Investment Opportunities In The Canadian Oil And Gas Industry
Authors: McIntosh R.A. , Van Wielingen M.H. 
Published: March 2010

The Canadian oil and gas industry offers attractive opportunities for new investments. Continuing fiscal and regulatory adjustments since the oil price collapse of 1986 have substantially restored after-tax returns from oil exploration and development and further improvements are anticipated. The large hydrocarbon resource base provides the potential for significant new reserve additions. In most countries real oil prices have returned to near those levels prevailing before the large price increases of the 1970s. The lower prices are expected to stimulate demand for oil and cause a reduction in non-OPEC supplies. Consequently the consensus expectations of oil prices remaining in the mid-teens may be too low. Prices moderately higher than the consensus forecast offer upside potential for Canadian oil and gas exploration and production.

Introduction

Investment opportunities in the Canadian oil and gas industry must be examined within the context of the recent sharp oil price decreases and within the framework of the Canada-United States producing and marketing sectors. Interlinked petroleum and natural gas product transportation and distribution systems between Canada and the United States together with common interests and significant common ownership require this perspective. Figure 1 shows the similarity in the patterns of oil and gas activity as measured directly by the number of wells drilled in each country. Differences between the patterns are caused by different regulatory and fiscal regimes as well as differences in exploration and development results.

Economic Trends and Outlook

Canadian oil markets and natural gas markets are similar, but have specific differences since oil supplies and markets are world-wide while gas markets and supplies are largely restricted to North America. The economic factors affecting crude oil and natural gas are discussed separately.

World Oil Markets

The two oil price shocks of the 1970s created powerful economic incentives for energy conservation, substitution away from crude oil, and development of additional non-OPEC oil supplies. From 1979 to 1985 world oil demand decreased by 8.8 million bbl/day while non-OPEC supply increased by 6.1 million bbl/day(1). The lowest cost supplier, Saudi Arabia, reduced its market share by two-thirds and adopted a swing producer role. When Saudi Arabia undertook actions to regain market share, oil prices collapsed. In most countries, real oil prices have nearly returned to the pre price-shock levels of the 1970s. This price reduction should materially affect the supply and demand for crude oil.

OECD group aggregate data supports the view that the rate of conservation had been slowing even before the recent large price reduction. In many industrial, developing, and centrally planned economies, energy demand per unit of economic output has stabilized or increased in recent years. It is reasonable to expect that future world energy requirements will resume a close relationship with real economic output. The market share of various energy sources is largely price-related and since crude oil has been re-established as a price-competitive source of energy a moderate rate of growth in oil demand is expected.

During the 1970s when massive investment was directed toward the exploration and development of new oil, the world's reserves remained stable and, in fact, peaked in 1975(2).