availability of technology for extraction are important factors. At the same time, volatility in oil prices has emerged as a fact of life. This reality must inform any business decision to tap oil and gas resources in Canada. Business plans must be flexible to adjust to evolving market conditions. They cannot be made on statist or unrealistic assumptions.
The recent fall in oil price had its consequences. China’s CNOOC, which purchased Nexenin Canada when oil prices were much higher, wrote off $842 million assets in North America acquired mostly through Nexen. There were also staff terminations and the trading unit in Alberta was closed. Meanwhile in South Korea, purchases of overseas oil assets are under investigation.
In India, there is a need for greater awareness about the country’s energy situation, the options that are available and their risks and rewards. Quite remarkably, Asian involvement with oil assets in Canada is through government-owned companies. This is true of all the four countries – China, Malaysia, Korea, and India. It is unclear if the private sector is unwilling and or incapable of investing the vast resources that are required for oil business and managing the complexities that are inherent.
(The writer is Associate Professor, Faculty of Law, University of Ottawa, Canada)