140901 rahman khanani jie lie master thesis oil clusters

ID number: 0959043

: 0960504

BI Norwegian Business School – Master Thesis

Supervisor: Torger Reve

The Canadian and Norwegian Oil

Clusters:

A Comparative Study

Date of submission:

01.09.2014

Campus:

BI Oslo

Examination code and name:

GRA 1900 Master Thesis

Programme:

Master of Science in Strategy and Innovation

This thesis is a part of the MSc Programme at BI Norwegian Business School. The school takes no

responsibility for the methods used, results found and conclusion drawn.

Master Thesis in GRA 1900 01.09.2014

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Acknowledgement

We would like to thank our supervisor, Dr Torger Reve, whose advice and

feedback has been instrumental in driving our thesis forward. Having one of the

world’s leading oil & gas experts as our thesis supervisor was not only beneficial

in terms of being a source of knowledge, but also in terms of ensuring that our

final thesis was both practical and relevant, while our recommendations were

realistic.

Jarand Rystad of Rystad Energy provided us with access to data, which has been

an important component within our analysis, and we are very grateful for his

support. In addition, we would like to particularly thank the Canadian Association

of Petroleum Producers (CAPP), and the Alberta Department of Energy where

multiple officials were kind enough to speak with us. Last but not least, we would

like to thank all our interviewees, who were very generous with their time, and

provided us with in-depth insight which enabled us to move forward.

Rahman Khanani Jie Li


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Executive Summary

This thesis includes an analysis of the Canadian onshore, offshore and oil field

service (OFS) industries, and the Norwegian oil industry via Porter’s Diamond,

which was used to evaluate these industries.

Canada has a strong business environment. However, a low number of PhD

students, and lower than average patents and innovation related spending and

financing illustrates that the innovation environment in the country is poor as

compared to other developed countries. In addition, its economy is significantly

dependent on the U.S. economy, while several provinces within the country

appear to prefer local content as opposed to national or international content. It is

important to note that the fiscal environment is variable all across Canada, with

Alberta having the lowest corporate income tax in Canada.

Canada has one of the world’s largest oil reserves, with 98% of its reserves

accounting for unconventional oil within the oil sands, and offshore reserves in

Atlantic Canada accounting for approximately 1% of Canadian reserves.

However, there is a strong possibility of finding significant reserves offshore,

considering almost $2 billion has been invested in into exploration.

The onshore oil industry in Canada is located in Western Canada and the

operating conditions are very complex. This has led to suppliers innovating within

the technologies of hydraulic fracturing and horizontal drilling. The U.S. receives

99% of Canada’s total exports, and 88% of total oil production. It is important to

note that total production in the U.S. is expected to increase significantly over the

next decade, while demand is expected to decrease, which is a concern for the

Canadian oil & gas industry. However, the oil is transported via pipeline, and

pipeline capacity to the Gulf Coast – the location of refiners for heavy oil – is

lacking significantly. In addition, proposals for constructing new pipelines have

faced many hurdles from environmentalists to First Nations groups. Rail is an

alternative for pipeline but there is limited capacity for rail transportation. It

should also be noted that the cost of rail transportation is higher than the cost of

pipeline transportation. Lack of access to other U.S. markets (i.e. the U.S. Gulf

Coast, the U.S. East Coast, Rockies and the U.S. West Coast) has led to a Western


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Canada Select (WCS) to West Texas Intermediate (WTI) differential of 21% due

to oversupply in the U.S. Midwest. It is also important to note that production

costs of the oil sands are very high, which implies high operational risks and

substantial investment. There have been several environmental concerns which

have led to a poor perception of the oil sands not only provincially or nationally,

but internationally.

The offshore oil industry in Canada has one of the harshest, if not the harshest

environment in the world. In addition, costs of drilling and operations are also

significant. Total demand is low while the industry is cyclical, which leads to

significant knowledge being lost as many individuals within the industry move to

other regions. There is a lack of critical mass, and this can be attributed to the lack

of production. There are significant local (provincial) content requirements via the

Atlantic Accords, which have minimized collaboration between the oil & gas

industry in Newfoundland and Labrador, and the shipping industry in Nova

Scotia. It is important to note that the offshore industry is expecting significant

finds; BP and Shell have invested approximately $1 billion each in exploration.

Canada does not have a market leading oil field service industry, while Norway is

leading the industry in this market. This could be attributed to it having

competencies in onshore oil field services, for which there is a significant market

in North America. However, 77% of total sales of Canadian oil field service

companies are within this region, which is a concern, as it demonstrates lack of

global competitiveness. Significant drawbacks are that Canadian firms are

conservative, and are suffering from a significant labour shortage, which is a

concern for the entire oil & gas industry. Significant concerns within this industry

are in terms of access to capital, especially as most capital in Canada is within the

sectors of mining and software. The value chain in onshore Canada is fairly

comprehensive, and appears to have competencies in hydraulic fracturing and

horizontal drilling. The value chain in offshore Canada has strengths within

engineering and operations, and lacks subsea design companies, while most

capital equipment is brought in for projects from overseas

The Norwegian industry has a very different licensing system than the Canadian

industry, as it allows licenses to be awarded based on expertise as opposed to a


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bid, as it is done in Canada. In addition, government funding and tax incentives,

and harsh operating conditions in Norway have led to Norwegian companies

innovating significantly within offshore technology. Norway has understood the

importance of the oil & gas industry, as it has significantly influenced the

prosperity of the country. This has led to it being viewed favourably amongst the

population. Norwegian oil field service companies are market leaders, and the big

four earn the majority of their revenues internationally. Many scholars have

attributed this to collaboration between the largest companies within Norway.

Based on the analysis of the industrial clusters, it is recommended that Canada

enhance its focus on innovation, improve infrastructure and access to markets,

enhance immigrations and encourage collaboration within the industry.

Furthermore, it is recommended that the industry partake in a PR campaign to

improve the perception of the population about the Canadian oil & gas industry. In

addition, access to capital for oil & gas technology companies has been a

significant drawback, and it is recommended that the government provide capital

to starts up and create a venture fund, which would ultimately allow the Canadian

oil field service sector to become as competitive as that of Norway. Last but not

least, it is essential that Canada diversify its export markets for oil as soon as

possible, as its production is expected to increase significantly, while currently it

is strongly dependent on the U.S. markets for purchasing its oil. However, the

U.S. production is expected to increase and demand is expected to decrease,

which could lead to Canadian oil resources becoming obsolete.

Keeping in mind the significant oil reserves and the possibility of reaching

international markets, the oil industry in Canada has a bright future. However,

access to markets, innovation and access to capital are significant concerns which

need to be resolved. Unless Canada can resolve these concerns, its oil will

command a lower price, and it will essentially take advantage of natural resources

instead of creating value added industry.


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Thesis Structure

Part One: Introduction and Cluster Theory

1. Introduction

2. Literature Review

Part Two: Canadian Oil Industry

3. Canada – Overview

4. Canadian National Diamond

5. Oil – Overview

Part Three: Canadian Onshore Diamond

6. Canada – Onshore Oil Diamond

Part Four: Canadian Offshore Diamond

7. Canada – Offshore Oil Diamond

Part Five: Canadian OFS

8. Canada – OFS Diamond

Part Six: Norwegian Oil Industry

9. Norwegian National Diamond

Part Seven: Comparative Analysis

10. Oil Costs – Canada vs. Norway

11. Comparing the Canadian and Norwegian Oil Clusters

Part Eight: Recommendation

12. Recommendations to upgrade the Canadian Oil Clusters


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Table of Contents

1.0 Introduction and Custer Theory ......................................................................... 1

1.1 Research Topic .............................................................................................. 1

1.2 Thesis Aims & Objectives ............................................................................. 1

1.3 Research Question ......................................................................................... 2

1.4 Research Methodology .................................................................................. 2

1.4.1 Secondary Research ................................................................................ 2

1.4.2 Primary Research .................................................................................... 3

1.5 Research Limitations ..................................................................................... 7

1.5.1 Limitations of Qualitative Case Studies ................................................. 7

1.5.2 Limitations of Interviews and Efforts Made ........................................... 7

1.5.3 Research Reliability and Validity ........................................................... 8

2.0 Literature Review .............................................................................................. 9

2.1 Introduction.................................................................................................... 9

2.1.1 Why Do We Study Cluster Theory? ....................................................... 9

2.2 Porter’s Cluster Study .................................................................................... 9

2.2.1 Porter’s Cluster Definition ...................................................................... 9

2.2.2 Porter’s Cluster Diamond ..................................................................... 10

2.3 The Development of National Competitiveness Study ............................... 11

2.3.1 Early National Competitiveness Study – Prior to 1990s ...................... 11

2.3.2 National Competitiveness – in 1990s and Thereafter ........................... 12

2. 4 Cluster Theory and Main Considerations ................................................... 14

2.4.1 Other Authors’ Clusters Definitions ..................................................... 14

2.4.2 Cluster Mapping ................................................................................... 15

2.4.3 Cluster Upgrading ................................................................................. 16

2.4.4 Cluster Life Cycles ............................................................................... 18

2.4.5 Critiques of Cluster Theory .................................................................. 19

2.5 The Next Development Stage of Industry Clusters ..................................... 20

2.5.1 The Global Knowledge Hubs ............................................................... 20

2.5.2 The Emerald Model .............................................................................. 20


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3.0 Canada – Overview.......................................................................................... 22

3.1 National Context .......................................................................................... 22

3.1.1 History .................................................................................................. 22

3.1.2 Economy ............................................................................................... 22

3.1.3 Social .................................................................................................... 25

3.1.4 Political ................................................................................................. 26

4.0 Canadian National Diamond............................................................................ 27

4.1 Government ................................................................................................. 27

4.2 Factor Conditions ........................................................................................ 29

4.3 Firm Strategy, Structure and Rivalry ........................................................... 35

4.4 Related Industry ........................................................................................... 36

4.5 Demand Conditions ..................................................................................... 37

4.6 Diamond Summary ...................................................................................... 38

5.0 Oil – Overview ................................................................................................ 39

5.1 Proven Conventional Reserves in Canada ................................................... 39

5.2 Proven Conventional Oil and Oil Sands in Alberta ..................................... 39

5.3 Crude Oil Production ................................................................................... 40

5.3.1 Onshore ................................................................................................. 44

5.3.2 Offshore ................................................................................................ 45

5.3.3 Oil Production ....................................................................................... 46

6.0 Canada – Onshore Oil Diamond ...................................................................... 47

6.1 Government ................................................................................................. 47


6.2.1 Oil Sands ............................................................................................... 50

6.2.2 Feasibility ............................................................................................. 50

6.2.3 Pipeline Infrastructure – Oil ................................................................. 51

6.2.5 Labour ................................................................................................... 54

6.2.6 Calgary .................................................................................................. 55

6.3 Firm Strategy, Structure and Rivalry ........................................................... 57

6.3.1 Industry Structure ................................................................................. 57


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6.3.2 Investment............................................................................................. 58

6.3.3 High Breakeven Costs .......................................................................... 60

6.3.4 Competition .......................................................................................... 61

6.3.5 Rivalry .................................................................................................. 61

6.3.6 Local Content and Ownership .............................................................. 63

6.4 Related and Supporting Industry ................................................................. 65

6.4.1 Oil Field Services ................................................................................. 65


6.5.1 Markets ................................................................................................. 65

6.5.2 U.S. Oil Imports .................................................................................... 66

6.5.3 Sluggish U.S. Demand .......................................................................... 67

6.5.4 U.S. Shale Revolution .......................................................................... 67

6.5.5 Pricing ................................................................................................... 68

6.5.6 Refining Capacity ................................................................................. 69

6.5.7 Environmental Concerns ...................................................................... 70

6.5.8 Exploration ........................................................................................... 70

6.6 Diamond Summary & Cluster Map ............................................................. 71

7.0 Canada – Offshore Oil Diamond ..................................................................... 74

7.1 Government ................................................................................................. 74

7.1.1 Regulators ............................................................................................. 74

7.1.3 Royalty .................................................................................................. 75

7.1.4 Government Initiatives ......................................................................... 76

7.1.5 Play Fairway Analysis (PFA) ............................................................... 78

7.1.6 Industry Sexiness .................................................................................. 79


7.2.1 Natural Resources ................................................................................. 80

7.2.2 Operating Environment ........................................................................ 80

7.2.3 Labour ................................................................................................... 81

7.2.4 Transportation ....................................................................................... 81

7.2.5 Capital Markets ..................................................................................... 82

7.3 Firm Strategy and Rivalry ........................................................................... 82

7.3.1 Local Rivalry and Capital Spending ..................................................... 82

7.3.2 Local Content and Ownership .............................................................. 83


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7.3.3 Cyclical Offshore Oil Industry ............................................................. 84

7.3.4 Global Rivalry ...................................................................................... 85

7.4 Related and Supporting Industries ............................................................... 86

7.4.1 Deep Ocean Technology Cluster .......................................................... 86

7.4.2 Secondary Petroleum Industries ........................................................... 87


7.5.1 Exports/Imports .................................................................................... 89

8.0 Canada – OFS Diamond .................................................................................. 94

8.1 Cluster Location........................................................................................... 95

8.2 Government ................................................................................................. 95

8.2.1 Fiscal Environment ............................................................................... 95


8.3.1 Access to Capital .................................................................................. 96

8.3.2 Investment............................................................................................. 97

8.3.3 Human Capital ...................................................................................... 98

8.3.4 Education ............................................................................................ 100

8.3.5 Innovation ........................................................................................... 101

8.3.6 Research Programs ............................................................................. 102

8.3.7 Patents ................................................................................................. 103

8.4 Firm Strategy, Structure & Rivalry ........................................................... 103

8.4.1 Structure .............................................................................................. 103

8.4.2 Rivalry – Onshore ............................................................................... 104

8.4.3 Rivalry – Offshore .............................................................................. 107

8.4.4 Competitive Advantage – Onshore ..................................................... 107

8.4.5 Competitive Advantage – Offshore .................................................... 108

8.4.6 Lack of Global Canadian OFS Firms ................................................. 109

8.5 Demand Conditions ................................................................................... 111

8.5.1 Domestic Demand .............................................................................. 111

8.5.2 International Demand ......................................................................... 113

8.5.3 Sophisticated Customers ..................................................................... 114

8.6 Related and Supporting Industries ............................................................. 115

8.6.1 Onshore Cluster – Value Chain .......................................................... 115


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8.6.2 Onshore Cluster – Related industries ................................................. 116

8.6.3 Offshore Cluster – Value Chain ......................................................... 116

8.6.4 Offshore Cluster – Related Industries................................................. 116

9.0 Norwegian National Diamond ....................................................................... 118

9.1 Government ............................................................................................... 118

9.1.1 Governance Structure ......................................................................... 118

9.1.2 Industry Specialization ....................................................................... 120

9.1.3 Industry Sexiness ................................................................................ 120

9.1.4 Political Consensus ............................................................................. 120

9.1.5 Licensing System ................................................................................ 123

9.1.6 Stepwise Opening ............................................................................... 125

9.1.7 Consistent Policies .............................................................................. 126

9.1.8 Industry Promotion – INSTOK .......................................................... 127

9.2 Factor Conditions ...................................................................................... 128

9.2.1 Reserves and Production..................................................................... 128

9.2.2 Historical Production .......................................................................... 129

9.2.3 Operating Conditions .......................................................................... 131

9.2.4 Labour and Human Capital ................................................................. 131

9.2.5 Efficiency of Human Capital .............................................................. 132

9.2.6 Access to Capital ................................................................................ 132

9.2.7 Infrastructure....................................................................................... 134

9.2.8 Innovation ........................................................................................... 134

9.2.9 Laboratory for Technologies Development ........................................ 135

9.3 Firm Strategy and Rivalry ......................................................................... 136

9.3.1 Structure .............................................................................................. 136

9.3.2 Competition ........................................................................................ 136

9.3.3 Effective Private and Public Collaboration ........................................ 137

9.3.4 Technology ......................................................................................... 139

9.4 Related and Supporting Industries ............................................................. 140

9.4.1 Oil Field Services ............................................................................... 140

9.4.2 International Operations of OFS ......................................................... 141

9.4.3 Shipping .............................................................................................. 144

9.5 Demand Conditions ................................................................................... 145


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9.5.1 Local Consumption ............................................................................. 145

9.5.2 Export Markets ................................................................................... 145

9.6 Diamond Summary .................................................................................... 147

10.0 Oil Costs – Canada vs. Norway ................................................................... 147

10.1 Cost Analysis ........................................................................................... 148

10.1.1 Operating cost ................................................................................... 148

10.1.2 Transportation Costs ......................................................................... 150

10.1.3 Royalties and Taxes .......................................................................... 150

10.1.4 Breakeven Costs ............................................................................... 150

10.1.5 Increasing Costs ................................................................................ 151

10.2 Cost Discussion – Canada vs. Norway .................................................... 152

11.0 Comparing the Canadian and Norwegian Oil Clusters................................ 155

11.1 Cluster Attractiveness .............................................................................. 155

11.1.1 Reserves ............................................................................................ 155

11.1.2 Location ............................................................................................ 156

11.1.3 Infrastructure..................................................................................... 156

11.1.4 Demand ............................................................................................. 157

11.1.5 Competition ...................................................................................... 158

11.1.6 OFS Value Chain .............................................................................. 158

11.1.7 International OFS Firms ................................................................... 159

11.1.8 Supporting Industry .......................................................................... 159

11.2 Education Attractiveness ......................................................................... 160

11.3 Talent Attractiveness ............................................................................... 161

11.3.1 Human Capital .................................................................................. 161

11.4 R&D and Innovation Attractiveness ........................................................ 162

11.4.1 R&D Requirement ............................................................................ 162

11.4.2 Innovation ......................................................................................... 162

11.4.3 Collaboration .................................................................................... 163

11.4.4 Sophisticated Customers ................................................................... 164

11.5 Ownership Attractiveness ........................................................................ 164

11.5.1 Fiscal environment ........................................................................... 164

11.5.2 Licensing........................................................................................... 165


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11.5.3 Protectionist Policy ........................................................................... 165

11.5.4 Capital Markets ................................................................................. 166

11.6 Environmental Attractiveness .................................................................. 167

11.6.1 Industry Sexiness .............................................................................. 167

11.6.2 Environmental Awareness ................................................................ 167

11.7 Comparative Analysis Summary ............................................................. 169

12.0 Recommendations to Upgrade the Canadian Oil Clusters .......................... 171

12.1 Cluster Attractiveness .............................................................................. 171

12.2 Ownership Attractiveness ........................................................................ 171

12.3 Talent Attractiveness ............................................................................... 174

12.4 Educational Attractiveness ...................................................................... 175

12.5 Environmental Attractiveness .................................................................. 176

12.6 R&D & Innovation Attractiveness .......................................................... 177

Conclusion ........................................................................................................... 179

References............................................................................................................ 180


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1.0 Introduction and Custer Theory

1.1 Research Topic

The Norwegian and Canadian offshore oil industries have adopted very different

approaches, and these approaches have been influenced by government regulation.

