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Introduction

The oil and gas industry is a major industry in the globe, not only in terms of its economic power as witnessed in countries such as United Arab Emirates, but also in terms of the end-product, which runs the world’s economy by virtues of being the source of energy for the majority of the engine powered processes. The success of oil and gas industry lies in identification of the best suited exploration site based on a number of factors. As stated by Al Mansour[1] pre-exploration analysis is vital for any oil and gas industry. This essay therefore is a consultancy report for Caledonia Exploration Ltd., a small exploration company and it recommends on a country that offers the optimal potential for oil and gas exploration. The report recommends the Atlantic offshore of Canada and the report will seek to support this through disusing the hydrocarbon profile for the region, the challenges that aboard, and lastly the techno-economic requirements for exploration and extraction.

 

Resources/ Reserves profile

According to Canadian Association of Petroleum Producers (CAPP)[2], Canada oil and gas reserves are among the best quality in the world, Heavy crudes between 10 and 22 °API, and Extra-heavy crudes less than 10 °API[3]. The Atlantic offshore region of the country offers rich reserves for unconventional oil and gas in the form of shale, and oil sand. The territory of Canada is well endowed with natural resources, both conventional and unconventional, and this is the reason why the country ranks among the top five oil and gas producers in the country. Canada has more the four billion barrels of oil reserves which are located outside oil sands. These are found mainly in Alberta, Saskatchewan, and offshore Labrador and Newfoundland[4].

Canadian unconventional oil reserves are unparalleled with for instance, oil sands having contributed to the country’s oil production for the last over five decades. Given the oil and gas industry is highly prone to political changes; oil sands a sure source of oil[5]. With the modern highly efficient and effective, and cheaper unconventional oil extraction methods, namely hydraulic fracturing, oil sands and shale are a primary interest for oil and gas companies. In general Canadian unconventional reserves are mainly in the Western Canada Sedimentary Basin (WCSB) and are in the form of Coal Bed Methane, tight oil and gas, and shale[6]. The rich unconventional reserves offer a major investment opportunity especially in the backdrop of environmental friendly energy sources.

In addition to the oil reserves, Canada has very rich gas reserves. According to the CAPP[7], Canada has about 388TcF of extractable shale gas resources. There are at least five identifiable sedimentary basins in the western of the country with thick, organic rich shales; the Cordova embayment, the deep basic/Montney in Alberta and British Columba, the Horn River, the Liard in northern region of British Columbia, and the Colorado group in the southern and central region of Alberta. Other notable shale gas reserves are in New Brunswick, Quebec, and Nova Scotia.

 

Exploration & production costs

Oil and gas exploration in Canada is argued to be one of the worlds harshest[8] based on the environmental and climatic conditions in the region. However, there are specialized equipments that are made to operate in these harsh conditions. These include communication and topographical equipments, heavy terrain automobiles for logistical purposes, and adapted drilling equipments to suit the climatic conditions of the region[9]. For exploration and production of oil in the region, a company pays about $65 billion of net cash annually. Explorations are about 11% of the expenditure, site development 49%, well and plant operations about 27% and royalties to the government 13%[10].

In addition to capital investments, the oil and gas industry is capital-intensive and an average of $3 million is paid to each employee annually. Nevertheless, capital investments are dependent on the demand of fuel, prices in the market, and new exploration and production techniques. A vital part of oil and gas industry, and other mining companies is social capital, which involves investing in the local community for goodwill, even though social capital in very dynamic, it is estimated that about $5 million would be used for social capital[11]. Other costs that affect capital investment are environmental and legal compliance operations. There are various environmental compliance requirements for air, water, waste management, and land and they all require financial investment.

 

Current oil price

Currently as a result of various factors working independently or together, the price of a barrel of crude oil is very low. The price of a barrel of Brent crude oil goes for $12 and a barrel of WTI goes at $10[12]. In the recent past, the industry has seen one of the largest declines in oil and gas prices. Moreover, and given the fact that market prices are mainly determined through market forces, currently the price per barrel of Canadian oil and gas ranges between $10 and $15. Regardless of the price factor, market for oil and gas produced in Canada has humble market either within the country or in the USA.

