Thursday, October 27, 2011

Calgary Rising

The world's greatest concentration of energy knowledge resides here. 
A cow town no more, Canada’s oil and gas capital sets its sights on Houston as petroleum capital of the world

This article appears in the December issue of Oilweek
By Peter McKenzie-Brown
Could Calgary become the centre of the petroleum world, finally shedding the century-old moniker of “Cow Town”? Many people think it’s not only possible, but inevitable.

Consider the views of Heather Douglas. “When I was president of the (Calgary Chamber of Commerce), I used to challenge visitors to name another city that had the intellectual knowledge about energy that Calgary has,” she says. Now a VP at Athabasca Oil Sands Corp. she adds, “That knowledge can be applied to any form of energy – nuclear, solar – not just oil and gas. We are already one of the world’s premier energy centres, and in the 21st century energy issues will endlessly challenge global economic and environmental systems.” Already in the big leagues, the city needs to get ready for growth.

Gary Leach puts the possibilities into a broader context. The executive director of the Small Explorers and Producers Association of Canada (SEPAC), Leach argues that “Houston was the late 20th century’s global energy capital. It’s now in decline, and Calgary is in the ascendant. A few things could affect (Calgary’s growing dominance.). What if the Mackenzie Valley and Alaska Pipelines are constructed, making Alberta the distribution centre for Arctic gas across the continent? Even if that doesn’t happen, within the next 20 years hundreds of billions of dollars will be invested in this province to develop the oilsands, and Canada will become a net exporter of millions of barrels per day – maybe 5 million barrels per day, most of it from the oilsands. The numbers are eye-popping.” According to a recent CAPP forecast, this country’s oil production will rise from 2.8 million barrels per day last year to 4.7 million in 2025.

“Looking back 20 years from now,” Leach adds, “we will see Calgary as a city of global importance” in more than energy. “Part of that is because of Canada’s energy and other resource surpluses. The other is the fact that Canada is one of the few countries in the world with food surpluses,” and Calgary will continue to be an agribusiness centre.

Constant Mixing
For decades Calgary has been home to the largest number of major head offices in Canada outside of the Toronto area, which has five times the population. Calgary is a corporate city, which arranges finance and makes business decisions. It is a technical centre, with an amazing array of scientific and technical skills. It is a management city, with seasoned executives continually making high-stakes decisions.

A unique mix of characteristics have set Calgary up for growth and increasing strategic importance in the energy world. Within the city’s ten blocks – the business part of downtown – is an extraordinary concentration of expertise. This includes the largest concentration of geological talent in the world, for example. Alberta’s petroleum industry has traditionally produced from conventional oil and gas formations that on a world scale are relatively modest. The industry developed strong drilling, engineering and technical skills at least partly in response.

Other areas of expertise include management, legal and accounting skills; finance and economics; technological development and environmental innovation. These skills developed in an entrepreneurial climate which takes a competitive delight in financing, exploring, developing and overseeing production from the geologically complex Western Canada Basin.

Underpinning the entrepreneurial environment is a fair and transparent regulatory system. Alberta’s system of land auctions and western Canada’s efficient regulatory systems make hydrocarbon development an attractive proposition. There is an enormous wealth of oil and gas data that must be made available by law. In Alberta, that information is mostly available through the Calgary-based Energy Resources Conservation Board.

With its concentration of companies, executives and expertise, Calgary is now the Canadian city you have to be in if you want to be in energy. You can’t be in Regina or Winnipeg or Toronto and be in the oil business. “In the last 20 years we have had the National Energy Board move here from Ottawa,” says Leach. “We had Shell and Imperial and TransCanada move here from Toronto and Enbridge moved its headquarters here from Edmonton.” Gulf Canada came indirectly, when Petro-Canada bought it out; so did BP when it acquired Amoco. “Calgary now has the densest focus of oil industry talent in the world between the Bow River and the Canadian Pacific rail tracks,” he says. “Everybody here is within a five or 10 minute walk of everyone else. That dense connectivity has created a unique and creative mix. There’s a constant mixing of competitors and collaborators.”

An unusual characteristic of Canadian business is that companies tend to go public at a very early stage – a tradition that in Calgary seems to be on steroids. There are hundreds of start-ups and other small energy companies, many of which have gone public. Forty per cent of the world’s 995 publically traded energy companies are headquartered in Calgary. Those companies represent about 30% of Canadian stocks by market value.

One of the reasons they are here is the resource potential. According to Heather Douglas, “Alberta is well-positioned to be a leading energy producer for decades. Challenging unconventional resources – oil sands, shale, tight and sour gas – are all a vital part of our future.”

The World’s Energy Cities
There is an organization known as the World Energy Cities Partnership, with 16 members. Besides Houston and Calgary, these cities include, for example, Aberdeen, Scotland; Atyrau, Kazakhstan; Dammam, Saudi Arabia; Daqing, China; Stavanger, Norway; and Tomsk, Russia. Canada is the only country to have three “energy cities” – the other two being Halifax and St. John’s.