The Canadians have adopted a free market approach, which is considered a more

North American approach to industry (Hsieh 2013). The Norwegians on the other

hand have had significant government involvement (Hsieh 2013). According to

the Norwegian Oil & Gas Association (2010) “the history of the oil & gas industry

in Norway is a saga of wise political decisions, world-class industrial

development and huge value creation.” This has led to a very strong and

prominent cluster within the oil & gas industry in Norway and has led to the

successful creation and operations of various companies which are involved

within the service aspect of the industry. These companies have been very

competitive in the global market, despite the fact that costs in Norway are some of

the highest in the world. Therefore, we can conclude by stating that the

Norwegian collaborative approach has been more effective in terms of industrial

development, than the individualistic approach adopted by the Canadians.

1.2 Thesis Aims & Objectives

Canada has two industries within oil & gas, onshore and offshore, while Norway

has purely an offshore industry. This thesis will examine all three industries, and

compare and contrast the differences. This will ultimately lead to this study being

a comparative cluster development analysis of the Canadian and Norwegian oil &

gas industries. There will be an additional focus on determining the reasons

behind Norway’s success within oil & gas. Utilizing comparative analysis, a

number of recommendations for the Canadian industry will be stated, while

accounting for the differences in geography, history, industry specialization, and

natural resources.

This thesis is essentially a way for Canada to learn from Norway in terms of

developing industries. Excellent industrial development policies within the oil &


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gas industry have been significant drivers in making Norway one of the world’s

most prosperous countries. This thesis will enable Canada to learn from these

best practices, and see if they can use similar policies to enhance industrial

development and overall prosperity.

Several individuals within both the provincial and federal government have

recognized that the prior strategy employed by Canada was to take advantage of

its natural resources. According to Larry Ziegenhagel, from the Department of

Energy at the Government of Alberta, there has been a recent focus on enhancing

value creation, and this thesis will act as a blue print for this.

A comparative study of the Canadian and Norwegian oil & gas industries has

never been undertaken. Therefore, the learnings from this study could potentially

provide significant insight for industry, academia and government.

1.3 Research Question

What can Canada learn from Norway in terms of developing its oil & gas cluster?

1.4 Research Methodology

This qualitative thesis consists of both secondary and primary research, for which

more details are listed below:

1.4.1 Secondary Research

The secondary data collection phase was divided into multiple segments.

1) Background information

The first aspect for both authors was enhancing their knowledge of both the

Canadian and Norwegian oil & gas industries. They did so by subscribing to

publications about the oil & gas industry in Canada, and globally. In addition, the

authors read background data about the industries in both Canada and Norway in


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order to develop a more thorough understanding.

2) Theoretical Grounding

Both authors conducted research with regards to determining the most applicable

theoretical framework for this thesis. This was the second stage of the study and

stated in the preliminary thesis report.

3) Data collection

This thesis is qualitative, and in order to collect relevant data, the authors had to

browse through various industry publications, governmental regulations,

provincial petroleum ministry websites, industry trade association reports,

external reports and company presentations. In addition, the authors obtained

some valuable quantitative data from Rystad Energy – a market intelligence and

consultancy based in Oslo.

4) Confidential Government of Canada Reports

Due to contacts with the Canadian government, the authors were able to obtain

several confidential Government of Canada reports about the Canadian oil & gas

industry. These reports proved to be beneficial for the purpose of the study.

5) Seminars

We attended two seminars at the Canadian Embassy of Norway in order to

enhance our understanding of the industries in both countries, while establishing

prospective contacts to interview.

1.4.2 Primary Research

Primary research was essential in order to have a thesis which consisted of all the

required data. Therefore, we had to identify viable interview subjects.

1) Selection of Interview Subjects

After mapping out the oil & gas clusters, we determined the organizations we

would like to get in touch with, and after researching the organization, we

determined the position of the ideal person we would like to interview. LinkedIn


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was an excellent tool in determining the name of the individual of interest. Alumni

of Queen’s School of Business and Trent University were given preference as the

authors had attended those institutions and it was likely that we had a chance of

obtaining a better response from alumni as this built an immediate connection

with them.

The goal in terms of determining the individuals we wanted to interview was to

ensure that the subjects had depth of knowledge, which we determined was based

on their prior experience, organization, and position. In addition, we ensured that

individuals from across the industry were interviewed; this included government,

trade associations, capital markets, oil field companies, industry experts and

operators. The reason we did so was to ensure that biases were prevented, and that

the opinions of stakeholders across the board were considered.

Individuals of interest were based both in Norway and in Canada. However, as the

research had a greater focus on Canada, most of the individuals interviewed were

from the Canadian oil & gas industry.

2) Obtaining Interviews

After determining the individual we would like to interview, we tried to use our

personal and professional network in order to get introduced. If we did not have

an individual in our networks who could introduce us to the individual of interest,

we would email them or send them a brief request to connect via LinkedIn. If this

failed, we would call them directly to express our interest in interviewing them.

3) Conducting Interviews

The interview varied as per the individual interviewed. However, all interviews

were limited to 75 minutes and consisted of a maximum of ten scripted questions.

The interview guide for the interview was tailored to the individual interviewed,

his/her position, educational and professional background along with their current

position within the industry.

Rahman Khanani interviewed all the interviewees within the thesis. This was

because of his prior experience in conducting research, and strong interpersonal

and communication skills.


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In order to ensure that the perspectives of both authors were recorded during the

interview, it was deemed necessary for both individuals to take notes. As most

interviews were conducted virtually, it was practical for both authors to take notes

on their computers.

The interview typically started with explaining to the interviewee the nature of the

study and the focus of the interview. The interviewee was also told to feel free to

divulge into any information that they might think would be relevant for the

purpose of this report, but was not specific to a question asked.

The following is a list of all interviewees:


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Name Organization Position

1 Arnt Inge Enoksen EY Norway Senior Associate

2 Anthony Patterson Virtual Marine CEO

3 Bettina Pierre-Gilles Phasis Consulting President & CEO

4 Brian Pyra Deloitte Canada Director of Operations

5 Bruce Edgelow ATB Financial VP Energy

6 Christian Hansen Embassy of Canada in Norway Senior Trade Commissioner

7 Christopher Theal Kootenay Capital President & CEO

8 Cooper H. Langford University of Calgary Professor

9 Craig Watt Premier's Office Southern Alberta Executive Director

10 David Arthur Boston Consulting Group Project Leader

11 Geoff Hill Deloitte Canada Partner

12 Håkon Skretting INTSOK Regional Director

13 James Logan Forbes Welaptega Marine Engineering Manager

14 Jarand Rystad Rystad Energy Managing Partner

15 John Winterbourne Embassy of Canada in Norway Trade Commissioner

16 Josh Hutchings Imperial Oil Project Manager

17 Jon Marsh Duesund Rystad Energy Project Manager

18 Jon Myran BW Offshore Head of Improvement Initiatives

19 Kelly Morrison Canadian Petroleum Services Association Vice President Communication and

Stakeholder Relations

20 Kinnon Kendziora Talon Energy Services Project Manager

21 Larry Ziegehagel Department of Energy at the Government of

Alberta Senior Advisor

22 Mark O’Byrne Schlumberger Canada Limited President

23 Mark Salkeld Petroleum Services Association of Canada President & CEO

24 Matthew Foss Department of Energy Government of Alberta Executive Director Economics and Markets

25 Max Ruelokke Aker Solutions Senior Manager

26 Mette Kloster EY Norway Senior Consultant

27 Michael Eklund Deputy Minister, Government of Alberta Advisor on Strategic Initiatives

28 Paul Barnes Canadian Association of Petroleum Producers Atlantic Canada Manager

29 Paul Paynter Saskatchewan Research Council Business Development Director

Energy

30 Peter Tertzakian ARC Financial Corporation Chief Energy Economist &

Managing Director

31 Richard Grant Gowlings Law Firm Partner

32 Richard Wayken Alberta Innovates Technology Futures Vice President - Pipelines

33 Shannon Chmelyk Alberta Energy Regulator Manager, Planning and Analysis

34 Steven I. Paget FirstEnergy Capital Director, Institutional Research

35 Susan Hunt Petroleum Research Newfound & Labrador Program Manager

36 Svein Inge Eide Statoil Canada Research Lead

37 Tore Sorheim Trican Norway General Manager

38 Wade Locke Memorial University Professor


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1.5 Research Limitations

1.5.1 Limitations of Qualitative Case Studies

The chosen research methodology is qualitative approach, because cluster

development and dynamics is a complex phenomenon that cannot be fully

explained using variables and assessing their relevant magnitudes. Qualitative

studies also facilitate cross-case comparisons and analysis (Johnson and

Christensen 2004), which is in line with this study. However, several limitations

are embedded in the interview-based qualitative approach (Johnson and

Christensen 2004):

1) Qualitative findings produced might not be easily generalized to other settings

2) Data collection and analysis generally takes more time, and it is more difficult

to draw conclusion due to tangled causal relationships

3) Results and implications are more easily influenced by the authors’ personal

biases

1.5.2 Limitations of Interviews and Efforts Made

Due to lack of industry expertise, both authors relied on available industry

publications to understand the current situation of clusters in Norway and Canada.

Therefore, their understanding and perception about the industry developed was

more likely to be easily influenced by biases in the industry reports and

misinterpretation of available industry publications. We overcame this limitation

by looking into publications from different stakeholders, such as regulators,

industry associations, and consulting firms within both clusters. We also cross

compared the information received from various sources in order to be as close to

industry reality as possible.

Interview questions developed are heavily dependent on the understanding of

authors in regards to the important elements that influence cluster development.

Therefore, important elements could have been missed. All interview questions

were prepared via discussion and collaboration of both authors in order to reduce


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the likelihood of interviewer bias. We encouraged interviewees to communicate

important factors that they thought would be beneficial to the thesis which were

not mentioned in the interview. The open-ended interview method has been

proven beneficial in guiding our research direction, as it gave us significant

additional information. Over time, significant aspects that needed to be researched

and discussed in order to understand cluster development are mentioned and then

confirmed by many interviewees. Their contribution and confirmation have

increased our confidence in covering important aspects in this clustering study.

1.5.3 Research Reliability and Validity

Both the limitations of quantitative approach and interview-based information

collection are sources of errors. These errors could affect the relevance and

validity of our thesis.

Validity concerns the objectivity and credibility in data collection (Anderson

2010). In order to increase the validity of our thesis, we use respondent validation

and constant comparison techniques. Respondent validation allows an interviewer

to read the analysis and provide feedback to confirm the author’s interpretation

(Anderson 2010). Constant comparison refers to interpreting new interview

findings based on previous information collected from industry publications and

interviews (Anderson 2010). We based our analysis on all interviews jointly,

rather than treating each interview as a fragmented piece of information.

However, due to the nature of the quantitative approach, we consider the validity

of our data collection moderate.

Reliability addresses reproducibility and stability of the data (Anderson 2010).

Firstly, the reliability is hard to attain in the sense that cluster development is a

dynamic process, and recommendations made in our thesis are situational to

external environments. Secondly, when asked the same questions again at a later

point in time, the interviewees might provide different answers as the industry

environment changes over time. Thirdly, suggestions that are relevant based on

initially observed market problems might lose their value as time elapses.


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2.0 Literature Review

2.1 Introduction

This section outlines the literature used within this study. The key concepts,

theories and frameworks are Cluster Theory, National Competitiveness, Porter’s

Diamond, Amir Sasson and Torger Reve’s Emerald Model, and the Global

Knowledge Hub concept authored by Torger Reve.

2.1.1 Why Do We Study Cluster Theory?

Cluster theory was chosen as the primary theory within our study because it is

most relevant to national competitiveness. Industrial clusters contribute to

industrial competitiveness, and national competitiveness is the accumulated and

synergetic effect of competitive industries. Supported by related industries, a

strong industrial cluster requires a critical mass of industrial and knowledge actors

at every stage of the value chain or value network (Reve 2009). The industrial

clusters produce positive knowledge externalities, because there are knowledge

spillovers and rapid learning processes that stimulate both innovation and

commercialization of innovation (Reve 2009). Like public goods, knowledge

externalities are undersupplied and hence government policies are essential to

bring the supply of knowledge externalities to the optimal level (Reve 2009). The

aim of our thesis is to provide recommendations that strengthen the Canadian

onshore and offshore oil clusters, after evaluating these clusters via Porter’s

Diamond

2.2 Porter’s Cluster Study

2.2.1 Porter’s Cluster Definition

Cluster refers to ‘‘geographic concentrations of interconnected companies,

specialized suppliers, service providers, firms in related industries, and associated

institutions (e.g., universities, standards agencies, trade associations) in a


Page 10

particular field that compete but also cooperate ( Porter 2000, 16).’’

According to Porter (2008), a cluster is a series of industries that are horizontally

(i.e. pharmaceutical and skin care industry) or vertically (i.e. supplier and services

providers, buyers) related to the central industry. A cluster is a set of firms that are

co-located and co-dependent (“external economics”: i.e. skin care industry

benefits from breakthroughs in pharmaceutical R&D), and they tend to have

strong commonalities and complementarities in terms of resources, skills, and

knowledge. Clusters also include institutions (i.e. specialized training entities,

standard-setting agencies, and industrial associations) which provide the

interconnection between different elements within the cluster.

2.2.2 Porter’s Cluster Diamond

Porter (1990) uses the Diamond Model to refer to the effect of the microeconomic

environment on industry competitiveness. The characteristics of the Diamond

Model are as follows:

1) Context for Firm Strategy and Rivalry

This determinant refers to how companies are created, organized and managed in

the nation, as well as how they compete (Porter 1998a). A healthy local

environment for firm strategy and rivalry encourages innovation, investment,

competition, and thus sustained growth. Vigorous competition among local rivals

indicates strong incentives to follow sophisticated strategies such as investing in

R&D, collaborating with institutions in innovation, and accumulating human

capitals in order to attain or maintain competitive advantage.

2) Factor (Input) Conditions

Factor conditions are essential variables which are required to compete in the

industry. They include natural resources, human capital, financial resources, and

physical and knowledge-based infrastructures. However, it is important to note

that, “… the stock of factors that a nation enjoys is less important than the rate

and efficiency with which it creates, upgrades, and deploys them in particular

industries” (Porter 1990, 172).


Page 11

3) Related and Supporting Industries

Local presence of capable and competitive suppliers, as well as supporting

industries enhances innovation in the focus industry. The presence of local

suppliers and other related industries that are internationally competitive creates

advantages in downstream industries, because they deliver the most cost-effective

inputs in a timely fashion (Porter 1998a). Local suppliers and related industries

also enhance innovation in the focus industry, because it enables the focus

industry to take advantage of short communication lines and receive ongoing

exchange of ideas and innovations (Porter 1998a).

4) Demand Conditions

This determinant refers to sophisticated and demanding local customers or a

challenging environment which leads to the industry has to provide superior

solutions. According to Porter “the size of home demand proves far less significant

than the character of home demand” (1990, 174). The demand is considered of

good quality, if specific customer needs at a given location can provide companies

the opportunities to learn and develop targeted products and services, and even

predict the needs of customers in other markets (Ketels 2006). Consequently, local

demand conditions that lead the global market is an important factor that

determine whether a cluster location is likely to be at the cutting edge of

innovation (Ketels 2006).

2.3 The Development of National Competitiveness Study

2.3.1 Early National Competitiveness Study – Prior to 1990s

The study of national competitiveness originated in the study of international trade

which states that international trade and specialization create a win-win situation

due to comparative advantages. In the book the wealth of nations, first published

in late 18th

century, Adam Smith (1868) used a pin factory example to explain the

efficiency improvement as a result of labour specialization. He observed that

division of labour improved the productivity. Later studies in the first half of 19th

century scale up productivity improvement to the national level. According to


Page 12

David Ricardo (1971), at the national level, if opportunity cost is taken into

consideration, the productivity improvement due to specialization and

international trade is called the law of comparative advantage.