Essentially, about 99 percent of oil exported from Canada goes to the US[13]. By far, Canada is the largest oil supplier for the American oil and gas market in 2011. Oil and gas is exported to the US in the form of oil and petroleum or simply crude oil. This means the overhead cost for market research and advertising are eliminated hence extending the profit margin[14]. For oil and gas companies located in the western region of Canada, 70% of extracted crude oil is exported to refineries located in the US Midwest[15].

 

Political stability

Economic fundamentals for Canada are and remain strong[16] and they are well protected by solid human rights and an independent judiciary that enforces the rule of law effectively. Canada’s commitment to free and open-market policies is strong and in addition to free-market policies, the country has policies that facilitate international trade and investment. The country’s economy has shown admirable resilience even in the recent years of domestic and international challenges. Canada has a high political stability index, according to Abrahams[17], Canada ranks 6th on political stability index ranking. In addition to political stability, the country has enjoyed absence of terror related activities.

Political stability means that the likelihood of the government of the day being overthrown through violent and unconstitutional means is very low. In addition, this means there would not be any instances of politically instigated violence or/or terrorism[18]. Political stability and absence of the politically-motivated violence and terror means there is economic freedom for investor, application of the rule of law in case of any conflicts, and investments are protected.

 

Environmental regulatory framework

In light of the current environmental awareness, Canadian oil and gas industry works with Canadian air quality and emission engineers and dispersion modeling specialists to ensure air quality assessment, emissions, control technologies, compliance, regulatory permitting, and reporting for oil and gas investments[19]. The Canadian oil and gas industry is regulated by through bodies and legislation that include the International Energy Agency, the Canadian Petroleum Resources Act, and the Indian and Northern Affairs Canada partnership[20]. Companies seeking to invest on the industry can also participate in determining industry environmental standards such as the ISO 14001 certification[21].

 

Fiscal and taxation systems

Through the extractive sector transparency measures act, companies in the industry are required to publicly report any payments to government at all levels that exceed $100000 per annum[22]. Natural Resource Canada the organization tasked with foreseeing the implementation of this act continues to engage with stakeholders as to develop guidelines for the application of this legislation. The tax treatment by the federal government for LNG liquefaction is class $& (8% declining balance), but the CAPP has recommended for revision of this to class 43 (30% declining balance) tax depreciation rate[23].

The Canadian oil and gas industry is highly subsidized. The aim of the Canadian fiscal structure is to appropriately balance the high-risk nature of oil and gas exploration and development activities[24]. The federal government provides tax incentives for all company sizes and in all sectors aimed at promoting scientific research and experimentation development. This tax incentive comprises of: income tax deduction, investment tax credit, and a tax credit refund[25]. Individual provinces also do offer tax incentives for example; Alberta too has scientific research and experimental incentive program similar to that offered by the federal government. British Columbia on the other hand has LNG income tax act going into force as at 2017 that entails, tax rate of 1.5% to net operating income, and tax rate of 3.5% to operator’s net income[26].

 

Techno-economic constraints

The technological and economic constrains that are faced by companies operating in the Canadian oil and gas industry are not specific to the particular industry, but similar across the industry globally. In addition, these constrains are dependent on the type of oil and gas reserves i.e. unconventional or conventional. While constrains in conventional oil and gas are rather manageable, those faced by companies dealing with unconventional reserves are rather challenging. For instance, specialized technology that is considerably expensive compared to that used for conventional reserves. Nevertheless, hydraulic fracturing has in the recent past proven to be better suited to solve the technological challenges in the unconventional oil and gas extraction sector[27].

 

Conclusion and recommendations

Canada oil and gas reserves are among the best quality in the world, characterize by heavy and extra-heavy crudes. The territory of Canada is well endowed with natural resources, both conventional and unconventional. Canada has very rich gas reserves. For exploration and production of oil in the region, a company pays about $65 billion of net cash annually. The price of a barrel of crude oil is very low, but enough for profitability. Canada has a high political stability index, it ranks 6th on political stability index ranking. Economic fundamentals for Canada are and remain strong and they are well protected by solid human rights and an independent judiciary that enforces the rule of law effectively.

The Canadian oil and gas industry is regulated through bodies and legislation that include the International Energy Agency, the Canadian Petroleum Resources Act, and the Indian and Northern Affairs Canada partnership. The tax treatment by the federal government for LNG liquefaction is class 47 (8% declining balance), but the CAPP has recommended for revision of this to class 43 (30% declining balance) tax depreciation rate[28]. The industry is highly subsidized by both federal and province governments. Canada has one of the harshest environments, but there are specialized equipments that are made to operate in these harsh conditions, plus for unconventional oil and gas, hydraulic fracturing has been a game changer in effectiveness and production costs.

