The Canadian and Norwegian Oil Clusters: A Comparative Study

17.03.2015
The Canadian and the Norwegian Oil Clusters: A
Comparative Study
Rahman Khanani
AGENDA
1. Introduction and Theory
2. Norwegian Oil Industry
3. Canadian Oil Industry
Canadian Onshore Industry
Canadian Offshore Industry
Canadian Oil Field Services
4. Comparative Analysis
5. Moving Forward
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17.03.2015
1. Introduction and Theory
2. Norwegian Oil Industry
3. Canadian Oil Industry
Canadian Onshore Industry
Canadian Offshore Industry
Canadian Oil Field Services
4. Comparative Analysis
5. Moving Forward
3
Cluster Theory
Definition
“geographic concentrations of interconnected companies, specialized suppliers, service
providers, firms in related industries, and associated institutions in a particular field that
compete but also cooperate”
Cluster Characteristics
• Critical mass of actors along the
value chain
• Knowledge spillovers and rapid
learning process
• Strong innovation pressure and
• Rapid commercialization process
• Local customers, competitive
suppliers, and intensive rivalry
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1. Introduction and Theory
2. Norwegian Oil Industry
3. Canadian Oil Industry
Canadian Onshore Industry
Canadian Offshore Industry
Canadian Oil Field Services
4. Comparative Analysis
5. Moving Forward
5
Norway’s Success Story
Focus on value creation
Consistent Policies
R&D
Licensing method
Access to Capital
Goodwill agreement
Globally Competitive
OFS Industry
Step wise opening
Collaborative environment
between companies
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1. Introduction and Theory
2. Norwegian Oil Industry
3. Canadian Oil Industry
Canadian Onshore Industry
Canadian Offshore Industry
Canadian Oil Field Services
4. Comparative Analysis
5. Moving Forward
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Canadian Industry
Strategy, structure & rivalry
 Efficient markets
x
Company spending on R&D
and innovation
x Low capacity of innovation
x Provincial trade barriers
Factor conditions
Demand conditions
 Large North American
 Natural Resources
 Soundness of banks
market
Related and supporting
industries
x
x
x
Availability of venture capital
Labour shortage
Low number of PhD students
x
Strong export and import
dependency on the U.S
 Quality of local suppliers
x
Local supplier quantity
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Canadian Oil Industry
Unconventional production in 2013: 2250 kbbl/d
Location of Oil Reserves
3,6
Alberta
Rest of
Canada
172,4
Forecasted unconventional production in 2025: 4500 kbbl/d
Type of Oil Reserves
4,14
Conventional
Unconventional
169,3
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1. Introduction and Theory
2. Norwegian Oil Industry
3. Canadian Oil Industry
Canadian Onshore Industry
Canadian Offshore Industry
Canadian Oil Field Services
4. Comparative Analysis
5. Moving Forward
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Porter’s Diamond, Onshore Cluster
- Factor Conditions
High Production Costs
Oil
• 20% of the oil is extracted via
mining
• 80% of the oil is extracted via
drilling
• Heavy oil → requires investment in
upgrading and refining + diluents
when being transported via pipeline
Inputs
• Shortage of labour expected to
increase due to baby boomers
retiring
• High unemployment in Ontario and
Quebec → Tighter restrictions for
foreign workers
• Average wage at McDonalds is
north of $15 an hour in Alberta
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Porter’s Diamond, Onshore Cluster
- Factor Conditions
Lack of Market Access
Production expected to
double
Over supply to the Midwest
Pipeline capacity
expected to stay stable
Keystone XL Pipeline
Northern Gateway
Pipeline
99% of Canadian oil being sold at
discounted rates – differential b/w WTI
and WCS was 21% in 2014
Rail
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Porter’s Diamond, Onshore Cluster
- Factor Conditions
RAIL
Faster
delivery
2 x higher
cost
Increased market
access
Backhaul products
income
Weight
limits
Negative effect at
other industries
The infrastructure has recently grown at record rates with increased
EPS among rail transportation companies.