“One country is said to have a comparative advantage over another in the

production of a particular good relative to other goods if it produces that good

less inefficiently than it products other goods, as compared with the other

country” (Baumol and Blinder 2012, 49).

The comparative advantage is shared between countries engaged in international

trade. Consequently, international trade is referred to as a win-win situation due to

the law of comparative advantage. However, in the 1980s and 1990s, the classical

concept of free trade was challenged by protectionist forces due to market failures

(Bhagwati 1994). In 1992, Lester Thurow authored a book titled Head to Head:

The Coming Economic Battle among Japan, Europe, and America. He wrote

about advanced nations being in a win-lose competition for world markets

because they all compete against each others to become the world’s most powerful

economy (Thurow 1992). This win-lose perception directly challenged the

fundamental propositions of the classical international trade model, because it

promoted local protectionism and government intervention instead of free

international trade, which the law of competitive advantage advocates (Krugman

1994, Krugman 1996).

2.3.2 National Competitiveness – in 1990s and Thereafter

Despite the ongoing debates between classical (win-win situation) and the

Mercantilist-based concept (win-lose competition) of national competitiveness,

the focus has shifted towards achieving national competitiveness (Krugman

1996). Porter’s cluster study in 1990s lays the foundation for creating and

sustaining national competitiveness in a knowledge-based economy and is the

dominant theory in national competitiveness studies.

Improvements in distance-free Information Communication Technologies (ICT)

alter the economics of location, because companies are no longer bound to source


Page 13

inputs (i.e. labour, capital and supplies) and do business locally (Cairncross 2001).

However, Porter observes the formation of clusters in every advanced economy,

and states that with globalization, geographical location is becoming more rather

than less important (Porter 1998b, Porter 2000, Ketels 2006). It is pointed out that

localization appears to be the feature of most business activities (i.e. computers,

software, biotechnology, fashion, design, media, and music) (Martin 2007).

Indeed, “while globalization and the new information and communication

technologies are rendering the ‘national economy’ increasingly ‘borderless’ and

problematic as a concept, it seems that economic production and organization are

becoming increasingly localized (Martin 2007, 35).”

Classical economic theory underlined the importance of labour costs, interest

rates, exchange rates and economies of scale as determinants of national economic

competitiveness, and thus the studies of national competitiveness focused on

utilizing macroeconomic factors of comparative advantage in international trade

(Porter 1998b). Porter’s insights in relation to national competitiveness are

essentially threefold:

1) National prosperity is dependent upon the competitiveness of its local industry

which is influenced by both macroeconomic factors and the microeconomic

business environment (Porter 1998c). Porter’s cluster theory focuses on

microeconomic factors.

2) “Industry competitiveness is created and sustained through a highly localized

process” (Porter 1998b, 155). Cluster effects are the main advantages of the

localized process of upgrading (Porter 2008).

3) In the process of industry upgrading, demanding local customers, competitive

home-based suppliers, and intensive rivalry all benefit the innovation and

upgrading process (Porter 1998a).


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2. 4 Cluster Theory and Main Considerations

2.4.1 Other Authors’ Clusters Definitions

Alfred Marshall (2009) uses the term “localized industry” to describe geographic

concentration of an industry.

According to Marshall, “when an industry has thus chosen a locality for itself, it is

likely to stay there long: so great are the advantages which people following the

same skilled trade get from near neighborhood to one another (2009, 255)”.

Physical conditions, such as climate, soil, natural resources and ease of

transportation, were identified as the most important reasons for the emergence of

“localized industry”. “Localized industry” has advantages due to the hereditary

skill, the growth of subsidiary trades, the use of highly specialized machinery and

a constant market for special skill (Marshall 2009). However, “sometimes a

localized industry makes too expensive demands for one kind of labour (Marshall

2009, 226)”. According to Marshall (2009), multiple localized industries

contribute to regional prosperity through avoiding depression, because “different

industries in the same neighborhood mitigate each other’s depression (227).”

Porter’s concept of clusters shares some similarities with Marshall’s localized

industry definition (Martin and Sunley 2003), because it also describes geographic

concentration of industries.

Porter (1998a) refers to the location externalities defined by Marshall as cluster

externalities, which essentially provide better access to specialized inputs,

employees, information, institution, local complementary activities and other

public goods. In addition, firms in clusters have stronger incentives for innovation

because firms can better involve local suppliers and customers in the innovation

journey, and utilize innovation in related industries that are co-located. This

enables them to remain competitive in the long run (Porter 1998a, Porter 1998c,

Porter 2000).


Page 15

Other than stronger incentives and richer capabilities for innovation, “close

proximity allows them to transact business more cheaply and easily, resolve their

problems more quickly and efficiently, and learn earlier and more directly about

new and innovative technologies and practices (Rosenfeld 1997, 3).”

Nevertheless, different authors tend to have a different emphasis (i.e. proximity,

collaboration, network effects, synergy, and innovation), which leads to confusion

of clusters definitions (Martin and Sunley 2003). Crouch and Farrell suggest a

more general concept of cluster which is “a tendency for firms in similar types of

business to locate close together, through without having a particularly important

presence in an area” (2001, 163). Similarly, Enright emphasis on proximity and a

cluster is defined as “an industrial cluster in which member firms are in close

proximity to each other (1996, 191)”.

Roelandt and Hertag use the network concept to describe cluster and a cluster is

defined as “networks of producers of strongly interdependent firms (including

specialized suppliers) linked to each other in a value-adding production chain. In

some cases, clusters also encompass strategic alliances with universities, research

institutes, knowledge-intensive business services, bridging institutions (brokers,

consultants) and customers (1999, 9).”

Rosenfeld (1996, 1997) highlights that “active channels” for collaboration (i.e.

business transaction, information sharing, communication, feedback) and cluster

synergy in addition to geographic proximity and concentration. According to

Rosenfeld (1997), good cluster dynamics achieved through “active channels” for

collaboration are the key to synergy and competitiveness. Consequently, a critical

mass without collaboration, which has no cluster synergy, should not be classified

as cluster (Rosenfeld 1997).

2.4.2 Cluster Mapping

Porter (1998a) outlines five steps to identify clusters:

1) Find concentrations of similar firms and then look “upstream and downstream


Page 16

in the vertical chain of firms and institutions (1998a, 200).”

2) Look horizontally (i.e. complementary products and related industry) to find

industries that utilize similar downstream channels or produce complementary

products;

3) Find additional horizontal chains of industry that have input similarity and

linkages;

4) Find local institutions or collective bodies which provide specialized skills,

technology, information, capital, or infrastructures to cluster;

5) Seek out regulatory bodies that significantly influence cluster participants.

The scope of a cluster is defined as ‘‘the distance over which informational,

transactional, incentive, and other efficiencies occur (Porter 2000, 16).’’

According to Porter (2000) a cluster encompasses the focus industry and several

related industries, and extends across the value chain of the focus and related

industries. Governmental and other institutions (i.e. university, industry

association, R&D entity) support the development of clusters, providing both

tangible (i.e. capital and infrastructures) and intangible resources (i.e. education,

regulations and policy). The boundaries of a cluster could be drawn by weighting

the importance of the linkages and complementary across industries and

institutions that enhance the competitiveness of the focus industry. The scope of a

cluster should aim to outline critical cluster attributes instead of comprising all

private and public participants (Porter 1998a).

2.4.3 Cluster Upgrading

National competitiveness is sustained through constant cluster upgrading (Porter

1998a). Quality of the National Business Environment, State of Cluster

Development, and Sophistication of Company Operations and Strategy are three

key indicators of microeconomic competitiveness (Delgado et al. 2012). Social

Infrastructure, Political Institutions, and Monetary and Fiscal Policies are key


Page 17

macroeconomic competitiveness variables that have a positive impact on country

output per potential worker (Delgado et al. 2012). Porter’s cluster theory focuses

on the microeconomic business environment (Ketels 2006).

Although sound macroeconomic context paves the way for economic

development, the microeconomic business environment rests on the sophistication

of the organization’s operations and strategy. Therefore, the quality of the

microeconomic business environment must be addressed in the discussion of

upgrading national productivity and hence prosperity (Porter 1998b, Porter

1998c). Porter’s empirical study of the World Economic Forum (1998c) finds a

strong (positive) statistical relationship between the microeconomic business

environment and economic development amongst 52 countries. Consequently,

Porter (1998c) states that national productivity is essentially a function of three

interrelated determinants: Macroeconomic Policies which provide contexts,

Microeconomic Conditions that determine business environment and Company

Operations and Strategies that create competitiveness.

In the process of economic development, competition shifts from being cost-based

to knowledge-based. The formation and upgrading of clusters is essential to reach

a high-level of economic prosperity in knowledge-based competition. This is

because clusters at the microeconomic level contribute to economic development

by facilitating specialization and innovation (Porter 1998a, Porter 1998b, Porter

1998c). Clustering per se is a result of specialization, and clusters reinforce

specialization. Specialized R&D institutions are often the knowledge bridge

builders that form knowledge networks (Reve 2009). As a cluster develops, more

public and private investments are made to support specialized R&D institutions

and upgrade human resources. Knowledge spillovers in the knowledge network

contribute to faster innovation and commercialization of new technologies. As this

process continues, clusters become more competitive and knowledge-based. As

per Porter’s Cluster Diamond, this is essentially the self-reinforcing dynamic of

the “competitive diamond” (Martin and Sunley 2003).

1) Advantages of Locating in Clusters – Innovative Pressure & Knowledge

Spillover

Porter (1990) argues that the sources of competitiveness for a firm that is located


Page 18

in a cluster stem from both improved operations (internal) and conditions of the

cluster diamond (external). Several empirical studies demonstrated that companies

within a cluster experience stronger growth and faster innovation than companies

which are not part of a cluster. Audretsch and Feldman (1996) examine the spatial

distribution of innovative activity and geographic concentration of production,

and find that innovative activities tend to cluster according to geographic

concentration of production, especially in industries that are characterized by

knowledge spillovers. In an empirical study based on firm activities statistics

gathered in the UK, Baptista and Swann (1998) find that firms located in strong

industrial clusters or regions are more likely to be innovative.

2) Self-Reinforcing Dynamic of the “Competitive Diamond”

As per Porter’s Diamond, each aspect within the diamond affects industry

competitiveness which ultimately affects national prosperity (1998c). The

intensity of interaction within the “competitive diamond” is enhanced if the firms

are clustered (Martin and Sunley 2003). Firms and institutions are likely to have

stronger linkages if they are clustered, than if they are far away from each other.

Therefore the self-reinforcing dynamic of the “competitive diamond” as a group

of interlinked industries and associated activities is the driving force making for

cluster development (Martin and Sunley 2003).

Although clustering takes place spontaneously, governmental policies influence

the formation and upgrading of the cluster through affecting the macroeconomic

context and microeconomic business environment. Therefore, the government

should aim to enhance the self-reinforcing dynamic of a cluster through the

variables within the Diamond (Porter 1998c).

2.4.4 Cluster Life Cycles

The evolutionary development of clusters shares similarities to the industry life

cycle. Oliver Williamson (1975) depicts the industry life cycle as an early

exploratory stage, an intermediate development stage, and a mature stage. Maskell

and Malmberg (2007) define cluster life cycles as rise, growth, decline and

possible rejuvenation of special clusters of similar and complementary economic


Page 19

activities.

However, cluster life cycles differ from the local representation of the industry life

cycle in three aspects (Menzel and Fornahl 2010). Firstly, during the growth stage,

with increasing numbers of co-located companies, cluster dynamics start to show

strong externalities which are rapid innovation and strong collaboration. Secondly,

clusters start to have a negative effect on companies within the cluster in the late

maturity stage (Menzel and Fornahl 2010). These negative effects, according to

Grabher (1993) and Maskell and Malmberg (2007) include lock-in traditional

trajectory and falling into the deep specialization trap. Thirdly, if the knowledge

heterogeneity is recreated in clusters, despite of entering into mature stage of

industry life cycle, clusters can be renewed (Menzel and Fornahl 2010).

2.4.5 Critiques of Cluster Theory

Porter’s Cluster mapping has been criticized for lacking clear industrial and

geographical boundaries (Martin and Sunley 2003).

Martin and Sunley argue that “in practice, there are probably very few firms that

do not have horizontal or vertical links (co-operative or competitive) of some sort

with other loosely-defined ‘geographical proximate’ firms. Does this mean that

virtually every firm could be considered part of a ‘potential’ cluster (2003, 13)?”

Porter (2004) defines a region’s prosperity as productivity which is the value of

output produced per unit of labour and capital, and other resources employed.

Porter’s productivity-based definition standardizes the unit of analysis in the study

of national competitiveness. Although economic, social and environmental goals

are not mutually exclusive, productivity-based definition is narrowly economic

and fails to consider social and environmental aspects (Ketels 2006).

Research illustrates that the effect of a cluster approach on small enterprises’

competitiveness has not been extensively researched in developing (transition)

countries, especially from the point of view of companies, as a result it is unclear

whether their performances have improved due to cluster effects (Karaev, Koh ,


Page 20

and Szamosi 2007).

Porter’s Cluster Diamond framework and definition of clusters have a deep root in

business strategy, industrial organization and economic interaction, and are highly

generic, vague and indeterminate (Martin and Sunley 2003). As a result, the

elasticity of Porter’s Cluster Diamond becomes a “chaotic concept”, in the sense

of equating different economic localization under one umbrella (Martin and

Sunley 2003).

2.5 The Next Development Stage of Industry Clusters

2.5.1 The Global Knowledge Hubs

According to Reve (2009), the global knowledge hubs are not simply geographic

concentration of firms, but they are characterized with dense inter-firm linkages

and strong knowledge networks. Research & Innovation is placed at the core.

Investors and Venture Capital surround the Research & Innovation. From the core

of knowledge base and competent capital, various industrial sectors of the focus

industry emerge.

Taking the example of Norwegian maritime industry, in the industry cluster

analysis, the shipping firms are placed at the core and surrounded by a large

network of customers and suppliers. Maritime R&D, institutions, and other related

service providers are at the periphery of the cluster. However, according to the

global knowledge hub framework, R&D is at the core and surrounded by

competent capital.

2.5.2 The Emerald Model

Reve and Sasson (2012) developed the Emerald Model to study the

competitiveness of a cluster. The six-dimensions of this model are Cluster

Attractiveness, Education Attractiveness, Talent Attractiveness, R&D and

Innovation Attractiveness, Ownership Attractiveness, and Environmental

Attractiveness.


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1) Cluster Attractiveness assesses the degree to which the cluster encompasses

all relevant activities (Sasson and Blomgren 2011). To study the completeness

of a cluster, Reve and Sasson (2012) suggest to examine the existence of a

critical mass of firms, study the distribution of larger and smaller companies

along the important parts of the value chain, and look into the diversity of the

cluster as a whole.

2) Education Attractiveness assesses the degree to which the advanced and

subject-specific education system channels human capital to support the

development and upgrading of clusters (Sasson and Blomgren 2011). Initially,

investments in general education are most likely institutional efforts, while as

clusters mature over time, the demand for human capital increases, and firms

in clusters often develop targeted programs to increase the pool of human

capital.

3) Talent Attractiveness assesses the degree to which the industries and firms

compete to attract the knowledge workers (Sasson and Blomgren 2011). To

stay competitive, firms need to attract talented individuals before making

investments in physical capital.

4) R&D and Innovation Attractiveness focuses on the innovation collaboration

among firms in clusters (Sasson and Blomgren 2011). A competitive cluster

has the support of a sound innovation system that involves institutions,

associations, and key industry players. Competitive clusters act as a laboratory

for the development of new technologies that could be spread out to similar

markets globally.

5) Ownership Attractiveness measures the extent to which firms in clusters are

able to attract competent capital, both domestic and foreign, to support their

development (Sasson and Blomgren 2011).

6) Environmental Attractiveness assesses the extent to which firms and

institutions in clusters are climate-sensitive and hence take actions to

implement environmental friendly production (Sasson and Blomgren 2011).


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3.0 Canada – Overview

3.1 National Context

3.1.1 History

Canada was initially colonized by England in the mid-1700s. The European

explorers arrived in Canada and tried to establish claims to property of the

Aboriginal people, also referred to as the First Nations people. These people were

enrolled in industrial and residential schools run by Christian churches in order to

civilize them and convert them to Christianity. In addition, residential reserves

were created for First Nations people to live on in order to isolate them, while

they were forced to renounce their language, cultural practices and beliefs. Canada

gained independence in 1857, but it still remains loyal to the British

Commonwealth.

3.1.2 Economy

1) GDP per Capita

According to the United Nations Statistics (2014), Canada had a GDP per capita

slightly above $U.S. 42,000 in 2011, making it the 2ed

highest in the G7 countries.

For the purpose of comparision, Norway has the world’s highest GDP per capita

in 2011, about $ U.S. 65,000.

2) Strong Service Sector

As demonstrated in the figure below, GDP is dominated by the service sector

(69.9%), while the industrial sector contributes 28 % and the agricultural sector

contributes 1.7% of GDP, based on a 2013 estimation.


Page 23

Canadian GDP by Sector

(April 2013)

Source: Statistics Canada, gross domestic product at basic prices, by industry

According to Statistic Canada, the labour force consists of 19.08 million

individuals, 76 % of which are employed in the service industry. The high number

of employees in the service industry is typical for an innovation driven economy

(Porter 1998b).