It is therefore recommended that Caledonia Exploration Ltd. Should commence plans for investment in the Canadian oil and gas industry. The company should seek to invest in both the conventional and unconventional oil and gas reserves for maximized return. Investment plans should include scientific research and experiments so as to receive tax incentives at both federal and province levels. For cheaper and faster delivery of products to the ready US market, the company should invest in the western costal part of Canada.

 

References

  1. Abrahams, Eric M. “Property rights and the historical development of Texas and Alberta’s oil and gas industries: an institutional perspective: MA thesis, University of Alberta, 2013.
  2. Al Mansour, Abdullah. “Essays in Risk Management for Crude Oil Markets” PhD thesis, University of Waterloo, 2012.
  3. Alberta Federation of Labour. Lost down the pipeline: in these difficult economic times, is the Alberta Government doing enough to keep value-added oil sands jobs in Canada? Edmonton: 2009.
  4. Alexander, Chloe. “Permission to pollute: regulating environmental corporate crime in the Alberta Tar Sands” MA thesis, University of Ottawa, 2015.
  5. Bass, Rick, David James Duncan, Frederic Ohringer and Steven Hawley. The Heart of the Monster: why the Pacific Northwest & Northern Rockies must not become an ExxonMobil conduit to the Alberta Tar Sands, Missoula: All Against the Haul, 2010.
  6. BRET-ROUZAUT, N and FAVENNEC, J. Oil and Gas Exploration and Production Reserves, costs, contracts. (3rd ). Editions Technip, Paris, 2011
  7. Brugger, Monique. Canada’s Oil and Gas Industry, Ottawa: the Conference Board of Canada, 2006.
  8. Calderbank, Bruce, David H. Gray, Alec M. MacLeod and Ted L. McDornan. Canada’s Offshore: Jurisdiction, Rights and Management, Victoria: Trafford, 2006.
  9. Canadian Association of Petroleum Producers (CAPP), Canadian Oil and Natural Gas, 2015. Retrieved from http://www.capp.ca/canadian-oil-and-natural-gas on 5 April 2016
  10. Dittrick, Paula ‘Canadian Provinces Follow US States in Hydraulic Fracturing Guidelines’ (2012) 110 Oil & Gas Journal 36-38
  11. Kennett, Steven A, Arlene J. Kwasniak & Alastair R. Lucas. “Property Rights and the Legal Framework for Carbon Sequestration on Agricultural Land” (2006) 37 Ottawa L Rev
  12. KPMG, A Guide to Oil and Gas Taxation in Canada. 2015. Retrieved from http://www.kpmg.com/Ca/en/IssuesAndInsights/ArticlesPublications/Documents/A-Guide-to-Oil-and-Gas-Taxation-in-Canada-web.pdf 5 April 2016
  13. KPMG, Economic Impacts of Western Canada’s Oil Industry. 2013. Retrieved from http://www.fccq.ca/pdf/general/FCCQ-Economic-Impacts-of-Western-Canada-s-Oil-Industry_nov-2013.pdf on 5 April 2016
  14. Letts, Laura. ‘Coal Seam Gas Production- Friend or Foe of Queensland’s Water Resources?’ (2012) 29 EPLJ 101-112
  15. Shedletzky, Adam. ‘Holding Frackers Accountable for Groundwater Pollution: An Analysis of Canada’s Liability Regimes for Hydraulic Fracturing’ (2012) University of Toronto Law School for Environment Probe
  16. Stefik, R. and Paulson, K. British Columbia Oil and Gas Commission, ‘When Unconventional Becomes Conventional’ (2011) 50 Journal of Canadian Petroleum Technology 68-70
  17. Stephenson, Eleanor and Shaw, Karena ‘A Dilemma of Abundance: Governance Challenges of Reconciling Shale Gas Development and Climate Change Mitigation’ (2013) 5 Sustainability 2210-2232
  18. Stickley, Dennis. ‘Expanding Best Practice: The Conundrum of Hydraulic Fracturing’ (2012) 12 Wyoming Law Review 1-17
  19. The Conference Board of Canada, Fuel for Thought: The Economic Benefits of Oil Sands Investment for Canada’s Regions: Economic Performance and Trends, 2012. Retrieved from
  20. https://www.albertacanada.com/files/albertacanada/AIS_FuelforThought.pdf on 5 April 2016

[1] A, Al Mansour. “Essays in Risk Management for Crude Oil Markets” PhD thesis, University of Waterloo, 2012.