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Porter’s Diamond, Onshore Cluster –
Demand Conditions
Sluggish US Demand
•
•
The Keystone XL pipeline linking Alberta to
the Gulf Coast is under debate
The US could be an energy exporter by
2020 – 2025
US Shale Revolution
•
Likely to make the US a leading oil & gas
producer → oil resources in Canada could
be obsolete, unless Canada can provide
access to the Asian markets
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Porter’s Diamond, Onshore Cluster –
Firm Strategy, Structure and Rivalry
Future global competiton – Onshore production
•
2025: US was expected to be the largest player → a cause of concern for Canada as the
US is its largest customer
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Porter’s Diamond, Onshore Cluster –
Demand Conditions
Technological Enhancement: Radio Seismic Technology
allows producers to drill deeper into the oil sands → better
understanding of the geology
Success Rate:
Current rate around
70 - 80 % compared
to a global 10 – 20 %
Production
in Alberta
Cost of Drilling:
Time frame required
from decision to
drilling to market is
short – Making small
fields more attractive
Low start-up costs, improved technology and well explored geology is
enhancing oil production.
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Porter’s Diamond, Onshore Cluster
- Firm Strategy, Structure and Rivalry
Local Content and Ownership
Foreign
Ownership
Requirement
National Security
Requirement
25 % Foreign
Branch Tax
Canadian Director
Requirements
Provincial Trade
barriers
Canadians
Prioritized for
Labour
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Canadian Onshore Diamond
Strategy, structure & rivalry
High number of producers,
which illustrates critical mass
Increasing investment
Factor conditions
x High breakeven costs
x Significant local content
requirements
Demand conditions
Significant reserves and
production
Private investment
Enhancements in rail
infrastructure
Sophisticated customers
Related & supporting
x High production cost
x Labour shortage
x Access to markets
industries
Strong OFS industry
x Sluggish U.S demand,
and increasing U.S
production
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1. Introduction and Theory
2. Norwegian Oil Industry
3. Canadian Oil Industry
Canadian Onshore Industry
Canadian Offshore Industry
Canadian Oil Field Services
4. Comparative Analysis
5. Moving Forward
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Porter’s Diamond, Offshore Cluster – Firm
Strategy and Rivalry
Atlantic Accord
Provincial tax on
offshore resources
Required to conduct
R&D in the province
Preference given to regional content
Prevented collaboration between the NS
Shipyards and NL oil industry
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Porter’s Diamond, Offshore Cluster
- Firm Strategy and Rivalry
Lack of Critical Mass
•
Six operators: Huskey Energy,
Statoil, Shell, BP, Suncor,
ExxonMobil
Cyclical Offshore Oil Industry
•
Number of construction phase
peaks and valleys
Lack of Skilled Labour, Minimal Knowledge Retention
Porter’s Diamond, Offshore Cluster
- Demand Conditions
Harshest operating climate in the
world
Norwegian OFS Firms:
Invest in Atlantic Canada
High costs
Expecting a massive find in
Atlantic Canada
Access to Markets
Shell, BP have invested $ billion in
exploration
«Most promising market in
North America»
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Canadian Offshore Diamond
Strategy, structure & rivalry
 Significant recent investment
in exploration
Factor conditions
x
x
x
Lack of critical mass of firms
Cyclical industry
High local content
requirement
Demand conditions
 Expecting large finds
 Demanding operating
conditions
x
x
x
x
Low production
Labour shortage
Availability of capital
Expensive operating
environment
x High production cost
Related and supporting
industries
 Deep ocean technology
cluster
x
Lack of subsea expertise in
OFS
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1. Introduction and Theory
2. Norwegian Oil Industry
3. Canadian Oil Industry
Canadian Onshore Industry
Canadian Offshore Industry
Canadian Oil Field Services
4. Comparative Analysis
5. Moving Forward
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$2,500