3) Industries

Canada has the 8th

largest commercial fishing and seafood industry, which

contributes $2 billion to the GDP (herein and after all $ values refers to Canadian

dollars unless otherwise noted). Canada has developed leading industries in the

sectors of petroleum, forest products, aerospace vehicles and defense, and

furniture (Harvard Business School 2014). The table below illustrates the largest

industries in Canada and this demonstrates that the economy does not have strong

industry specialization.

Canadian GDP by Industry (April 2013)

Source: Statistics Canada, Gross domestic product at basic prices, by industry

Goods-producing industries

30%Service-

producing industries

70%

Canadian GDP by Industry

(April 2013)

Agriculture, forestry,

fishing and

hunting6%

Mining, quarrying, and

oil and gas

extraction27%

Utilities8%

Construction24%

Manufacturing

35%


Page 24

4) Export-Driven Economy

According to Trading Economics (2014), exports account for more than 45% of

Canada’s GDP, and the main exports are oil & gas, mineral products, chemicals,

primary metals and food products. In addition, Canada also has increasing exports

in professional and financial services (Burt 2013).

5) Major Trading Partners

Canada has close ties with other developed countries, especially the U.S. The

North American Free Trade Agreement (NAFTA), between the U.S., Canada and

Mexico has led to substantial trade between these countries as per the figures

below.

Source: United Nations Statistics, Canada

6) Strong Correlation to the U.S. Economy

Canada’s economic and technological development is parallel with that of the

U.S., as per the figures below. This can be attributed to its reliance on the U.S.

economy, especially in terms of exports. The graphs below also illustrate the

similar growth trajectory between the Canadian and U.S. economies. GDP of

Norway is added for the purpose of comparison.

74%

4% 4%

United States United Kingdom China

Canada's Major Trading Partners

(% of Exports, 2011)

50%

11%6%

United States China Mexico

Canada's Major Trading Partners

(% of Imports, 2011)


Page 25

Source: US Bureau of Labour Statistics, International Labour Comparisons

3.1.3 Social

1) Language

Canada has two official languages, French and English. French is considered the

primary language in the province of Quebec.

2) First Nations

Over the past few decades, positive steps have been taken to address the grave

injustices suffered by the First Nations people. Currently, the First Nations people

receive extra government assistance in terms of tax breaks, funding for higher

education and monthly remunerative assistance. Some First Nations people have a

share of the money distributed from oil & gas royalties on their land, or land

settlements. It is important to note that some First Nations people feel aggrieved

about the injustices they faced from the European settlers. The First Nations

communities own significant pieces of land all over Canada, and the government

is required to negotiate with them prior to using their land for any activities. The

injustices committed to First Nations communities, along with the fact that these

communities own significant pieces of land has greatly affected the oil & gas

industry in Canada, and will be discussed in further detail below.

$0

$10,000

$20,000

$30,000

$40,000

$50,000

$60,000

$70,000

Real GDP per Capita, by Country,

1960–2011 ( 2011 USD)

Canada United States Norway

Average Annual Rates of Change

1960–2011

United States Canada Norway


Page 26

3) Diverse Population due to Immigration Policy

The population is diverse and this can be attributed to its immigration policies.

However, it is important to note that most immigrants entering Canada move to

the provinces of Quebec (Montreal) and Ontario (Toronto). According to Statistics

Canada, out of the 257,887 immigrants in 2012, 99,154 moved to Ontario and

55,062 moved to Quebec. The high immigrant intake, higher population density,

and less natural resources in the provinces of Central Canada, as compared to

Alberta, Saskatchewan (Western Canada) and Newfoundland and Labrador

(Atlantic Canada), has meant that the GDP per Capita is lower and unemployment

rate is higher in Central Canada. This has had several implications for the

Canadian oil & gas industry, and will be stated in this report.

4) Significant Land Mass and Lack of Population Density

Canada is located in North America with the North Pacific Ocean to the west, the

Arctic Ocean to the North and the North Atlantic Ocean to the east. Canada has

ten provinces and three territories. The ten provinces are Alberta, British

Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia,

Ontario, Prince Edward Island, Quebec, and Saskatchewan. The three territories

are Northwest Territories, Nunavut, and Yukon. Canada shares an 8,893 km long

border with the U.S., and has a coastline of 202,080 km. Canada’s landmass

area of 9,984,670 square kilometers makes it the world’s 2ed

largest country,

although its population is only 35 million.

3.1.4 Political

Canada is a parliamentary democracy, a federation, and a constitutional monarchy.

The head of state is Queen Elisabeth II, and the Prime Minister is Stephen Harper,

who represents the conservative party.


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4.0 Canadian National Diamond

4.1 Government

1) Fiscal Policies

The fiscal policy in Canada varies by province, although it is coordinated with the

federal government.

2) Monetary Policies

The Bank of Canada and the federal financial authorities promote the stability and

efficiency of Canada’s financial systems. According to the Bank of Canada

(2013), the Central Bank has aimed for an inflation rate of 2% since 1991. The

monetary framework enjoys a high degree of credibility as inflation has remained

close to the 2% target since 1995 (OECD 2012). In order to support economic

recovery, the Bank of Canada has maintained its policy rate at 1 % since 2010

(OECD 2012). Canadian banks have little direct exposure to the vulnerable euro

area, although a major crash could have damaging indirect effects due to lower

equity prices and higher funding costs (OECD 2012). The World Economic

Forum (WEF) ranked Canada’s banking sector as the most sound in the world for

six years in a row from 2008 – 2013 and has praised the sector for adequate

capitalization and efficient regulation (Schwab 2013). The stability within

financial services in Canada is beneficial for the oil industry as a whole.

3) Royalty and Tax

Canadian oil & gas producers pay tax and royalty to federal and provincial

governments. The table below illustrates the fiscal burden and differences within

tax.


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Federal Royalty and Tax on Oil Production

Corporate

Income Tax

The oil sector is taxed at the same rate as other sectors

15% federal corporate tax in addition to provincial tax

Provincial or territory tax ranges from 10% to 16%: 10% in Alberta

and British Columbia, 14% in Newfoundland and Labrador, and

16% in Nova Scotia.

Energy

Production

Royalties

Royalties for energy production on crown lands (in which mineral

rights that are owned by federal, provincial, and territorial

governments) pay crown royalties which range from 10% to 45%

Royalties for energy production on First Nations reserves are

negotiated on a case by case basis

Oil sands and offshore productions have special regimes

Royalties for energy production on privately owned mineral rights

are negotiated on a case by case basis

Tax Credits

20% federal tax credit on Scientific Research and Experimental

Development expenditures was eliminated in 2013

Royalty is tax deductible

Exploration cost (which is 100% expensed as costs) and

development costs (which is written off at a 30% declining balance

rate) are tax deductible

Federal Atlantic Investment tax credit (10%), will be completely

eliminated by 2015

Source: Global Oil & Gas Tax Guide 2013

As illustrated via the table below, royalty regimes vary dramatically across

provinces. Therefore, significant efforts are required to understand and negotiate

royalty rates and tax credits, which increase the transaction costs for companies.

In addition, well-by-well and location-by-location negotiation delays investment.

Furthermore, the negotiation-based royalty regime in Atlantic Canada is less

transparent and more time-consuming. Therefore, the Canadian royalty and tax

regimes make Canada a less attractive place to invest. However, the negotiation-

based royalty policies can also a have positive impact on international oil & gas

companies. According to Bott & Carson (2007), the flexibilities in determining

offshore energy royalty allows investors to recover a significant amount of the

initial investment before paying a high percentage of revenues as royalties.


Page 29

Federal and Provincial Royalty and Tax on Oil Production

Alberta

–

Conventional

Oil

15% Federal income tax

10% Alberta provincial income tax

Royalty on gross revenue: royalty rate varies with the price of

oil o $50 per barrel – 29% o $72 per barrel – 40% o $95 per barrel – 47%

Royalty is not based on net profit

Alberta

–

Oil Sands


10% Alberta Provincial income tax

Royalty on gross revenue: 1% when development costs are not

recovered or when profits are negative

Royalty on net profit: ranges from 25% if price below $55 per

barrel to 40% at $ 120 per barrel

Newfoundland

and Labrador

–

Conventional

Oil


14% Newfoundland and Labrador provincial income tax

Royalty on gross revenue: 1% to 7.5% as cumulative

production rises

Royalty on net profit: ranges from 20% to 30% and above, rises

as project profitability rises

Nova Scotia

–

Conventional

Oil


16% Nova Scotia provincial income tax

Royalty on gross revenue: initially 2%, increased to 5% once

project breakeven

Royalty on net profit: 20% once unused operating and capital

costs (carried forward on long-term government bond rate plus

20%, or eventually 45%) are exhausted

Source: Taxing Canada’s Cash Cow: Tax and Royalty

4.2 Factor Conditions

1) Natural Resources

Canada's natural resources are widespread, with a large amount of minerals, fish,

timber, wildlife and petroleum. Its natural resources include 25% of the world’s

fresh water, 10% of its forests and 13% of its oil reserves


Page 30

2) Domestic and International Transportation

According to the Global Competitiveness Reports from the World Economic

Forum, Canada’s infrastructure is ranked 12th

, quality of port infrastructure is

ranked 20th

and quality of air infrastructure is ranked 19th

out of 144 countries

(Schwab 2013). However, the low ranking can be attributed to its large size and

low population density, which makes it difficult to develop infrastructure. The

lack of population density and significant land mass have made transportation

very expensive across Canada, which has led to transportation or travel to some

U.S. destinations being more economical as compared to within Canada. It is

interesting to note that the flight time from St. John’s, Newfoundland and

Labrador, Canada to London, United Kingdom is 5.5 hours, while the flight time

from St. John’s to Vancouver, British Columbia, Canada is approximately 6.5

hours. This illustrates that transatlantic travel can be more efficient than national

travel. This also signifies the massive distances which need to be covered in

Canada.

3) Educational System

Canada is ranked 16th

in higher education and training, and 10th

in terms of quality

of educational system, but 34th

on staff training (Schwab 2013). This illustrates

that Canada needs to improve its educational system in order to enhance its

competitiveness.

4) Low Number of PhD Graduates

Canada has one of the world’s highest education levels, and is considered one of

the global leaders in post-secondary education. However, Canada has a low

number of PhD graduates (The Conference Board of Canada 2014). The low

number of PhD graduates could mean a lack of focus on research in Canada, and a

lack of individuals capable of performing high intensity R&D.


Page 31

Source: The Conference Board of Canada, PhD Graduates

5) Labour Shortage

The labour supply shortage is an ongoing challenge in Canada. It is anticipated

that from 2012 to 2015, approximately 15,000 jobs will be created in Canada’s oil

& gas industry due to an aging workforce and leakage to non-energy industries,

but the current labour supply can only fill 64% of the forecasted labour demand

(Canadian Association of Petroleum Producers 2013a). Over the next decade,

labour shortage will intensify, as Alberta anticipates a shortage of 77,000 workers

(McKibbon, Mortlock, and Robinson 2011). As per the 2020 employment outlook,

the Canadian industry anticipates a demand of at least 170,000 workers

(McKibbon, Mortlock, and Robinson 2011).

Labour shortage leads to continued wage increase in mining, quarrying, and oil &

gas extraction. According to Statistics Canada, from 2002 to 2010, the weekly

wage earning for the energy sectors, increased from approximately $1,250 to

$1,800, an average of 5.5% increase every year (McKibbon, Mortlock, and

Robinson 2011). As a result, since 2006, Alberta has maintained the highest

average hourly wage in Canada. An aging population further intensifies the labour

shortage issue. Based on 2006 Census of Canada, about 60% of the pipelines

workforce and 52% of energy production workforce are in the 35 – 54 age groups

(McKibbon, Mortlock, and Robinson 2011). Besides the aging demographic and

labour supply shortage, high mobility is an ongoing challenge as Alberta has a

high concentration of energy-related business. This makes jobs switching within

70 6965

76 74 7277

8691

101

127

112

124

132

5558 55 55 55 55

62 6470

73

82 8185 88

24 25

41

29 27

42

3135

24

37

5350

65

74

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

PhD Graduates, Number of Graduates per 1000,000 Population Aged 25-39

Norway Canada Alta. N.L.


Page 32

the energy sector easy (McKibbon, Mortlock, and Robinson 2011).

6) Canadian Stock Exchange

The TSX (headquartered in Toronto, targets senior companies) and TSX Venture

Exchange (TSXV, headquartered in Calgary, targets emerging companies) have

the largest oil & gas public market in the world by number of listed oil & gas

companies (TMX Group 2014).

World’s Largest Oil & Gas Public Market

Source: Global Leaders in Oil & Gas

As per the figures above, 369 oil & gas companies were listed on the TSX and

TSXV stock exchanges as of December 2013 (259 on TSXV and 110 on TSX).

They had a total market capitalization of $376 billion (TMX Group 2014).

According to the TMX Group (2014), during 2013, oil & gas companies listed on

these two stock exchanges raised $5.2 billion, accounting for 15% of oil & gas

equity capital raised globally. Within the 369 listed companies, 234 companies (or

64%) have global operations. 80 energy service companies are listed on TSX and

TSXV, representing more than 20% of the world’s public energy services

companies.

7) Canadian Energy Sector Debt and Equity Financing

Canada is ranked 1st in soundness of banks, although there is room for

improvement in ease of access to loans (26th

) and availability of venture capital

(23rd

). Access to financing is an issue when doing business in Canada (Schwab

2013).

369

167 147 136

4917 14


Number of Listed Oil & Gas Companies

80

59

6

21 1913

46


Number of Listed OFS Companies


Page 33

Despite the 2008 financial crisis, there has been significant access to capital in the

Canadian energy sector (Canadian Energy Research Institute 2013c). Based on the

2011 estimates, a total of $15 – $20 billion in capital was invested via equity and

debt.

Equity and Debt Capital Raised

Annual Financings Including Trusts

Source: ARC Financial

According to Christ Theal, President and CEO of Kootenay Capital Management,

energy financing activities are cyclical because the capital market is correlated to

the performance of the energy sector as a whole. He also stated that access to

capital varies across upstream operators due to company-specific factors, such as

cash flows, commodity choices, reserves, and operations. In his opinion,

integrated upstream operators and oil field services companies are usually self-

sufficient in capital, while small and medium sized companies in the energy sector

frequently raise capital.

Chris Theal stated that there has been an increase in capital within oil field

services, and this can be attributed to Canada enhancing its expertise in

developing the oil sands, with those projects being capital intensive. Despite

technological enhancement in developing unconventional resources, equity

financing for unconventional oil projects has remained weak due to significant

operational risks in the sense that oil sands projects in general have higher break-

even costs than light oil.

8) Foreign Direct Investment (FDI)

In 2012 the FDI from the U.S. into Canada was $319 billion, which is more than


Page 34

50% of Canada’s total FDI (Market Line 2013). Over the past four decades,

Canada’s inward FDI has steadily dropped (The Conference Board of Canada

2012). Canada receives a grade D and 6th

place out of the 16 peer countries on

inward FDI. Looking at FDI outflow, Canada receives a C and is ranked in 10th

place (The Conference Board of Canada 2013).

Source: Statistics Canada, Canada's State of Trade and Investment Update 2008

9) Recent Decline in SOEs Investment in Canadian Energy Sector

In 2012, the capital committed by State Owned Enterprises (SOEs) to the

Canadian oil & gas sector totaled $28 billion (Canadian Energy Research Institute

2013c). This is about 15.38% of Canadian GDP in 2012. The increased level of

investment from foreign SOEs has raised serious concern with the Canadian

federal government, because foreign SOEs are inherently susceptible to foreign

government influence, which might undermine Canadian economic objectives

(Business Monitor International 2013). In December 2012, the federal government

announced changes in reviewing SOEs investment in Canadian oil sands. These

changes made it harder for SOEs to become controlling shareholders in the

Canadian oil sands projects. This development took place because the government

wanted to ensure that the oil sands were owned primarily by private sector

companies (Tertzakian and Baynton 2011).

The new practice to review SOEs investment under the Investment Canada Act

(ICA) places significant limitations on acquisitions of control by SOEs in

Canadian oil sands development. The view held among commentators was that

changes in policy would lead to more joint ventures with Canadian partners as an

alternative to the takeover of Canadian oil companies (Tertzakian and Baynton

North America and Caribbean

59%

South and Central America

3%

Europe31%

Africa1%

Asia/Oceania6%

Stock of Foreign Direct Investment in Canada

by Region 2007


Page 35

2011). As a result of changes in ICA, as of Q3 2013, the amount of SOEs

committed to Canadian energy sector was down to $320 million (Turner and

Glossop 2014), and total foreign direct investment in the oil patch declined 92%

to $2 billion from $27 billion in 2012. The oil & gas M&A activities had averaged

around $50 billion a year over the last decade, however, in 2013 the activity has

dropped to $8 billion from $66 billion in 2012 (Government of Canada 2012).

Compared to 2012, M&A activity in the Canadian energy sector decreased over

80% in 2013 (Government of Canada 2012).

