By Robert Campbell
NEW YORK Oct 18 For years the energy story out
of Canada has been exclusively about the emergence of Alberta's
oil sands as a massive, if costly new source of crude.
Indeed, the rise of the oil sands was always seen as a happy
solution to the country's dwindling conventional oil production
and the crumbling economics of Alberta's natural gas industry.
But a funny thing has been happening. The shale revolution
has come to Canada's oil sector in a big way. And like similar
developments in the United States, the hottest play seems to be
closely linked to the place where conventional oil production
started decades ago.
As in Texas and Oklahoma, Alberta's oil patch is seeing
renewed interest in old acreage. Indeed, the latest transaction
in the sector is aimed in part at the source rock - the Duvernay
shale - of the famous Leduc No. 1 well that touched off
Alberta's postwar oil boom in 1947.
Exxon Mobil Corp's proposed $2.6 billion acquisition
of much of the assets of Canada's Celtic Exploration
instantly makes the supermajor a key player in both the Duvernay
and the larger Montney shale.
Although the takeover is far too small to transform a
company the size of Exxon, it speaks volumes about the shale
potential in Alberta.
Indeed, the takeover is likely to force a lot of
international companies to re-evaluate the potential of
Alberta's conventional oil sector.
Oil sands will remain huge, but could it be that cheaper and
easier-to-develop shale oil captures the imagination?
OIL IS THE KEY
Exxon tends to get acquisitions right, and the company's
reputation for long-term thinking means the Celtic buy has to be
looked at strategically.
Celtic's assets and current production are mostly gas-rich,
but Exxon has played up the liquids angle in the transaction.
That is the nature of most shale plays, though: They offer
exposure to both oil and gas.
Although the longer-term picture for Western Canadian
natural gas may improve with potential exports to Asia in the
form of liquefied natural gas, the current picture is ugly and
seems likely to stay that way for years.
Alberta's natural gas sector is being squeezed by the shale
revolution that is opening up production closer to its main
markets in Eastern Canada and the U.S. Midwest.
That is hammering the economics of Albertan gas production,
especially as dwindling volumes on major pipelines force up
On the other hand, both oil and natural gas liquids look far
Alberta is already a major petrochemical producer, and the
oil sands require condensates for shipping. Therefore, anyone
producing natural gas liquids and condensates in the province
enjoys an advantage over producers who have to ship their
product in by pipeline or rail.
Crude oil is similarly advantageous. Unlike more speculative
plays, Alberta is an established oil center, replete with
infrastructure and services.
That makes development cheaper and easier. Moreover Canada's
legal and regulatory regime is relatively stable, so that
returns are more predictable.
But perhaps what most attracts Exxon is that Canada's oil
and gas industry suffers from a lot less of the political
constraints that American producers face.
For all of the United States' pretensions of supporting
global free trade in energy, it is clear that crude oil exports
from Texas and Oklahoma, however economically rational, are
going to be politically controversial.
Natural gas exporters are also facing calls for restraint,
notably from industrial users who hope to benefit from cheap
Canada, on the other hand, has a more coherent policy that
favors energy producers. It wants to boost the price its
producers receive by trying to build a pipeline to the Pacific,
even in the face of local opposition in the province of British
These should be the parameters for assessing the Celtic
takeover. It is a transaction that gives Exxon exposure to
non-oil sands crude and liquids in Canada as well as potential
long-term upside from a recovery in Western Canadian gas prices.
It also raises interesting possibilities for future oil
production. Could it be that Western Canada will be an even
bigger producer a decade from now than currently believed if the
conventional oil sector rebounds rather than declines?
And if so, where is this oil going to go? The last decade
has shown just how challenging it has been for pipeline networks
to adapt to the surge in oil sands crude and the surprise of
North Dakota shale oil.
What if another shale oil giant bursts onto the scene?