[2] Canadian Association of Petroleum Producers (CAPP), Canadian Oil and Natural Gas, 2015. Retrieved from http://www.capp.ca/canadian-oil-and-natural-gas on 5 April 2016

[3] N. BRET-ROUZAUT and J. FAVENNEC. Oil and Gas Exploration and Production Reserves, costs, contracts. (3rd edn.). Editions Technip, Paris, 2011

[4] CAPP, Canadian Oil and Natural Gas, 2015

[5] N. BRET-ROUZAUT, and FAVENNEC, J. Oil and Gas Exploration and Production Reserves, costs, contracts. 2011

[6] KPMG, Economic Impacts of Western Canada’s Oil Industry. 2013. Retrieved from http://www.fccq.ca/pdf/general/FCCQ-Economic-Impacts-of-Western-Canada-s-Oil-Industry_nov-2013.pdf on 5 April 2016

[7] CAPP, Canadian Oil and Natural Gas, 2015

[8] The Conference Board of Canada, Fuel for Thought: The Economic Benefits of Oil Sands Investment for Canada’s Regions: Economic Performance and Trends, 2012. Retrieved from https://www.albertacanada.com/files/albertacanada/AIS_FuelforThought.pdf on 5 April 2016

[9] KPMG, A Guide to Oil and Gas Taxation in Canada. 2015. Retrieved from http://www.kpmg.com/Ca/en/IssuesAndInsights/ArticlesPublications/Documents/A-Guide-to-Oil-and-Gas-Taxation-in-Canada-web.pdf 5 April 2016

[10] Ibid

[11] KPMG, Economic Impacts of Western Canada’s Oil Industry. 2013

[12] KPMG, A Guide to Oil and Gas Taxation in Canada. 2015

[13] Alberta Federation of Labour. Lost down the pipeline: in these difficult economic times, is the Alberta Government doing enough to keep value-added oil sands jobs in Canada? Edmonton: 2009

[14] M. Brugger, Canada’s Oil and Gas Industry, Ottawa: the Conference Board of Canada, 2006.

[15] R. Bass, David, James Duncan, Frederic Ohringer and Steven Hawley. The Heart of the Monster: why the Pacific Northwest & Northern Rockies must not become an ExxonMobil conduit to the Alberta Tar Sands, Missoula: All Against the Haul, 2010.

[16] S. Eleanor and S. Karena, ‘A Dilemma of Abundance: Governance Challenges of Reconciling Shale Gas Development and Climate Change Mitigation’ (2013) 5 Sustainability 2210-2232

[17] E.M. Abrahams, Property rights and the historical development of Texas and Alberta’s oil and gas industries…, 2013.

[18] R. Stefik and K. Paulson, British Columbia Oil and Gas Commission, ‘When Unconventional Becomes Conventional’ (2011) 50 Journal of Canadian Petroleum Technology pp. 68-70

[19] L. Laura, ‘Coal Seam Gas Production- Friend or Foe of Queensland’s Water Resources?’ (2012) 29 EPLJ 101-112

[20] M. Brugger, Canada’s Oil and Gas Industry, 2006

[21] C. Alexander, “Permission to pollute: regulating environmental corporate crime in the Alberta Tar Sands” MA thesis, University of Ottawa, 2015.

[22] CAPP, Canadian Oil and Natural Gas, 2015

[23] Ibid

[24] B. Calderbank, David H. Gray, Alec M. MacLeod and Ted L. McDornan. Canada’s Offshore: Jurisdiction, Rights and Management, Victoria: Trafford, 2006.

[25] D. Paula, ‘Canadian Provinces Follow US States in Hydraulic Fracturing Guidelines’ (2012) 110 Oil & Gas Journal 36-38

[26] CAPP, Canadian Oil and Natural Gas, 2015

[27] S. Dennis, ‘Expanding Best Practice: The Conundrum of Hydraulic Fracturing’ (2012) 12 Wyoming Law Review 1-17

[28] Ibid


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