Recent policy changes have reduced foreign capital available to oil sands business

and hence delayed oil sands development. The economic consequences of

decreased SOEs capital and transactional activity in the Canadian oil sands are

negative, because SOEs investment is a critical catalyst to growth in Canadian

unconventional energy sector. According to the Alberta government, the capital

investment in the oil sands is estimated to add up to $207 billion over the 2013 to

2022 periods, and every dollar invested in the oil sands creates about $8.00 worth

of economic activity (Turner and Glossop 2014). Oil sands investment also

indirectly affect professional services, oilfield services, manufacturing, wholesale

trade, financial services, and transportation (Ivsion 2013). This policy is

questionable because Canada does not have adequate access to capital, and

foreign capital is required for the industry to grow.

4.3 Firm Strategy, Structure and Rivalry

1) Good Business Environment


in goods, 7th

in labour and 12th

in financial markets

(Schwab 2013). This illustrates that Canada has a sound business environment,

efficient markets, educated workforce, and a sound financial system, which are

important factors in making Canada an attractive country to conduct business in.


in availability of the latest technology (Schwab 2013),

which is moderate but leaves room for improvement, as availability of the latest

technologies is likely to enhance competitiveness.


Page 36


in prevalence of trade barriers (Schwab 2013), which

illustrates an improvement is required in reducing trade barriers, which will

ultimately enhance competition for local industry, providing it with access to

larger markets.

2) Lack of Specialized R&D and Innovation

The biggest concern is that Canada is ranked 27th

in capacity for innovation, 29th

in company spending on R&D and 18th

in university and industry collaboration on

R&D (Schwab 2013). The lack of innovation and R&D is likely to significantly

affect Canadian industry.

Canada spent 1.8 % of its GDP on research and Development in 2011, compared

to the US which spent 2.8 %, while the EU average is 2.0 %. R&D spending has

not increased despite generous tax incentives for business innovation (Market

Line 2013). Canada ranked 14th

overall in competitiveness for the second year in a

row, down from 9th

place in 2009 (Schwab 2013). Michael Bloom, Vice-President

of the Conference Board of Canada stated: “When it comes to business

innovation, Canada is seriously underperforming" (Canadian Press 2013). In

innovation and business sophistication Canada dropped 4 places to 25th

place in

2013. Innovation related access to financing, and insufficient capacity to innovate

have been defined as significant factors preventing the development of industries.

Canada also has performed poorly in terms of total patents. It has developed 165.6

patents per million people compared to 385.5 in the US, and 397.5 in Japan.

Therefore, innovation performance in Canada received a D grade, and 13th

place

out of 16 peer countries (The Conference Board of Canada 2013). The lack of

patents, spending on R&D, and PhD graduates appears to be significantly

impacting ability of Canadian innovation.

4.4 Related Industry

It is interesting to note that Canada is ranked 57th

in value chain breadth, which is

a cause of concern and can impact the competitiveness of the industry (Schwab

2013). Canada is ranked 12th

in quality of local suppliers, but much lower at 36th

place in the local supplier quantity.


Page 37

4.5 Demand Conditions

Geographic proximity, the North American Free Trade Agreement (NAFTA), and

the large market size of the US have made it Canada’s most important trading

partner. As discussed earlier, Canada has a strong dependence on the US economy.

The Canadian market is large and is ranked 13th

in market size (Schwab 2013) –

which illustrates that it has strong demand conditions.


Page 38

4.6 Diamond Summary


Page 39

5.0 Oil – Overview

5.1 Proven Conventional Reserves in Canada

As per the Geological Survey of Canada, Canada’s conventional petroleum

reserves are divided into seven petroleum regions (Bott 2004). These seven

hydrocarbon regions are: Western Canada Sedimentary Basin (which accounts for

57% of Canada’s estimated conventional petroleum reserves), Atlantic Margin

(18%), Arctic Cratonic (10%), Arctic Margin (6%), Pacific Margin (4%),

Intermountain (3%), and Eastern Cratonic (2%) (Bott 2004). Western Canada

(British Columbia, Alberta, Saskatchewan and Manitoba) and the Atlantic Margin

(New Brunswick, Newfoundland and Labrador, Nova Scotia, and Prince Edward

Island) account for roughly 75% of Canadian conventional petroleum reserves.

These percentage estimations highlight the geological potential of the above-

mentioned regions but do not take into consideration the vast bitumen resources in

the Alberta oil sands which are considered unconventional hydrocarbon resources.

According to the Canadian Association of Petroleum Producers (2014),

conventional petroleum reserves are characterized by small volumes that are easy

to develop, whereas unconventional reserves are featured with large volumes that

are difficult to develop. Conventional reserves include easy-to-access natural gas,

condensates and natural gas liquids (NGL) and crude oil. Unconventional reserves

include oil sands and shale gas.

5.2 Proven Conventional Oil and Oil Sands in Alberta

According to Canadian Centre for Energy Information (2014a), Alberta has an

estimated 1.49 billion of the total 4.14 billion barrels of conventional crude oil

reserves in Canada. Therefore, Alberta has 36% of Canada’s total conventional

crude oil reserves.


Page 40

Source: The Canadian Centre for Energy Information

In 2010, Alberta’s oil sands reserves totalled 169.3 billion barrels (Canadian

Centre for Energy 2014). Taking into account conventional and unconventional oil

reserves, condensate, and natural gas liquids (NGL), Alberta has 172.4 billion

barrels of oil reserves, or 98% of Canada’s total oil reserves, which are currently

176 billion barrels.

Source: The Canadian Centre for Energy Information

5.3 Crude Oil Production

According to U.S. Energy Information Administration (2014), as of 2012, Canada

is the world’s 5th

largest oil producer, producing 3.9 millions of barrels per day.

According to the Canadian Centre for Energy Information (2014c), with the

expansion of oil sands projects, Canada will be the 4th

largest oil producer by

2015, and Canadian oil production is forecasted to increase to 4.7 million barrels

Alberta

36%

The Rest

of Canada

64%

Dirstibution of Conventional Crude Oil

Alberta

172.4

billion

barrels

The Rest

of Canada

3.6

billion

barrels

Dirstibution of Conventional and

Unconventional Crude Oil

2.65

3.6

1.49

172.4

0

20

40

60

80

100

120

140

160

180

CoventionalOil Conventional and Unconventional Oil

Canada's Oil Reserves

(2010, in billion barrels)

Alberta The Rest of Canada

1.49

169.3

1.61

0 50 100 150 200

Conventional Oil

Oil Sands

Condensate and

NGL

Alberta's Total Oil Reserves

(2010, in billion barrels)


Page 41

per day by 2025, up from 2.8 million barrels per day in 2010.

According to the Canadian Centre for Energy Information (2014a), as of 2011,

Canada has the 3ed

largest proven crude oil reserves in the world at 176 billion

barrels, and over 97% of the reserves are oil sands. According to the U.S. Energy

Information Administration, the Canadian proven oil reserve is 173.6 billion of

barrels in 2012, and still has the 3ed

ranking. The figure below illustrates the

increase in total oil production in Canada by 2040, and it is clear that it is likely to

increase significantly.

Production (kbbl/d)

Source: Rystad Energy


Page 42

The figure below illustrates the largest producers of unconventional energy

(herein and after refers to oil sands, shale gas and tight oil) globally in 2013, and

Canada is ranked 2ed

after the US. Its total production of unconventional energy in

2013 was approximately 2250 kbbl/d.

Production (kbbl/d)



Page 43

As per the figure below, Canada is still expected to be the second largest producer

of unconventional energy globally behind the US in 2025. However, it is

important to note that total unconventional energy production in Canada is

expected to double, which translates into a higher demand for OFS within this

segment.

Production (kbbl/d)



Page 44

5.3.1 Onshore

According to the Alberta Energy Resources Conservation board, Alberta is the

largest producer of conventional crude oil, synthetic crude, natural gas, and gas

products in Canada. In addition, there are three oil sands deposits – Athabasca,

Pease River and Cold Lack – in Alberta and Saskatchewan as illustrated below

(Canadian Association of Petroleum Producers 2013a). The oil sands are at the

surface near Fort McMurray. Therefore, mining is the technology used to recover

oil from the oil sands. Oil sands in the other two deposits are deeper in the ground

(more than 200 feet below the ground), and drilling (in situ) is the major method

used to extract the oil (Canadian Association of Petroleum Producers 2013a). The

figure below illustrates the location of the oil sands in Western Canada.

Source: Canadian Association of Petroleum Producers, About Canada’s Oil Sands,

Page 5

There are other oil fields in South East, North West, Central and North East

Alberta as well. In addition to Alberta, there is onshore oil & gas in British

Columbia, Manitoba, Saskatchewan, Northern Canada (Yukon, Nunavut,

Northwest Territories) and Eastern and Atlantic Canada (Nova Scotia,

Newfoundland and Labrador, Ontario, and Prince Edward Island). There is

drilling in Southern Ontario, Western Newfoundland and Labrador, Northern


Page 45

Nova Scotia, Cape Breton Island, and in Northern and Eastern Prince Edward

Island (National Energy Board of Canada 2013a).

5.3.2 Offshore

According to the Canadian Center for Energy Information, large amounts of crude

oil and natural gas are located beneath the ocean floors of Canada’s shores (Bott

2004). Today, there is offshore production in the Beaufort Sea off the Mackenzie

Delta in Northern Canada. In addition, there is offshore drilling in the provinces of

Nova Scotia and Newfoundland and Labrador. The fields of Hibernia, Terra Nova

and White Rose are located off the coast of Newfoundland and Labrador. There

has also been offshore drilling and production in the field of Sable Island off the

coast of Nova Scotia. There is drilling across the continental shelf off Nova

Scotia, Laurentian Fan, and the Northumberland Strait (National Energy Board of

Canada 2013a). Canada’s offshore industry has primarily focused on the East

Coast due to significant resources in Eastern/Atlantic Canada. Furthermore, these

resources are located close to energy-hungry markets in Europe, Asia, and Eastern

U.S. and Canada.

The reason there is a high level of activity in offshore is because Canada’s major

petroleum basins are passing into maturity, and production is declining (Bott and

Carson 2007). Therefore, the offshore reserves will become a major source for

crude oil and natural gas. In addition, the average onshore well in Western Canada

produces less than 50 barrels of crude oil per day, while approximately 57,000

barrels of crude oil initially flowed from the Hibernia well (Bott and Carson

2007). Although the wells’ output will decline over time, their production is still

significantly greater than the typical onshore well. On the cost side, crude oil and

natural gas produced via offshore developments reduces Canada’s use of imported

oil, which is shipped into Eastern Canada via an ocean tanker, mainly from South

America and the Middle East (Bott and Carson 2007). This is because it is cheaper

than transporting crude oil via pipeline from Western Canada. About half the

imports directly go to Eastern Canadian ports, while the remainder is delivered to

Portland, Maine for shipment via pipeline to Quebec and Ontario (Bott and

Carson 2007).


Page 46

5.3.3 Oil Production

As stated above, most of Canada’s reserves are unconventional onshore oil. The

figure below illustrates production forecasts in Canada specifically in regards to

offshore and onshore production. It is clear that offshore production is expected to

increase, and the increase might be significant relative to total offshore

production, but not significant compared to total Canadian oil production. In

addition, onshore production is expected to rise significantly as well.

Production (kbbl/d)



Page 47

6.0 Canada – Onshore Oil Diamond

6.1 Government

1) Federal Regulation

Jurisdiction over energy is divided between the federal, provincial and territorial

governments. Provincial governments have jurisdiction on exploration,

development, conservation and management of non-renewable resources. Federal

jurisdiction in energy is limited to regulation of inter-provincial and international

trade and commerce. The National Energy Board (NEB) regulates the Canadian

energy industry. It was created in 1959 and reports to the Federal Minister of

Natural Resources.

2) Provincial Regulation

Provinces impose royalties and taxes on oil and natural gas production. In

addition, they also provide drilling incentives and grant permits and licenses. The

provinces also regulate distribution systems and determine the retail price of oil &

gas. According to Shannon Chemlyk, Manager, Policy and Analysis at the Alberta

Energy Regulator, there are a large number of regulatory bodies in Alberta, which

makes the regulatory environment very complex, while increasing the transaction

cost. This is especially difficult for firms used to operating in the U.S., as the

regulatory environment in the U.S. is not as stringent.

3) Corporate Tax

The province of Alberta has no municipal sales tax, provincial sales tax or

provincial general capital tax. It also has the lowest provincial corporate tax rate

in Canada. Its current general provincial tax rate is 10%; while Canada’s corporate

tax rate is 15%. The result of this is that Canada has the lowest corporate income

tax rate in the G7 (Calgary Economic Development 2014). In addition, businesses

in Alberta have no inventory tax, no machinery and equipment tax and no payroll

tax. Alberta has a flat personal income tax rate of 10%, and is the only Canadian

province to adopt such a tax scale. Alberta also has a Scientific Research and

Experimental Development (SR&ED) tax credit program which refunds tax credit

for SR&ED expenditures. This makes Alberta a fairly attractive place to do

business – especially within the oil & gas sector.


Page 48

4) Royalty

According to National Energy Board (2000), prior to 2009, Alberta collected a

single rate of 25% royalty based on net profit of the project only when payout

began. Otherwise, there is a 1% royalty based on gross revenue if the net profit tax

is not paid, or if the development costs are not recovered. In Alberta, royalty for

conventional oil & gas production is based on production, but the oil sands royalty

regime is not (National Energy Board 2000). This difference is due to high cost,

long lead-time and the associated high-risk nature of oil sands investment. After

2009, the oil sands royalty varies by oil price. The new royalty rates on net profits

range from 25% if price below $55 per barrel to 40% at $120 per barrel (Mintz

and Chen 2010). Alberta’s oil sands have a lower fiscal burden than conventional

oil & gas production, because oil sands royalty regime provides an explicit

deduction of costs from the taxable income (Mintz and Chen 2010). This appears

to be an effective strategy to enhance investment into the oil sands, as the biggest

concerns appear to be price per barrel.

5) Value Add Strategy

According to Larry Ziegenhagel, Special Advisor in the Oil Sands Division at the

Department of Energy in Alberta, the government is looking to enhance the value

added activities being conducted in the province. This includes encouraging

refining activities, and increasing petroleum products and petrochemicals

productions. In addition, the government is looking to move up the oil sands value

chain to support integrated hydrocarbon processing. Therefore, the government is

encouraging the development of a hydrocarbon-processing cluster.

6) Innovative Energy Technologies Program (IETP)

As per the Government of Alberta (2014a), this program is a $200 million

commitment to provide royalty adjustments to pilot and demonstration projects

that use innovative technologies to enhance recoveries from the reserves, which

will ultimately increase production and royalties.

Successful applicants receive royalty benefits of up to 30% of the project’s costs.

The total investment in the program is expected to be $1.15 billion – industry

contributing $955 million, and the province contributing $195 million (Alberta

Energy 2014).


Page 49

The IETP supported the first field wide polymer flood in Canada. It also funded

the first steam assisted gravity drainage project in Alberta – this led to the

potential to tap another 300 billion barrels of bitumen (Alberta Energy 2014).

7) Industry Sexiness

Amir Sasson and Torger Reve used the sexiness barometer to determine talent

attractiveness as per the Emerald Model within specific industries. The sexiness

barometer was determined based on a quantitative study of positive as compared

to negative articles written about the industry in the media. As per the Emerald

Model, it impacts talent attractiveness. However, we believe that the sexiness

barometer also impacts the perception of the industry by other stakeholders.

This study has not included a quantitative study of the articles written by the

industry. However, based on our knowledge and conversations with interviewees,

we can confidently state that the onshore oil & gas industry is Canada is not sexy.

It has faced significant negative publicity, especially due to the perceived

environmental impact of the oil sands. This can be attributed to the Keystone XL

pipeline facing strong opposition not just within Canada but also the U.S. – this is

discussed further below. In addition, the Northern Gateway pipeline has also faced

opposition. Last but not least, the industry appears to not be viewed favourably by

residents in Western Canada, despite the strong positive economic impact it has

had on the region.


Page 50


6.2.1 Oil Sands

According to CAPP, Canada possesses approximately 174 billion barrels of oil

that can be recovered with today’s technology. Out of the 174 billion barrels, 169

billion are located in the oil sands, making Alberta’s oil sands the world’s 3rd

highest (behind Saudi Arabia and Venezuela) hydrocarbon deposit (Canadian

Energy Research Institute 2013a). The development of the oil sands is regulated

by the Alberta Energy Resources Conservation Board (ERCB).

According to Business Monitor International (2013), the oil sands had production

of 56% of total oil in 2012, and production is expected to rise to 59% in 2015.

However, the export potential is limited in the short run due to pipeline capacity

constraints, and Canada’s exports of oil are expected to rise once there is an

increase of capacity in the pipeline.

6.2.2 Feasibility

It is important to note that oil sands are heavy and require substantial investment

in upgraders and refineries. In addition, diluents are required to reduce the

viscosity of the crude, ensuring that oil flows in the pipeline (Canadian Energy

Research Institute 2013b). This reduces the profit margin of the producers and can

at times reduce the feasibility of oil sands production.

In addition, it is not financially feasible to move forward with some oil sands

projects, as the WCS has been trading at a discount to the WTI due to

infrastructure bottlenecks. According to Craig Watt, Executive Director, Premier’s

Office, Southern Alberta at the Government of Alberta, the differential between

the WTI and the WCS last year was 21%. In addition to it commanding lower

revenue, the WCS has higher costs at about $60 per barrel. Trading against the

Brent is considered the preferred situation for the oil sands, but it is only likely to

occur if Canada is able to end its singular dependence on the US or significantly

increase the oil shipped to other markets (Deloitte 2013).


