1. Introduction of the Canada and Alberta Energy Market
According to the latest statistics in 2015, Canada has proven reserves about 172 billion barrels – the third largest crude oil reserve in the world, after Saudi Arabia and Venezuela. Alberta has proven reserves of 168 billion barrels, which is more than 95% of the total reserves in Canada. In general, total investment in new Alberta oil sands projects and re-investment (sustaining capital) in existing oil sands projects has exceeded $514 billion (2013 Canadian dollars). Revenues from all existing and new projects will exceed $2,484 billion (2013 Canadian dollars).
Oil sands production (upgraded and non-upgraded) is forecasted to grow from the current level of 1.98 million barrels per day (2013) to 3.7 million barrels per day by 2020 and 5.2 million barrels per day by 2030. For the period 2014 to 2038: the sum of initial capital for new projects, sustaining capital for existing projects and operating and maintenance expenses for all projects is expected to reach average $55 billion per year (2013 Canadian dollars). Total GDP impacts of all oil sands investment, re-investment and operating revenues is estimated to be $3,865 billion.
2. General Investment Information
Other than oil sands, new discoveries in Alberta are all small oil fields or units. The success rate of exploration wells is between 60-70%. The success rate of infill drilling on producing fields is above 97%. Alberta has complete oil and gas producing, processing and transporting facility; the production cost is low and the profitability is good. However, the open access to domestic oil and gas production in the U.S, depressed natural gas prices. This leads to unpleasant consequences to the Canadian energy market. Thus, a lot of big Canadian energy companies need strategy changes.
The Canadian energy market has abundant natural resources; however, it lacks domestic capital investment. Moreover, the crisis after 2008 along with strategy changes of domestic companies has exacerbated this situation. These actually have created a good environment for international investors. Because a lot of big oil companies have changed their strategy, many producing properties have been transferred to smaller companies. Due to the flexibility of the ownership transfer, there is a boom in the development of medium and small size energy companies. Nearly 70% of the 2000 oil companies in Calgary are medium and small companies. These companies can rapidly expand their sizes to big companies if they have adequate capital. There is no market or policy limit. The oil and gas market in Alberta is open to investors around the world; any company or individual can invest in the oil and gas sector. The exploration and development rights can be transferred and the information is transparent.
3. The advantages of investing in the oil and gas sector
First, oil and gas assets in North America are relatively new to Asian market, so they can access Chinese capital market more easily than other listed North American companies. Meanwhile, the demand from the US has been low since the restructuring of US energy market; thus, the asset value of the Canadian energy market is relatively underestimated. Moreover, the Canadian government is building up the transportation capacity of oil and gas via the Pacific. The next one to two years will be the golden age for Canadian oil and gas investment.
Second, there is a mature model for oil and gas asset purchases: cash flow is needed to compensate the decline. Compared with other projects in natural resources and mining, investing in producing oil and gas properties can produce cash flow right after the purchase of the assets; there is little exploration and development risk.
Third, with adequate investment, the growth of rate in return of the Canadian oil and gas assets is between 10%-25% (annually), which makes the according investment products stand out in the Chinese exchange market. At the same time, Chinese capital market is more active in fund raising than Canadian market, which brings more upside potential to the energy industry. The merging of Chinese listed companies and Canadian assets becomes a trend lately.
Fourth, Canada is the second largest oil producer among developed countries. It has a mature market, a large-scale industry, complete legislation and property security. Besides, Canada has stable political environment and little chance of war, and is more politically friendly to China than the U.S.. Canada does the best job in protecting international investors among many other developed countries. As a result, Canada is an excellent choice for Chinese energy investors.
Last but not least, the profitability and speculation have been reduced because of the gloom in the Chinese real estate market. It is a good opportunity for investors to turn the focus onto some other targets such as the Canadian energy market.
4. Categories of investment in oil and gas fields
- Purchase producing properties: the annual return is about 40% and the payback period is 2 to 3 years; low risk, low investment in infrastructure; investors can optimize the profit by drilling new wells and increasing production.
- Purchase exploration properties, and be responsible for some exploration costs: the annual return is about 30-40% and the payback period is 2-3 years, the input/output ration is 1: 5-6.
- Invest in self-explored project: the success rate of finding oil or gas reserves is only 30%-40%; This option is associated with high risk, but the rate of return can be enormous: 10 to 20 times the original investment.
- Invest in moderately developed properties with upside potential. This type of investment is similar to the third type; it is also considered as the high risk and high return type of investment.
5. Other Information
The department of Energy regularly updates the Oil Sands Projects map, which includes the current number of operating projects, including those under construction and projects that are approved, announced or in the application process. It also listed the current upgrades and plans for upgrades.