“The money’s all green,” goes an old Wall Street adage. Coined from the colour of American bills, the banker lingo suggests that companies are indifferent to which institutions finance their business, as long as they get the money they need. In the eyes of Canada’s entrepreneurial oil patch, CEOs have long seen the money as ‘green’, with American green being especially abundant and welcome. But now the colour of the money is changing. The axis of investment capital is rotating from a north-south flow over the 49th parallel to an east-west current across the longitude of the Pacific Ocean. A recent swell of Asian money coming into the Canadian oil patch represents one of the biggest megatrends in the business.
At last count, Korean, Chinese and Japanese interests have contributed or committed at least $13.8 billion into the Canadian oil and gas economy. As Table 1 shows, that’s only in the past 12 months, and doesn’t include unannounced deals that probably add another billion investment dollars into Calgary head-office coffers. Equity infusions and joint venture dollars account for $9.7 billion, most of which will be invested into Western Canadian projects over the next few years. The full acquisition of Harvest Energy by the Korean National Oil Company put $4.1 billion into the pockets of Harvest’s shareholders who may not reinvest into Canada’s oil and gas business. However, under the banner of Korea’s state-owned oil company the new Harvest should have no trouble accessing a pipeline to deep-pocketed Asian capital.
Energy is a high cost business and the Canadian oil and gas industry has always relied heavily on foreign investment to explore, develop and bring to market growing supplies of hydrocarbons. Between overt Wall Street sources and the less transparent budgets of foreign multinational oil companies, over 50% of the industry’s investment dollars comes from sources draped in a flag other than the Maple Leaf.
Let’s put the $13.8 billion of Asian inflow into Capital expenditures into Canada’s oil patch are down by 25% since the heyday of 2006-to-2008, but are still running around $40 billion per year right now. Another relevant marker is that companies have been raising about $10 billion a year from equity markets since 2005, dominantly from Western institutions, so in this context too the influx of new Asian money is very significant, even if it’s spread out over a few years. To be sure, reinvestment into Canada’s upstream oil and gas economy would be significantly lower, probably at least 10% less, if access to the Asian capital was absent this year.
It’s too early to call patterns in Table 1, but not too early to note that the last two big deals targeted natural gas. E.F. Hutton would be proud of the “buy low” strategy, especially knowing that the industry is being stifled with depressed commodity prices. To be sure, it’s a great time to secure low-cost, patient gas reserves if the view is to access Pacific markets sometime over the next 10 years. It makes perfect sense for flush visionaries who think in terms of decades instead of fiscal quarters.
Also notable in the past month is the equity investment by the Korean Investment Corporation into Laricina, an upand- coming oil sands company. It’s a much smaller investment that we’ve seen in the past, not a joint venture, and could be an indicator that serious Asian money is now willing to trickle down market into more entrepreneurial companies.
Capital from across the Pacific has many reasons to come to Canada. No doubt there is a broad flight to own real, tangible assets. What better real asset than energy for a region that’s growing its economy aggressively? Certainly, it makes more sense than putting money into flaky sovereign bonds. There’s no secret that cash-flush state-owned and private Asian companies have been globe-trotting over the past decade to find and secure good energy investment opportunities. Relative to nastier parts of the world, Canada was a hidden jewel with its vast resources, stable government, rule of law, established infrastructure, technical know-how, and access to the big US market, among other feel-good features. Only one thing was missing: direct access to Pacific markets. That could change this decade, which is another reason for the influx of capital.
Since WWII there has been a symbiotic, bi-directional flow of capital and energy resources between Canada and the US. Now a new dynamic is emerging like déjà vu. Growth economies like China look very similar to the United States in the 1950s and 60s – capital rich and hungry for energy. Today, Asian capital is coming across the Pacific seeking a partnership with Canadian energy at a time when American funding is not as enthusiastic about developing our energy resources, especially natural gas. The new money from beyond our western shores isn’t classically green, but it is arriving at a good time.
Peter Tertzakian, Chief Energy Economist
Kara Baynton, Manager, Energy Research
Disclaimer The information and data contained herein has been obtained or prepared from sources which ARC believes to be reliable but has not been independently verified. ARC makes no representations or warranties as to the accuracy or completeness of such information and data nor the conclusions derived therefrom. This document has been published on the basis that ARC shall not be responsible for, and ARC hereby expressly disclaims any responsibility for, any financial or other losses or damages of any nature whatsoever arising from or otherwise relating to any use of this document.