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However, production forecasts are expected to rise exponentially due to several

reasons, as outlined by Bruce Edgelow, VP Energy, ATB Financial:

1) Use of radio micro-seismic technology which provides greater data, while

enhancing efficiency and certainty.

2) Enhancements in technology are allowing companies to go deeper into the

field, which will ultimately enhance total production.

3) New technology allows companies to go back into the reservoirs which

were determined as not feasible to drill anymore due to either economic or

technological reasons. Some of these wells were drilled as early as 1927,

and new technology is allowing firms to extract significant oil from these

fields.

As per Bruce Edgelow, these enhancements in technology might not enable

Canada to move ahead of Saudi Arabia and Venezuela in terms of total reserves,

but it will enable it to move significantly closer.

6.2.3 Pipeline Infrastructure – Oil

Oil is transported from Western Canada to the U.S. via pipelines. However, the

limited capacity of the pipelines has reduced production. According to CAPP, the

lack of pipeline market access costs the economy $40 million per day.

According to many analysts, the current takeaway capacity of Western Canadian

oil is 3 million barrels per day (MBD), with 1.5 MBD allocated to heavy oil, such

as oil from the oil sands. In 2012, production from the oil sands in Western

Canada exceeded available takeaway capacity by 0.3 MBD. As per CAPP,

Canada’s total export capacity will need to double by 2030, and this will equal 8

MBD. Therefore, even if all the pipelines including Keystone XL are built,

Canada will still need to add more export capacity (Carbon Tracker Initiative

2013).


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1) Keystone XL

The proposed Keystone XL (KXL) Pipeline project is a $7 billion project run by

TransCanada, which will connect Hardisty, Alberta with Steele City Nebraska.

This pipeline will transport crude oil from Canada and the U.S. to the large

refining markets in the American Midwest and Gulf Coast. However, President

Obama and the American government are concerned with the increase of CO2

emissions released via the pipeline. If built, this pipeline would have a capacity of

830,000 barrels per day (BPD). Taking into account that TransCanada has

allocated roughly 100,000 BPD of this amount to light oil from North Dakota’s

Bakken formation, the KXL would move 730,000 BPD to the Gulf Coast

refineries, which is equal to almost half of Western Canada’s takeaway capacity

for heavy oil (Carbon Tracker Initiative 2013).

2) Northern Gateway Pipeline

It is a $6.5 billion twin pipeline project run by Enbridge. It will run 1,177 km

from Northern Alberta to the deep water port of Kitimat, British Columbia. It has

a capacity of 525,000 BPD. This pipeline will provide access to new markets in

the Pacific Rim, which will ultimately reduce Canada’s dependence on the US

market. However the pipeline has faced significant opposition from

environmentalists. In addition, several First Nations groups have opposed the

North Gateway pipeline proposal because they see it as an intrusion on their lands.

This project has recently been approved by the government. However, there is a

still a possibility that it could be cancelled due to further protests or lobbying from

First Nations groups.

Alternative pipeline routes face challenging prospects due to the rights and

demands of Canada’s First Nations communities as they would need to agree to

any pipeline crossing their lands (Carbon Tracker Initiative 2013).

6.2.4 Rail – Oil

Approximately 250,000 BPD of Canadian oil – mainly light blends from

Saskatchewan are currently shipped via rail to the U.S. However, costs to move

oil via rail from Western Canada to the Gulf Coast range from $15 to $20 per

barrel, compared to $7 to $11 via pipeline. It is important to note that companies


Page 53

can cap costs to $10 per barrel if they have their own rail infrastructure. In

addition, deployment of unit trains – where all rail cars are shipped from the same

origin and arrive at the same destination – would help reduce costs (Carbon

Tracker Initiative 2013).

As per the Carbon Tracker Initiative (2013), report titled Keystone XL Pipeline: A

Potential Mirage for Oil Sands Investors, the question arises, as to how much of

the rail capacity will be built, and if so on what timeframe. This is because

manufacturers of heated and coiled rail cars will need to be able to deliver the

significant backlog of orders. In order to unload 20 – 30 thousand barrels per day

(KBD) of oil, one Gulf Coast refinery will need 1,600 heated and coiled tank cars.

Furthermore, rail cars have restrictions on maximum weight. Therefore, the higher

density of bitumen as opposed to the lighter oil reduces the number of barrels each

rail car can carry. Bitumen also needs to be heated before being unloaded and this

reduces the number of barrels each rail car can carry. These factors make it

expensive to transport heavy crude via rail. Another issue appears to be the fact

that the companies are unwilling to build loading terminals if the refineries in the

Gulf Coast do not have unloading terminals. The refiners in the Gulf Coast are not

willing to build unloading terminals, unless there are firm commitments from

producers in Western Canada.

It is important to note that currently there is limited capacity for rail, and demand

has exceeded supply for rail transportation. According to Richard Wayken, Vice

President, Pipelines at Alberta Innovates, this will lead to the oil industry paying a

higher price for rail transportation, which will take away capacity from other

industries. He stated that the limited capacity of rail has especially affected the

forestry industry. Therefore, it can be stated that the lack of pipeline capacity is

negatively impacting not only the direct and indirect oil & gas industry, but also

other industries.

Peter Tertzkakian, Chief Energy Economist and Managing Director of ARC

Financial Group has a very different opinion about rail transportation. He stated

that infrastructure (rail roads, and loading and unloading facilities) has been built

at record rates over the past 18 months. This was reiterated by Bruce Edgelow, VP

at ATB Financial, who stated that there is greater rail capacity than Keystone XL


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could provide. He also stated that rail transportation could give the WCS access to

over 40 to 50 refineries which possess the technology to refine heavy Canadian

oil, while pipeline only gives access to 4 or 5 refineries. In addition, rail can move

the oil a lot faster to the destination, which means that oil producers will be paid

for the oil quicker than if it were transported via pipeline. Furthermore, oil

companies can influence the feasibility of rail transport by examining back

hauling other products to the destination. For example, if oil is being transported

from Edmonton to Houston, another product could be transported back from

Houston, which would reduce the total cost of transportation via rail.

According to Bruce Edgelow, VP Energy at ATB Financial, the impact and

demand for rail can be demonstrated by earnings per share of Canadian rail firms

which transport crude oil. This is illustrated by the fact the incremental growth in

their earnings per share has been substantial.

6.2.5 Labour

In a report published by the Canadian Energy Research Institute, it was stated that

if all new oil sands projects were to move forward, it would lead to $2.1 trillion

investment, and would grow the labour force in North America from 75,000

employees to 900,000 – which is equal to the current population of Edmonton,

Alberta, Canada. This does not take into account the growth in the work force for

existing projects (Deloitte 2012). This illustrates that there is a significant

requirement for more labour in Western Canada.

A study conducted by Deloitte (2012) illustrated that Alberta will remain an

employee-driven market until 2020. In addition, Baby Boomer retirements and the

few established plans to retain talent suggest that skill shortages will worsen in the

next few years. In addition, the higher turnover in Generations X and Y will

escalate replacement costs for talent in the oil & gas industry, leading to be 25% –

200% of the annual compensation of the employee. The total cost of turnover is

$58 million for a company which has 5000 employees, and less than 10%

turnover .Temporary foreign worker allowances enable the Canadian industry to

fill gaps for skilled labour, but only on a short term basis. The program suffers a


Page 55

significant issue as the recent amendments require qualified workers to leave

Canada after four years, and then wait another four years before being eligible to

work in Canada again (Deloitte 2012). As mentioned above, according to

Statistics Canada, Ontario and Quebec are densely populated. Combined they

have a population of over 21 million, while Canada’s total population is about 35

million. As per Statistics Canada, from 2009 to 2013, the Canadian population

increased by about 1%, the rate of increase was the same in Ontario and Quebec.

However, the rate of increase in Alberta was 2.3%. Despite Alberta having the

highest percentage increase in population, mainly due to international and

domestic immigration, its population increase in absolute numbers is not the same

as Ontario or Quebec. In addition, it is important to note that Ontario and Quebec

have the highest unemployment rates in Canada, and the population in these

provinces has pressured the government to reduce immigration from foreign

countries, and this has ultimately impacted the number of immigrants coming into

Alberta.

As per conversations with several of the individuals interviewed, individuals

working minimum wage jobs in Alberta were earning over $16 per hour, as

opposed to Ontario and Quebec where they were earning $10 per hour. Several

stores, restaurants and businesses were being closed earlier than preferred due to a

lack of labour. This further illustrates the significant labour shortage in Western

Canada.

6.2.6 Calgary

Calgary is the capital of Alberta and is the location of the oil & gas cluster in

Canada. According to Calgary Economic Development (2008), Calgary is now the

location of 87% of Canada’s oil and natural gas producers, although there are

relatively few well sites near Calgary. However, Calgary is where the expertise in

management, finance and technology is located, and provides knowledge for oil &

gas exploration and extraction. This has enabled Calgary’s economy to become a

knowledge economy (Langford, Li and Ryan 2010).

As per British Petroleum’s World Energy Review in 2011, Calgary is home to the

head office of almost every major oil & gas company in the country. Most of the


Page 56

industry’s major trade associations, major pipeline operators, manufacturers,

oilfield service companies, drilling companies, energy related engineering firms

and consulting firms, Canada’s national energy regulator and various industry

bodies are located in Calgary (Paynter and Yin 2012).

1) Education

Calgary has five post-secondary institutions within the city and two post-

secondary institutions in the suburbs. In addition, there are thirty independent

research institutions in Calgary, and many of them have been recognized

internationally for their work (City of Calgary 2008). According to a report

published by the City of Calgary, there is a significant labour force shortage in the

city. In order to counter this issue, the city has taken a number of initiatives to

attract and retain labour from other parts of the country and the world. A concern

for the city is the fact that Calgary’s post-secondary transition rates of 63.5% of

high school graduates proceeding towards post-secondary education within six

years of graduation are not suitable to be competitive in the global economy (City

of Calgary 2008). In addition, a low unemployment rate has contributed to higher

wage levels, which has led to many companies moving to other parts of the

country in order to be cost competitive.

2) Human Capital

As per the Civic Census of 1981, there were 591,857 residents in Calgary. The

Civic Censure of 2006 reported a population of 1,079,310 which illustrates that

the population doubled as of 1981. It is important to note that Calgary attracted

the highest number of Science and Engineering professionals, and Business and

Finance professionals across Canada. As per Calgary Economic Development

(2008), Calgary offers the highest concentration of engineering, business and

finance talent in Canada. Furthermore, Calgary’s scientists and engineers have

played a significant role in developing techniques of horizontal drilling, shale

fracking, Steam Assisted Gravity Drainage (SAGD), Toe to Heel Air Injection

(THAI) and other technologies for extracting hydrocarbons (Paynter and Yin

2012).


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3) Calgary – Logistics

Calgary’s location in Western Canada and its integrated multi-modal

transportation infrastructure has helped it in becoming a centre for transportation

and warehousing operations (City of Calgary 2008). It has logistics, supply chain

management and transportation management services, accessible terminals,

warehousing and distribution centers, and linked road, rail and air networks. There

are rail and intermodal auto and trainload facilities available from both the

Canadian Pacific Railway and Canadian National, and they serve every major city

in North America. Furthermore, it provides access to the “Canamex smart

corridor” which runs between Alaska and Mexico City, and has enhanced the

development of the manufacturing base in the province (City of Calgary 2008).

4) Capital Market

Most major financial institutions and lenders are present in Calgary. 17 of the top

20 investment banks are present in Calgary. As Canada’s M&A hub, it accounted

for more than 26% of the total M&A deal volume in the country, which was

higher than any other Canadian city. The finance and business industry is growing

rapidly in Calgary, and has added 13,300 new jobs over the past ten years, which

amounts to an increase of 39%. In September 2012, Calgary ranked 23rd

on the

Global Finance Centre Index (GFCI), which measures 77 global financial centres

in terms of competitiveness (Paynter and Yin 2012). Calgary’s financial services

sector’s advantage is in its knowledgeable experience and sophistication of its

workforce, especially in the selling side of the transaction, as the energy sector in

Calgary is an attractive market for firms in financial services due to its high

concentration of capital intensive companies, high deal velocity and large deal

size (Paynter and Yin 2012). According to Paynter & Yin, while only 3% of the

world’s energy M&A deals took place in Calgary, it still represented 12% of the

total deal volume.

6.3 Firm Strategy, Structure and Rivalry

6.3.1 Industry Structure

There are five main segments in the Canadian oil & gas industry (Natural


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Resource Canada 2013):

1) Upstream oil & gas companies (exploration, drilling, production, and field

processing)

2) Oilfield services providers to the upstream oil & gas extraction operation

(perform drilling and well maintenance services based on contracts)

3) Petroleum refineries that process crude oil into refined products

4) Oil pipelines that transport crude oil and refined produced between production

sites, refineries, export or import border points, and end-users

5) Distributors of refined products at wholesale and retail levels

According to Natural Resource Canada (2013), each segment is composed of a

large number of private sector firms, including multinational companies, regional

firms, and small businesses. Several upstream players (e.g., Imperial

Oil/ExxonMobil, Shell Canada, Chevron, and Suncor) are vertically integrated oil

companies, having activities such as in-house oil field services, oil field

productions, refineries, and retail distribution networks. The figure below shows

the largest producers within Alberta.

Source: Alberta Energy Regulator

6.3.2 Investment

The oil sands have received the most FDI in Canada’s energy sector since 2007.

-

10,000

20,000

30,000

40,000

50,000

60,000 Top Oil Producers in Alberta

(Production bbls/d)

As of June 2013

2012


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Foreign entities can gain access to the oil sands via farm-ins, where new entrants

can negotiate deals with established lease holders (Canada Research Institute

2013). Leases are initially available through a land tenure system which is

administered by the Alberta Department of Energy. Most of these rights are

offered through public offerings via auctions, which are held throughout the year.

Rights are sold to the higher bidder at these auctions for a minimum price of $1.25

per hectare. Canadian and foreign companies both have equal rights to participate.

This process has led to a busy market place, along with frequent rights transfers

and trades, mergers and acquisitions. Chinese and U.S. Investment represents 60%

of the total FDI going into the oil sands since 2007 (Canada Research Institute

2013).

The figure below illustrates total investment in the Canadian upstream energy

sector. We did not have the data for separate onshore and offshore investments.

However, due to the substantial production in onshore Canada, we can state that

most of these investments were made within that sector. It is clear that investment

is expected to increase over the next decade within both the onshore and offshore

clusters.


The figure below illustrates the distribution of investment, and it is interesting to

note that although total exploration expenditure might be increasing, the total

exploration expenditure relative to total expenditure is decreasing, while operating


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expenditure in terms of an absolute amount and relative to total expenditure is

increasing.


6.3.3 High Breakeven Costs

Analysts typically estimate the breakeven costs of an oil project in terms of the

price per barrel required to cover costs while achieving the required rate of return.

The main cost components are capital costs, operating costs and royalties paid to

governments. Therefore when evaluating the economics of the oil sands projects

in Canada, the important questions which need to be answered are the oil price

required to cover total production costs, the comparison of this price with other

prospective projects in the world, and the availability of cost effective access to

markets (Carbon Tracker Initiative 2013).

As per Carbon Tracker’s report (2013), fossil fuel projects with greater than

average costs of production are at a risk of being cancelled. This was reiterated by

Citibank’s analysis of the largest 300 oil & gas projects, which indicated that

many unconventional assets, including Canada’s oil sands were more expensive

than the average project and risked becoming a stranded asset. Therefore, they

could be written down or completely written off.


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6.3.4 Competition

Competition for the pipeline growth is from shale oil production in the U.S.,

which has led to an increase in crude by rail deliveries, which is more expensive.

In addition, there has been an increase in liquids produced, mainly from the

Bakken formation in North Dakota. The product found is a lighter and sweeter

version, which can be sold for a higher price to refineries as compared to the

heavier crude from the oil sands. This has reduced the U.S. demand for Canadian

crude.

In Canada, there are about 200 upstream producers, while the top 40 upstream

operators dominate the upstream market. As shown in the following chart, the top

20 upstream producers produce about 60% of total national production, and the

top 40 upstream producers produce about 80% of total national production.


6.3.5 Rivalry

The figure below illustrates the largest players within the global onshore industry

in 2013, along with total Canadian production. Canada was ranked in 5th

place

within total onshore production in 2013, and the biggest players were Russia,

79%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Top Canadian Producters

Top 20 (%) Top 30 (%) Top 40 (%)


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Saudi Arabia, U.S., China, and Iraq.


The figure below illustrates forecasted global onshore oil production in 2025. It is

interesting to note that the U.S. is expected to be the largest player, and total

production in North America is expected to be very high. This might be a cause of

concern for Canada as the U.S. is its largest customer. The figure also illustrates

that total onshore Canadian production is expected to rise significantly.


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6.3.6 Local Content and Ownership

The Investment Canada Act governs the foreign ownership in Canada. To acquire

Canadian firms, foreign investors have to complete a “net benefit to Canada” test

to see if the investment amount exceeds $330 million, and this review process

takes at least 30 days (Deyholos and Cuschieri 2013). If the foreign investor is a

stated-owned enterprise, the investment plan has to demonstrate no threats to

Canada’s national security. As discussed previously, in December 2012, changes

were made to the Investment Canada Act and these changes place significant

limitations on acquisitions of control by SOEs specifically within the oil sands.