$0
Trican Wellservice
Ensign Energy
Precision Drilling
Calfrac Well Services
CHC Helicopter
Secure Energy Services
Savanna Energy Services
Mullen Group
Canadian Energy Services
Enerflex
PHX Energy Services
Western Energy Services
Tuscany International Drilling
Bird Construction
Essential Energy Services
Canyon Services Group
Xtreme Drilling and Coil Services
SNC-Lavalin
Macro Enterprises
Cathedral Energy Services
Strad Energy Services
Finning
ShawCor Industries
Gasfrac Energy Services
Bonnets Energy Corporation
Calmena Energy Services
Hyduke Energy Services
Enseco Energy Services
Wenzel Downhole Tools
Pason Systems
Computer Modelling Group
Eagle Well Servicing
McCoy
Orion
Pulse Seismic
Black Diamond
Winalta
Ridgeline Energy Services
NXT Energy Solutions
Discovery Air
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International Demand
Canadian OFS Firms
Revenue of Canadian OFS by region
• Revenue of Canadian OFS firms: $16.5 billion
Revenue Distribution of Canadian OFS
Companies
by Regions
2013 (MUSD)
$1018,
6%
$852,
5%
$12689,
77%
Australia
Asia
Middle East
Africa
America S
America N
Europe
Russia
Unknown
N/A
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Porter’s Diamond, OFS
- Demand Conditions
International Sales – Canadian OFS Firms
• Large 4 Canadian OFS firms earn most of the industry revenue abroad
• 10 firms earn in excess of $500 million in revenue from international operations
Canadian OFS Companies Abroad
2013 (MUSD)
$2,000
$1,500
$1,000
$500
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Canadian OFS firms struggle in the
commercialization phase and are acquired
Labour Shortage
Risk Averse
Canadian Culture
Strong &
Profitable North
American Market
Comfortable in
North America
Unsuccessful prior
ventures
Short Term
Outlook (Revenue
Squeeze)
Lack of Access to
Capital
Lack of
Operational Scale
Low spending on
R&D
Declining funding
for research
programs
Lack of globally
competitive Canadian Oil
Field Service Firms
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Porter’s Diamond, OFS
- Related and Supporting Industries
Onshore Cluster
Strengths
• Comprehensive value chain
• Onshore drilling equipment and
technology
• Multistage fracturing and horizontal
drilling
Weaknesses
• Spill response
• Technology in metal fabrication –
especially leakage detection in
pipelines
Offshore Cluster
Strengths
• Project development and operations
Weaknesses
• Small labour pool, shortage of skilled
labour
• Lack of Subsea companies → work
is outsourced to foreign firms
• Local OFS firms lack the capital and
machinery required for most capital
intensive projects → most of the
machinery in Atlantic Canada is from
overseas
• Not a comprehensive value chain
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Canadian OFS
Strategy, structure & rivalry
 High profitability
 Many SMBs
 Large players within drilling
Factor conditions
and tubing
 Competencies in hydraulic
fracturing and horizontal drilling
Demand conditions
x
 Increase in patents from
Conservative firms with a
lack of international revenues
or operations
2003 to 2013
Related and supporting
x
x
Availability of capital
Lack of investment in
innovation
x Labour shortage
x Lack of upper management
talent
 Harsh operating conditions
 Significant onshore demand
 Access to large U.S market
industries
 Comprehensive value
chain
within onshore OFS
x
Lack of demand in offshore
oil & gas
x
x
Lack of subsea expertise
Lack of companies with
capital equipment for offshore
production
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1. Introduction and Theory
2. Norwegian Oil Industry
3. Canadian Oil Industry
Canadian Onshore Industry
Canadian Offshore Industry
Canadian Oil Field Services
4. Comparative Analysis
5. Moving Forward
30
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Comparative Analysis
Government
Canada
Offshore
cluster
Norway
Onshore Offshore
cluster
cluster
Fiscal Alberta has the most favourable fiscal environment, while
Norway has a higher tax on net profit, and offers lucrative R&D
Environment tax credits, which drive innovation
Norway awards licenses to the most suitable operators,
Licensing onshore Canada solely focuses on the bid.
