Big Oil Begins Return to Canada amid Energy Crunch

For about ten years, Big Oil moved away from Canada’s oil sands and into cheaper, more easily developed—and less regulated—locations. Now, the supermajors are returning, looking for a piece of an energy industry that just got a lot more attractive.

Last week, Shell said it would buy Canada’s ARC Resources in a $16.4-billion deal that will add roughly 370,000 barrels of oil equivalent per day to its production and strengthen the supermajor’s position in one of the continent’s most strategic gas corridors.

The acquisition gives Shell access to roughly 2 billion barrels of reserves while bolstering supply feeding LNG Canada, the export project Shell operates with a 40% stake and increasingly views as a cornerstone of its Asia growth strategy. With ARC’s assets adjoining Shell’s Canadian operations that feed LNG Canada, the deal boosts Shell’s LNG supply position while also replenishing reserves.

Days after that news broke, reports emerged that Shell was considering a partial sale of its stake in LNG Canada, with three of the biggest asset managers globally vying for the interest. KKR, Apollo Management, and Blackstone are in the race, Reuters reported, citing unnamed sources, earlier this week, with a potential deal estimated at between $10 billion and $15 billion.

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The price tag for the stake highlights Canada’s position as a secure energy supply alternative to the Middle East, where flows of oil and gas remain paralyzed. But Shell and the asset managers are not the only ones eyeing a greater presence in Canada’s oil and gas patch.

TotalEnergies, Norway’s Equinor, ConocoPhillips, and BP are also looking at acquisition opportunities in Canada, Reuters reported this week. The publication cited unnamed sources as saying the four majors had asked investment banks to compile lists of suitable acquisition targets for them. There is no guarantee deals will be made but the fact there is interest from supermajors suggests a changing sentiment to the countries with one of the most abundant oil and gas reserves in the world.

“The fact they (Shell) are buying in Canada is an indication that we have tremendous, world quality resources,” an energy consultant from McDaniel & Associates told Reuters, noting that interest was “validating”.

Earlier reports this month about interest in Canadian liquefied gas from European buyers also sounded a note of validation. European energy buyers are already big clients of U.S. LNG producers, but long-term diversification would require spreading reliance over more suppliers, hence the interest in Canadian LNG.

Japan’s biggest gas buyer, JERA, is also looking to North America for supply diversification amid the massive disruption in the Middle East. For JERA, the matter is as urgent as it is for European buyers such as Uniper, not least because the Japanese company had recently sealed a 3-million-tpa supply deal with QatarEnergy. The Qatari company declared force majeure on exports in March following Iranian strikes on its LNG infrastructure.

The renewed interest of Big Oil in Canada’s oil and gas, however, reflects a change in sentiment among their investors, as well as the indispensable nature of hydrocarbons, as evidenced by the race to secure alternative supplies amid the Middle Eastern outages. That change suggests climate change and carbon emissions are no longer the number-one priority for energy investors—because it was climate and emission concerns that drove Big Oil out of Canada in the first place. That, and a pipeline shortage.

Back in 2019, the Canadian energy industry was facing an investor exodus. Production, especially from the oil sands, was rising, but there were no new pipelines getting built, so producers were stuck with rail exports to the United States. They were also being pressured by increasingly harsh emission-related regulations—and yet production grew.

Since then, the Trans Mountain pipeline has been doubled in capacity—and is already used at that capacity—and there is talk about more pipelines, and about a second LNG project on the west coast of the country. The Ksi Lisims project, if built, would be smaller than LNG Canada, which would eventually have a capacity of 14 million tons annually but is currently producing at less than the nameplate capacity of its first train, which is 6.5 million tons. Ksi Lisims is planned at 12 million tons annually, making for a total Canadian export capacity of 26 million tons, which looks like they would be very much in demand in Asia.

Canada’s oil and gas are attractive again, not least because of an apparent change in government attitude. The Carney government has signaled it would like to do business with the energy industry instead of stifling it. Although this change is more words than action, it seems to have contributed to the change in Big Oil sentiment. “When you want energy and you look at the world and what could go wrong, Canada has a lot of things going for it,” law firm Mayer Brown partner Jose Valera told Reuters.

By Irina Slav for Oilprice.com

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