According to Jarand Rystad, Managing Partner, Rystad Energy, international firms

are taxed 1% more than Canadian firms. Canada has a 25% branch tax imposed on

unincorporated branches of non-resident corporations in addition to the normal

corporate income tax (PwC 2012). According to Income Tax Act bulletin, the 25%

branch tax is imposed on the branch’s after-tax Canadian source income, as

adjusted by deducting an allowance for investment property in Canada. If the

branch is incorporated in Canada as a subsidiary of a foreign company, it would


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be considered as Canadian resident for income tax purposes (Goodmans 2007).

The Canadian subsidiary is therefore subject to withholding tax (5%, 10%, or

15%) that applies to dividends, interest, and other passive investment income paid

to the non-resident corporation (PwC 2012). This demonstrates that the Canadian

industry has several protectionist tendencies.

In addition to the Investment Canada Act, the federal Canada Business

Corporations Act and the Business Corporations Act (Alberta) require 25% of the

directors to be Canadian residents (Deyholos and Cuschieri 2013). According to

Håkon Skretting, Regional Director, INSTOK, this lead to several Norwegian

firms having to acquire Canadian firms in order to do business in Canada.

The federal government’s policy and the Immigration and Refugee Protection Act

indicate that employment opportunities in Canada belong first to Canadian

citizens and permanent residents (Deyholos and Cuschieri 2013). Production on

Aboriginal land also needs to satisfy the employment and benefit obligations

owed to Aboriginals.

Signed in 1995, the Agreement on Internal Trade is a formal agreement among the

federal, provincial and territorial governments to promote free trade within

Canada (Government of Alberta 2014b). This agreement provides two dispute

resolution mechanisms: consultation and independent panels. However, none of

the dispute resolution mechanisms are legally binding. We would argue that the

non-binding nature of the Agreement on Internal Trade might fail to bring the

desired free trade across Canadian provinces. For instance, according to Vicki

Huntington, the Legislative Assembly of British Columbia, Alberta’s “residency

requirements” for oil & gas companies is a protectionist requirement that unfairly

favoured Alberta as the location of headquarters (Huntington 2012). According to

Vicki Huntington, Alberta’s residency requirement states that companies must

have local offices in Alberta in order to conduct oil & gas related business in

Alberta. This local office in Alberta must also be complete with the management

team which makes full operating decisions. Alberta’s Energy Resources

Conservation Board Liability Management Group, which was succeeded by the

Alberta Energy Regulator in 2013, undertakes residency audit to ensure

companies locate their main office in Alberta. Vicki Huntington argued that B.C.


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has no similar residence requirement, and as a result, companies in the oil & gas

business tend to locate their main office in Calgary and not in B.C. (Huntington

2012).

According to Michael Ekelund Deputy Minister, Government of Alberta, the

government requires a registered office, which is not necessarily a head office, in

order to ensure that the government can provide the companies a notice on

environmental issues if the need arises. This residence requirement ensures that

operators are liable under Alberta law for paying royalties, cleanup, and

reclamation. This residency requirement governs only operators not OFS

companies. According to Michael Ekelund, the Government of Alberta recognizes

offices in some other Canadian provinces, but the operators have to convince the

Government of Alberta that sufficient supervision and enforcement are in place.

6.4 Related and Supporting Industry

6.4.1 Oil Field Services

Based on our interviews with industry experts from both public and private

sectors, oil field services firms in Alberta have developed excellent local expertise

in horizontal drilling and hydraulic fracturing. An entire section within this report

has been dedicated to relating and supporting industry within the oil & gas sector.


6.5.1 Markets

Only 12% of the oil produced in Canada was used within the country, and the

remaining 88% was exported. 97% of total Canadian heavy crude oil exports were

to the U.S. The most important U.S. markets were the Midwest (72% of total

exports), Rockies (12% of total exports), Gulf Coast (6% of total exports), West

Coast (4% of total exports) and the East Coast (2% of total exports). The five sub-

regions within these areas were Chicago, Wood River, Twin Cities, Billings and


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Toledo (Canadian Energy Research Institute 2013b).

As the Midwest is where most of the Canadian heavy crude oil is supplied, the

price of the oil sands crude is determined by the refiner’s value of the crude in the

Midwest. According to the Canadian Energy Research Institute (2013b), the value

to the refiner is influenced by a number of factors such as the crude’s gross

product worth (GPW), the value of the refined petroleum products (RPPs), yield

from the crude, processing cost, transportation cost, refinery margins and

availability, and price of competing crude. Taking into account that the majority of

the heavy crude in this region is Canadian, its price is determined by the

availability of the required refining capacity. Currently the Canadian crude is

oversupplied which is why there is a significant price differential to the WTI

(Canadian Energy Research Institute 2013a).

6.5.2 U.S. Oil Imports

The U.S. import requirements averaged 17.5 million barrels per day in 2010. 9.5

million barrels were imports, with Canada being the largest exporter of oil to the

U.S., exporting 2 million barrels per day (21% of imported oil). Saudi Arabia was

second with 1.1 million barrels per day (11.6% of imported oil) (Angevine and

Oviedo 2012). 99% of oil sold from Canadian oil sands to the U.S. is sold at

discounted rates due to oversupply to the Mid-West, which can be attributed to the

lack of market access to the Gulf Coast (Canadian Energy Research Institute

2013b). In addition, the total demand for oil is declining in the U.S., while it is

increasing for the BRIC nations. The figure below illustrates the differences in

demand between the U.S. and BRIC nations.


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U.S. and BRIC Oil Consumption, Share of Total Oil Consumption

Source: BP Statistical; Review of World Energy

6.5.3 Sluggish U.S. Demand

A concern for the Canadian producers is where the production could go after

reaching the U.S. Gulf Coast, as domestic U.S. production has been increasing

and there has been increasing efficiency of use. Regardless of Canada gaining

efficiency in production, processing and transportation, the question about who

will purchase the oil is valid. There have been predictions by some that the U.S.

could be an energy exporter by 2020 – 2025 (Carbon Tracker Initiative 2013).

This will ultimately reduce demand for Canadian oil sands imports.

The options to export are either via pipeline or rail. The benefits of providing

access to refineries provides the oil with access to global markets which will

ultimately lead to higher prices, and this is essential to further expanding the oil

sands production. The Keystone XL pipeline debate linking Alberta to the Gulf

Coast is key for the industry to grow (Carbon Tracker Initiative 2013). The

industry’s preference is for pipelines due it being more cost effective than rail

transport. In addition, rail has substantial infrastructure development issues, and

use of rail negatively affects other industry, as stated above.

6.5.4 U.S. Shale Revolution

According to Arnt Inge Enoksen, Senior Associate at EY, the U.S. Shale

Revolutions is likely to make the U.S. oil & gas producer in the world. Taking into


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account the declining U.S. demand, it is likely that U.S. dependence on Canadian

oil will decrease significantly. Keeping in mind that Canada does not have other

markets for its oil means that oil resources in Canada could be obsolete, unless

Canada can acquire access to the Asian markets.

6.5.5 Pricing

A major challenge for the producers is the lack of access to refining capacity. The

heavy oil from the oil sands has higher sulphur content than conventional oil in

Canada and the U.S. Therefore, it can be refined by a limited number of refineries

which have invested in such technology and are located close to Western Canada.

Oil sands production is much higher than the refining capacity available to

process it in the Canadian and U.S. mid-continent markets (areas accessible via

existing infrastructure). Therefore, due to increased supply, the price for WCS has

traded at a steep discount to the WTI. Over the past 12 months, the WCS has been

priced over 24% lower than the WTI, which has reduced profit margins for the

producers (Carbon Tracker Initiative 2013).

As per the Carbon Tracker Initiative report (2013), the WCS is similar to the

Mexican heavy crude, which sets the price for the Maya. Therefore, once the

WCS is accessible to the Gulf Coast refineries, its price will be similar to Maya.

Canada exports 1.1 MBD of heavy oil to the U.S. Midwest and the amount is

expected to rise to 1.6 MBD by 2016. This increase in heavy oil exports and

infrastructure bottlenecks are constraining the oil being transported to the U.S.

Gulf Coast. This has created a glut which is depressing price for Western

Canadian Select (WCS) (Carbon Tracker Initiative 2013). This costs producers in

Canada millions of dollars per day, and is driving the push to build more

infrastructure which is required to deliver the heavy crude to refineries in the U.S.

Gulf Coast – which are likely to pay a higher price. The other options appear to be

building pipelines to send the crude to the U.S. West Coast, Asia and the Canadian

East Coast. However, the short term solution appears to be pipeline expansion to

the U.S. Gulf Coast (Carbon Tracker Initiative 2013).


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6.5.6 Refining Capacity

According to the CAPP, oil sands producers are looking to increase production by

200% by 2030. However, limited export capacity is a major constraint for the

producers looking to increase production. The time required to add this capacity

and the method of transport will influence the economics of production. Oil sands

oil can only be processed in refineries with specialized equipment to handle heavy

oil, meaning that the crude from the oil sands has a restricted market, as opposed

to lighter Canadian or U.S. oil (Carbon Tracker Initiative 2013). Western Canada

has 260 KBD of refining capacity for heavy oil, which is equal to 15% of

Canada’s heavy oil production. Therefore, the majority of the crude oil production

goes to refineries capable of processing this crude, and these refineries are located

in the U.S. Midwest and Gulf Coast (Carbon Tracker Initiative 2013).

As per the Consumer Council of Canada, the Canadian Petroleum Products

Institute (CPPI) stated that Canadian refineries are facing significant competition

from imports and super refiners in China and India, as these large refineries are

able to use their scale to reduce unit costs. In addition, the local demand within

Canada, the U.S. and other OECD countries is likely to go down in the future,

which would lead to the Canadian refineries facing difficult times (Canadian

Energy Research Institute 2013b).

According to Business Monitor International (2013), refineries in Eastern Canada

are reliant on expensive crude oil imports for refining feedstock. In addition,

gasoline prices are regulated in the Eastern provinces of Newfoundland and

Labrador, Nova Scotia, New Brunswick, Quebec and Prince Edward Island. This

has led Shell to convert its Quebec refinery into an oil products terminal. Poor

infrastructure in regards to connecting Western Canadian crude oil to the

refineries in Eastern Canada is another reason that has contributed to Imperial Oil

and Suncor not enhancing their production (Canadian Energy Research Institute

2013b).

The Western Canadian refineries have an advantage due to the low prices of

Canadian crude. According to Business Monitor International (2013), this can be

attributed to excess supply in the U.S. Midwest and Cushing, Oklahoma, which is


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Canada’s largest crude oil market. In addition, an increase in oil production from

the oil sands in Western Canada is also enhancing supply. Due to the discounted

crude oil, the refineries are able to purchase cheaper feedstock, which ultimately

leads to enhancing profits for the refiners. However, the lack of capacity in

Canada’s pipeline network is still likely to be a huge issue, and this will reduce the

gains (Canadian Energy Research Institute 2013a).

6.5.7 Environmental Concerns

The concerns about the environmental impact have reduced the number of

markets open to Canada. The EU is planning to label exports from the oil sands as

“dirty” and will be enforcing a tax on refiners who use it (Canadian Energy

Research Institute 2013b). However, this is not likely to impact the industry as oil

sands oil is not transported to the EU, but this could be a cause of concern if

Canada obtains market access to other continents.

6.5.8 Exploration

According to Matthew Foss, Executive Director from the Department of Energy

of the Government of Alberta, there is not a lot of exploration taking place in

Alberta as the geology is reasonably mapped out, and over 300,000 wells have

been drilled. However, it is important to note that the success rate of drilling in

Alberta is significantly higher at 70% – 80% compared with the success rate of

drilling in the rest of the world which is 10% – 20%. More discoveries are likely

to take place even though the geology is well mapped out, but the size of projects

is likely to be small. Exploration and production are feasible for smaller

companies that have the cost structure to operate smaller scale projects. In

addition, it is important to note that the incremental cost of drilling a well in

Western Canada is reasonably less compared to other places in the world, while

the time frame required between deciding to drill and having production on the

market can be as short at 6 – 8 weeks, which makes small production fields more

attractive to smaller companies which have the flexibility to operate on such time

frames.


Page 71

6.6 Diamond Summary & Cluster Map


Page 72

Canadian Onshore (Alberta) Oil Cluster Map – Oil Production Value Chain

Integrated Operators:

Imperial Oil/ExxonMobil, Shell Canada, Chevron, Suncor, Husky Energy, Cenovus Energy, Harvest

Operations

Focused Operators:

Penn West, Canada Natural Resources,

Talisman Energy, Pengrowth Energy,

ARC Resources, EnCana, Crescent

Point Energy, and Pacific Rubiales

Energy

Enbridge,

TransCanada,

ShawCor, Mullen

Group, Superior

Plus, Canadian

Pacific, Canadian

National rail

Ten refineries in

Western and

Central Canada;

72% of total

export goes to the

U.S. Midwest via

pipelines

Imperial Oils,

Petro-Canada,

Devon Canada,

Gibson Energy,

Nexen, Shell

Energy, Sunwest

Oil Exploration

&

Development

Oil Completion

&

Production

Transportation

Pipelines

&

Rails

Oil

Refining

Oil Distributors

& End

Customers


Page 73

Canadian Onshore (Alberta) Oil Cluster Map

Specialized Institutions

Regulators:

The Federal &

Provincial

Governments

NEB, NRC, AE, AER,

ESRD

Associations:

CAPP, GAGC, PSAC,

JCPT, APEGBC,

OSLI, CEPA,

CAODC, PTAC,

CSUR

Research

Institutions:

Alberta Innovates,

CERI, COSIA,

University of Alberta,

University of Calgary,

SRC, SDTC

Training Centers:

NAIT,

University of Calgary

University of Regina

Enform

Oil Field Services / Contractors

Drilling & Drilling

Equipment

Business Services

Project

Development

Engineering,

Fabrication,

Construction &

Installation

Waste

Management

Trican Well Service,

Calfrac Well Services,

Precision Drilling,

AMEC, WorleyParsons

Kiewit Energy Canada Corp.,

Bantrel, Fluor Canada, Jacobs

Engineering Group, Secure

Energy Services, Tervita

Energy Financing & Capital Market:

Canadian Banks, State-Owned Enterprises,

Private Equity

Accounting & Auditing / Law Compliance

Business Consulting

Related Industries

Petrochemical, Financing,

Mental Fabrication,

Renewable Energy

Exploration

&

Development

Completion

&

Production

Transportati

on

Pipelines &

Rails

Refining

Distribution

&

End

Customers


Page 74

7.0 Canada – Offshore Oil Diamond

7.1 Government

7.1.1 Regulators

According to the Canada Petroleum Resource Act, federal law governs offshore

acreage, and companies have to obtain rights from the federal government through

a public-call-for-bids process. They have to pay royalty to the federal government

(Business Monitor International 2013). Accord Implementation Acts govern how

offshore energy management and revenues are shared between the federal

government and the provincial government. As a result two offshore regulatory

boards, the Canada Newfoundland and Labrador Offshore Petroleum Board

(CNLOPB) and the Canada Nova Scotia Offshore Petroleum Board (CNSOPB),

were established (Business Monitor International 2013). The roles of the

governments and regulatory bodies are listed below.

1) The Federal Government

Grants rights through a public-call-for-bids process

Collects royalty

2) Provincial Governments

Share offshore energy management and revenues with the federal

government

Govern onshore energy exploration

3) Offshore Regulatory Boards

Represent federal and provincial government Issue exploration, significant

discovery and production licensees for offshore energy production

Source: INTSOK, East Coast Canada Annual Report 2011

7.1.2 Atlantic Accord

As per the Atlantic Accord, there are legislative requirements for expenditures

related to R&D in Newfoundland and Labrador: “Expenditures shall be made for


Page 75

research and development to be carried out in the province and for education and

training to be provided in the province” (Canada Newfoundland and Labrador

Offshore Petroleum Board 2011). According to Canada Newfoundland and

Labrador Offshore Petroleum Board (2011), the R&D expenditure that operators

have to commit is not a fixed percentage of revenue. During the exploration

phase, the R&D expenditure could up to a maximum of 5%. Production phase

R&D expenditure is the residual of total R&D expenditure (which is the product

of Statistics Canada benchmark for oil & gas extraction companies, total

recoverable oil, and long-term oil price) minus the R&D expenditure during the

exploration phase.

Newfoundland and Labrador and Nova Scotia both have Atlantic Accords with the

Government of Canada. According to Svein Inge Eida of Statoil, this leads to

preference of regional content in terms of both employees and companies.

Therefore, companies within the province(s) have an advantage as compared to

Canadian companies, which have an advantage as compared to international

companies. Such protectionist measures negatively impact companies and prevent

them from being globally competitive as per Porter’s diamond model.

As noted above, provincial trade can be difficult as provinces have different

agreements between them and with the federal government. According to Svein

Inge Eide, one of the reasons Norway has developed a strong offshore oil field

services industry is because it carried over its knowledge from the shipping and

maritime industries. The province of Nova Scotia has several companies within

these industries, while companies within offshore are based in Newfoundland and

Labrador. Due to the Atlantic Accord and provincial trade restrictions, the

knowledge of the shipyards and maritime industries in Nova Scotia have been

underutilized in Newfoundland and Labrador, which has prevented the offshore

oil field services cluster from being a market leader.