How do the world’s other energy cities compare to Calgary? “Many of these centres have the disadvantage that they are dominated by a few very large producers, many of them state-owned,” according to Leach. “For example, Rio de Janeiro is the centre for Brazil’s offshore oil production, but it’s dominated by Petrobras.”

Other cities have other problems. “To be a serious contender as an oil and gas centre, you have to have the rule of law, democracy, and a stable environment,” Leach says. “You have to have transparent laws and regulation. You have to be a place where people will invest for the long term.” In many energy cities, few or none of these factors exist: Think China, Iran, Kazakhstan, Russia, and Saudi Arabia. Sudan, anyone?

What about Europe’s energy cities? “Aberdeen is only a service centre for oil and gas. It’s not financial. It doesn’t rival Calgary in any way,” according to the flag-waving Leach. “The same is true of Stavanger: It’s an important regional support and service centre, but that’s all. And of course North Sea oil production is declining rapidly, and that’s going to affect the relative rankings of those two centres…. Only Calgary, Houston, Dallas and London can say ‘We have big companies, we have oil and gas assets, we have a lot of financial strength, and here is where decisions are made.’”

London is a special case. It’s a financial superpower, of course, and it is headquarters for BP, Shell and some producers based in the North Sea. However, because energy is a relatively small part of its economy, it really isn’t an energy city.

The Rise and Decline of Houston
Houston’s status as the world’s dominant energy centre is fairly new. Until 1986 there were five significant oil centres in the US: Houston, but also Dallas, Denver, Oklahoma City and Tulsa.

When the oil industry went into a 20-year slump with the 1986 oil price collapse, much of the industry moved from Tulsa, Oklahoma City and Denver to Houston, which also benefitted from explosive growth in Gulf of Mexico drilling. Dallas is still an important centre, but primarily because ExxonMobil calls it home.

With its port and pipeline connections, Houston has become the world’s largest refining hub. It is an extremely important centre for petroleum technology, especially for offshore drilling and production. Still the world’s premier energy city, Leach argues that “its best days are behind it. As Calgary’s potential waxes, Houston’s is going to wane. We have the potential to rival them, not only in the oilsands but because of the prospect of Pacific Rim exports, for example. Calgary can become a Pacific Rim energy capital. This isn’t fantasy: Chinese, Japanese, Korean and Malaysian (companies are already) here.”

Already snapping at Houston’s heels, Calgary one day may take over. According to Chris Lee, managing partner of a resource consultancy provided by accounting giant Deloitte Touche, this country “has the opportunity to be an energy superpower. To do that we have to ensure that issues around transportation infrastructure are resolved. We need a national energy strategy. We have to deal with potential labour shortages and cost overruns, and we need a more positive public image for the oilsands. The future of the oilsands is incredible. Just imagine what would happen if (bitumen) carbonates became economic! What would this city be like?!”

Heather Douglas thinks Alberta should seize the moment to establish a Canadian benchmark for international trade. Right now world oil prices are quoted in reference to foreign crudes – mostly West Texas Intermediate (WTI), Brent and Dubai. “We usually sell at a discount to WTI,” she says. “Brent production is rapidly declining, while Alberta production is growing. We need to create a Canadian benchmark that is internationally recognized – maybe a price based on upgraded bitumen.”

The Economist recently ranked Calgary as number five on its list of the world’s 100 most liveable business cities, and a Houston-based publication named Rigzone named the city number 2 in its list of the top ten energy centres to be transferred to – citing the Rockies, the fishing and the Stampede. (Dubai was number one, because of its tall new buildings and its shopping.)

And some months ago, 17-year-old Megan Butlin, on her way to Sweden as an exchange student, delivered a presentation to my Rotary club. It was a trial run for a presentation she would give to her Stockholm sponsors. According to one of her slides, “Statistically speaking, Calgary is 100% more awesome than Edmonton.”

Is any of this stuff really true?

Because of its proximity to major oil deposits – in the early days, Leduc and Pembina; recently, the Athabasca and Cold Lake oilsands deposits – Edmonton has become one of the world’s premier operations and service centres for the petroleum industry. It has fabrication and manufacturing capacity that would be the envy of virtually any other oilfield service centre. The University of Alberta is a jewel in the city’s crown, and it has been a centre of oilsands research since the 1920s.

The area is Alberta’s refining and petrochemical centre – notably the “Industrial Heartland” northeast of Edmonton. That industrial region has grown organically since the late 1940s, when Imperial Oil brought a tin-pot World War II refinery down from Whitehorse to process crude from nearby Leduc and other new fields. Now the beneficiary of more than $25 billion in investment, this 582-square-kilometre region hosts 40 large companies and many small ones. Together they operate numerous refineries and petrochemical plants, an upgrader, pipelines, service companies and numerous other interdependent businesses.

As the oilsands enable Canada to become an energy superpower, Edmonton will continue to serve as the staging area for the world’s biggest petroleum projects – most of them encircling another dynamic Alberta city, Fort McMurray. That, too, is awesome.

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