Protectionist Canada has protectionist policies, while Norway was
Policies deregulated in -94 resulting in leading local OFS firms
R&D Onshore Canada requires no R&D investments, offshore
Canada requires a percentage of revenue and exploration
Requirement expenditures. Norway has an R&D agreement with operators
Industry Canada has no specific organization which promotes the
Promotion industry internationally, while Norway has INTSOK
Industry The Norwegian cluster is perceived as «very sexy» due to its’
impact on the country. The onshore cluster is perceived as the
Sexiness least «sexy» due to its’ environmental impact
Comparative Analysis
Factor & Demand Conditions
Canada
Norway
Offshore Onshore Offshore
cluster
cluster
cluster
Capital Calgary referred to as the hub of energy finance. TSX and
TSXV referred to as the “Junior Mining Boards”. Weak capital
Markets market for oil technology firms. No local stock exchange in
Atlantic Canada. Significant access to capital in Norway.
Access to
Markets
Alberta is landlocked. Atlantic Canada has access to the U.S
East Coast and Europe. Norway has access to Europe
Reduction in grants and R&D spending in onshore Canada.
Innovation Low industry investment in innovation in offshore Canada.
Significant innovation in Norway – the state, operators,
education and research institutions drive innovation
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Comparative Analysis
Firm Strategy, Structure & Rivalry
Canada
Offshore
cluster
Collaboration
Supporting
Industries
International
OFS Firms
Norway
Onshore Offshore
cluster
cluster
Minimal collaboration in Onshore Canada. Some collaboration
within offshore Canada (Joint projects/RFPs) but not much
interaction with the government. Significant collaboration in
Norway
Shipping industry in NS does not have significant access to
the OFS industry in NL – Atlantic Accord. Strong supporting
shipping industry in Norway.
77% of revenue comes from the North American market, while
revenue of the big four outside NA is 15%. Norwegian firms are
market leaders in multiple segments of the value chain, and
earn 40% of their revenue internationally, while international
revenue of the big four is 68%
1. Introduction and Theory
2. Norwegian Oil Industry
3. Canadian Oil Industry
Canadian Onshore Industry
Canadian Offshore Industry
Canadian Oil Field Services
4. Comparative Analysis
5. Moving Forward
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The oil industry was very profitable
Unclear how the oil price sustained itself over $100 for two years
Industry focused on growth, not
efficiency
Short Term
Entered into costly projects
Balance sheets
under pressure
Focus on
conventional oil
Greater focus on
smaller fields
Reduction in
investments in
the oil sands
Rushed to get projects
completed
Accepted less productive
inputs
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Impact
A reduction in the oil price is
beneficial
Investments in
Tech Innovation
Focus on
operational
efficiency
Reduce price of
inputs and cost
drivers
Lower inflation
Understand
importance of
the oil industry
Will drive the
competitiveness
of smaller firms
The oil price will stay stable
 Reduction in production costs for
unconventionals
 Access to markets for onshore oil
 Eventual discovery in offshore
Canada
 Supply of offshore oil outside of NA
Canada will be come a major player
in the oil industry
 Canadian oil will be available outside
NA
 Will ensure the oil price does not
skyrocket
 Will ensure there is minimal or no
differential b/w the WCS and WTI
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WRAP-UP
Increasing production, but lack of markets – pipeline access to Asia is key
Expecting a discovery in Atlantic Canada – has access to markets
Increase in innovation spending is required
Collaboration between industry, academia and government is essential
Local content requirements are not beneficial for the industry as it hinders
competition
Oil companies – Offshore Canada is a Gold Mine! Especially for Norwegian firms
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Thank You – Questions?
Rahman Khanani: RK@rsmi.no
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