7.1.3 Royalty

Newfoundland and Labrador Offshore Royalty Regime and Nova Scotia’s Generic

Offshore Petroleum Royalty Regime provide guidelines for offshore energy

royalty collection (Business Monitor International 2013). In Newfoundland and


Page 76

Labrador, oil royalties include basic royalty (calculated based on gross revenue,

and ranges from 1% to 7.5% as cumulative production rises), which are to be paid

at all stages of the project and are linked to realized prices, and net royalty

(calculated based on net revenue), which varies according to the project’s

profitability (Mintz and Chen 2010). According to Bott & Carson (2007), due to

accords between the provincial and federal governments, the provinces are able to

create royalty policies based on the wellhead value of the petroleum and the

profitability of the individual projects.

There are three tiers of oil royalty rates in Newfoundland and Labrador, while four

tiers in Nova Scotia. Royalty regimes are similar in Nova Scotia and

Newfoundland and Labrador, because in both provinces royalties are determined

based on the profitability of the project (Mintz and Chen 2010). The previous

table in the Canadian National Diamond – Government section illustrates the

differences in royalty rates between Newfoundland and Nova Scotia.

A recent study illustrated that oil & gas producers in Newfoundland and Labrador

and Nova Scotia have a low tax and royalty burden due to both a royalty structure

that provides excessive deductibility for investment costs and the Federal Atlantic

Investment tax credit (Mintz and Chen 2010). However, Paul Barnes, CAPP

Atlantic Region manager, stated that the complexity of the royalty regime had

made energy investment in Atlantic Canada less attractive for international oil

companies. In his opinion, despite the fact that the Newfoundland and Labrador

government have royalty regime established, royalties rates were not clear and oil

companies had to devote significant efforts in negotiating royalty payments and

seeking tax credits. This illustrates that the transaction cost involved for oil & gas

firms to negotiate royalty rates can be significant, and it should be taken into

account when determining the total cost of the project.

7.1.4 Government Initiatives

1) Ensuring Predictable Provincial Energy Strategy

According to CAPP, from 1997 to 2005, the oil & gas sector generated

approximately 48% of economic growth in Newfoundland and Labrador, and


Page 77

cumulated over $18 billion in investment (Newfoundland and Labrador 2006). In

2005, the oil & gas sector accounted for close to 25% of total provincial GDP

(Newfoundland and Labrador 2006). In order to sustain the oil & gas industry in

Newfoundland and Labrador, the CAPP recommended that the provincial

government encourage exploration through ensuring a stable business climate and

predictable regulatory system. This is because existing fields are approaching

production peaks, and stable business climate and predictable government regimes

are essential in order to attract more exploration investment (Newfoundland and

Labrador 2006).

In order to meet industry expectations, the provincial government has outlined its

long-term energy development strategy in an Energy Plan published in 2007. As

presented in the Energy Plan, the provincial government aims to achieve

economic self-reliance and environmental sustainability in the long run

(Newfoundland and Labrador Department of Natural Resource 2007). These goals

will be achieved through the conversion of non-renewable resources into

renewable, environmentally-friendly sources of energy (Newfoundland and

Labrador Department of Natural Resource 2007). Renewable sources of energy,

energy efficiency and conservation programs will be encouraged and funded by

the government through royalty revenues collected from the oil & gas sector

(Newfoundland and Labrador Department of Natural Resource 2007). Sustainable

value will be created through exporting electricity generated from renewable

sources, including but not limited to hydroelectric and wind generation.

Newfoundland and Labrador aims to become an energy warehouse for global

markets through exporting crude oil & gas, as well as electricity from renewable

sources (Newfoundland and Labrador Department of Natural Resource 2007). It

is evident that the goal of becoming an energy warehouse for global markets is

mainly dependent on oil & gas royalties (which will fund renewable energy

projects). In order to enhance royalties, the government needs to enhance oil

production in Newfoundland & Labrador, which only has three offshore wells.

Therefore, enhancing exploration is essential if the government wants to achieve

its goal of being an energy warehouse.

2) Encouraging Exploration in Existing and Nearby Satellite Fields

The provincial government has made an initial $20 million investment in 2007


Page 78

through the Energy Corporation to purchase proprietary seismic data for re-

evaluation and acquire new data to fill in the gaps in existing offshore geological

data (Newfoundland and Labrador Department of Natural Resource 2007). This is

because new exploration opportunities are often discovered through the process of

geological data consolidation. This demonstrates that the government understands

the importance of having more discoveries.

7.1.5 Play Fairway Analysis (PFA)

As per the Nova Scotia government website, petroleum exploration in Nova

Scotia spans over 50 years. During this period, over 200 exploration, delineation

and production wells have been drilled with discovered reserves amounting to

2.21 billion barrels of oil. However, recent exploration has not been successful,

and is shown by the fact that since 1998 over 29 wells have been drilled, costing

over $1 billion, but there has been only one commercial gas discovery – Deep

Panuke. Poor success in regards to exploration has led to a decline in exploration

licenses from 59 in 2002 to only 10 being awarded in 2008. Therefore, the Nova

Scotia Department of Energy commissioned a study which determined that the

region has a perception of being a high cost environment, and high geological

risk. In order to enhance exploration activity, the government funded Play Fairway

Analysis (PFA), in order to enhance offshore petroleum activity. The goal of this

project was to demonstrate to the industry that there is opportunity in offshore

Nova Scotia. The project recognized that there was a large amount of knowledge

about the offshore geology in Halifax, and incorporated this knowledge into a

thorough geoscience analysis. This analysis addresses both the geological risk,

and the potential volumes of hydrocarbon resources (Province of Nova Scotia

2014).

According to Province of Nova Scotia (2014), there is a substantial opportunity in

shallow water, small-scale traps with potential for both oil & gas. The PFA has

also identified and mapped very large-scale potential traps that could contain gas,

condensate, and/or oil. Large-scale gas/condensate opportunities exist along the

North Eastern part of the margin in deep water and a predicted oil-charged play in

the South West of the margin.


Page 79

The diversity of the opportunity set makes Nova Scotia of interest to a wide range

of companies. Combined with the proximity to the world’s largest market and the

political stability of a G8 nation, this makes Nova Scotia Offshore a very valuable

investment opportunity for the oil industry. This became evident when,

subsequent to the completion of the PFA, two call-for-bids rounds were held. In

2011, Shell Canada was awarded four deep water parcels in the southwest for a

combined work expenditure bid of $970 million. In 2012, BP was awarded four

deep water parcels in the region south west of Sable Island for a total work

commitment of $1.05 billion. Additionally, Shell Canada was also awarded two

deep water and two shelf parcels for a combined work commitment of $32

million. In total, this resulted in $2.05 billion in work commitment bidding

including the highest bids received in Atlantic Canada on both a per bid round and

per block basis.

The 2013 call-for-bids focused on the shallow water regions north and east of the

Sable Island area. Since this call, the province has completed new geoscience

analysis including seismic reprocessing. Although there weren’t any bids in 2013,

the industry expects positive results in future as the province will release new

geological data when these areas again come up for bid.

The 2014 call-for-bids is in the Laurentian Subbasin. The province will release

new geoscience research in time for the 2014 call-for-bids. This new information

will address many geological questions for the industry.

7.1.6 Industry Sexiness

The Canadian offshore oil & gas industry can be considered “sexier” than the

onshore industry. This can be attributed to the lack of its impact on the

environment, which can also be attributed to the lack of production within this

industry. However, this is a very small industry and has not generated significant

attention – as most of the attention has been focused on the industry in Western

Canada. According to Jim Logan Forbes, Senior Subsea Engineer at Wesi, the

industry has faced significant opposition from the fishing industry, and the

environmentalists. However, there have not been any spills so far – which is


Page 80

beneficial for the offshore oil & gas industry. In addition, the industry is small and

has not significantly impacted the Canadian economy yet.


7.2.1 Natural Resources

According to National Energy Board of Canada (2013b), initial oil reserves in

Newfoundland and the Grand Banks totalled 2,152 million barrels, out of which

1,290 million barrels (or 60% of initial reserves) have been explored, and 862

million barrels (or 40% of initial reserves) of established reserves are remaining.

In Nova Scotia, cumulative oil production totalled 44 million barrels, and the area

offshore Nova Scotia has no significant remaining established oil reserves

(National Energy Board of Canada 2013).

7.2.2 Operating Environment

According to Max Ruelokke, former deputy minister within the government of

Newfoundland and Labrador, and currently Senior Manager at Aker Solutions,

Newfoundland and Labrador and Nova Scotia are very expensive areas to drill.

The most expensive well drilled was in Newfoundland and Labrador. He stated

that the costs in Atlantic Canada were approximately 50% for drilling, and 50%

for support services, such as helicopter flights. In addition, the operating

environment in this region is very harsh, and is considered significantly harsher

than the operating environment in Norway. This is proven by the fact that in

Norway, the well head can be placed on the sea bed, while in Newfoundland, it is

important to go ten metres into the seabed in order to prevent iceberg impact.

Furthermore, it is essential to have a Floating Production Storage and Offloading

(FPSO) vessel in Newfoundland and Labrador as all the facilities attached to the

seabed need to be rugged enough to withstand iceberg impact. The safety and

regulatory regime is very stringent, and this can be attributed to the potential for

environmental damage. According to Max Ruelokke, these factors have

contributed to oil & gas projects in Atlantic Canada having a much lower ROI.


Page 81

It is also important to note that the vessels need to be mobilized from Europe,

which is very expensive – the mobilization cost for the construction vessel bought

to the Deep Panuke project cost $1 billion, and they had to do it twice. In addition,

the industry is very cyclical, and due to the weather conditions, operations can

only take place between May and October, which is the Canadian summer, and

many individuals within the industry prefer being on vacation.

7.2.3 Labour

Similar to the onshore oil production in Alberta, labour shortage also hinders the

development of the offshore energy industry in Atlantic Canada. Based on our

interview with Max Ruelokke, the labour market in Newfoundland and Labrador

is tight, and hence costs have gone up due to stronger competition for labour. In

addition, it is important to note that companies that conduct business in

Newfoundland and Labrador have to train local people because it is cheaper than

hiring expatriates. The government has done a better job of having companies

employing locals and expect to see a transformation from 20% to 90% local

employees.

7.2.4 Transportation

According to National Energy Board (2014), over 80% of oil produced offshore in

Atlantic Canada is transported to refineries located in the U.S. East Coast by

tankers. According to Jim Logan Forbes, Senior Subsea Engineer at Wesi, the oil

is located between 1500 and 2000 metres under water, which it makes it

challenging to get the oil to the market. There is a very long drop off, and an

unstable bank, which prevents oil from being transported via pipelines. Therefore,

floating structures are needed and FPSOs are used which offload the oil into the

tankers. In addition, during certain months, the weather conditions do not permit

oil to be offloaded, which is why production needs to be reduced. This illustrates

that production and transportation of oil in Atlantic Canada is very challenging.


Page 82

7.2.5 Capital Markets

According to the World Federation of Exchanges, by the end of 2010, the Toronto

Stock Exchange (TSX) is the 3rd

largest stock exchange by market capitalization

in the Americas, and the 8th

largest stock exchange in the world (World Federation

of Exchanges 2010). The Canadian capital market is one of the leading players in

global energy financing, and Calgary is the hub of energy financing. Canada is

famous for having one of the world’s best banking systems, as stated above.

However, energy-financing activities are less active in Atlantic Canada as

compared to Toronto and Calgary.

7.3 Firm Strategy and Rivalry

7.3.1 Local Rivalry and Capital Spending

Current operators in this area are ExxonMobil (the Hibernia and the Sable

Offshore Energy project), Suncor (the Terra Nova project), Husky Energy (the

White Rose and the North Amethyst project), and Encana (the Deep Panuke

project). Several extension projects of existing producers are anticipated in the

years to come (INTSOK 2011).

All of the upstream operators that operate on Canadian offshore fields have both

conventional and unconventional outputs (Business Monitor International 2013).

Unconventional projects are characterized by massive reserves base, high cost,

and demand for technology. According to Canadian Association of Petroleum

Producers (2013a), the oil sands, which are unconventional output reserves,

account for 36.5% or $63 billion of total industrial capital spending which

includes spending on oil sands and on conventional energy. However, industry

capital spending in Atlantic Canada is only $1.5 billion, or 2.4% of national total

as illustrated by the figure below. The figure below illustrates relative capital

spending within the oil & gas industry in Canada.


Page 83

Source: Canadian Association of Petroleum Producers, Newfoundland and

Labrador's Offshore Oil & gas Industry: Opportunities and Challenges

The minimal amount of investment in the Atlantic Canada region can be attributed

to small market size. Currently, there are only four offshore producing fields, three

in Newfoundland and Labrador and one Nova Scotia.

7.3.2 Local Content and Ownership

In addition to federal level regulations mentioned in the Onshore Diamond

section, in Atlantic Canada, benefits plans (i.e., employment and training) must be

submitted and approved by the Offshore Petroleum Board before any offshore

energy-related activities (Canada-Newfoundland and Labrador Offshore

Petroleum Board 2014, Canada-Nova Scotia Offshore Petroleum Board 2014).

Despite local content promotion, major oil companies have not altered their plans

to explore and develop in the Atlantic offshore (Center for Energy Economics

2001).

According to Kinnon Kendziora, Project Manager at Talon Energy Services, due

to the local content requirement in Atlantic Canada, foreign companies acquire

0.3 0.3 0.5

22.7 23 23

37.636

38

1.5 1.5 1.5

2011 2012 2013

Energy Industry Capital Spending

(in $ billions)

Northern Canada Oil Sands Western Canada East Coast Offshore


Page 84

very small local service companies and aim to earn contracts via these companies.

They do not establish an office or head office within the province in Nova Scotia

or Newfoundland and Labrador. This illustrates that the local content requirement

has not been very successful.

The preference for local content by the provincial government in Atlantic Canada

has raised the cost of production, which negatively affects the attractiveness of the

industry. According to Håkon Skretting, Canadian firms in the oil & gas sector

have the tendency to seek protection, and this leads to high production costs and

inefficiencies. This also limits competition, and a lack of competition, as per

Porter’s diamond model is not beneficial for the local industry, as it prevents it

from being competitive globally.

7.3.3 Cyclical Offshore Oil Industry

Despite the fact that the petroleum sector provides significant construction

employment benefits when projects are in the development phase, local

employment history of the offshore projects has been characterized by a number

of construction phase peaks and valleys as illustrated in the figure below. This has

led to significant knowledge being lost about the local industry as talent has left

the industry due to a lack of opportunities during a trough. Consequently, the

local government believes that promoting local oil field service industry will help

to stabilize the employment fluctuations in the oil & gas sector (Newfoundland

Labrador Department of Natural Resource 2007).

Number of Employees in Offshore Projects in Newfoundland and Labrador

Source: Newfoundland Labrador Department of Natural Resource, the 2007

Energy Plan: Focusing Our Energy, Page 25


Page 85

Based on our interview with Kinnon Kendziora, the small market size and cyclical

nature of oil production in the Atlantic offshore make OFS hard to grow. This is

because industry is on and off, which corresponds to the development of offshore

oil fields. It is not easy to predict the market size in Atlantic Canada, because this

region is underexplored. He also stated that due to lack of collaboration, the

experience is not taken from one project to another.

7.3.4 Global Rivalry

As stated above, the Canadian offshore industry is very small. The figure below

contains global offshore production data for 2013, and it is clear that the Canadian

offshore industry is not a large global player due to minimal production.

Production (kbbl/d)


The figure below illustrates expected global offshore production in 2025, and it is

clear that Canada is not expected to be a large global player, although its total

production is expected to increase significantly. However, it is important to note

that both BP and Shell have each committed to $1 billion in exploration in

Atlantic Canada. This is a very large investment in exploration, and local industry


Page 86

is expecting a very large find. According to Kinnon Kendziora, Project Manager

at Talon Energy Services, this find could be as large as Norway’s total offshore

resources.

Production (kbbl/d)


7.4 Related and Supporting Industries

7.4.1 Deep Ocean Technology Cluster

Located in St. John’s, Newfoundland and Labrador, the Ocean Technology Cluster

(OTC) consists of more than 50 local companies and institutions in the Offshore

Energy, Ocean Observation/Science, Marine Transportation, Fisheries, Education

& Training institutions, Defence & Security, and Aquaculture (OceansAdvance

2012). The sector’s revenues have risen from just over $100 million in 2001 to

over $500 million dollars in 2010 (Government of Canada 2011).


Page 87

Established in 2005, OceanAdvance Inc. is a private sector-led organization that

aims to foster and promote the development and expansion of the ocean

technology cluster in Newfoundland and Labrador. According to OceansAdvance

(2014), the aggregated cluster revenue is likely to reach $1 billion by 2015.

The primary driver for the formation of the Ocean Technology Cluster is the need

to overcome the harsh environment challenges in offshore energy exploration

which is dated back to as early as 1970s (OceansAdvance 2014). Moreover,

fishing and weather forecasting have also accelerated the ocean technology

development (Safer 2012).

In Canada, a typical ocean technology firm employs 10 – 20 people and generates

sales on average of $100,000 to $120,000 per employee (Government of Canada

2012). As of 2012, there were more than 500 ocean technology firms in Canada.

In 2012, approximately 25% of Canadian ocean technology firms were located in

the Atlantic Canada region (Newfoundland and Labrador, Nova Scotia, Prince

Edward Island and New Brunswick) (Government of Canada 2012).

The largest customer segments of Canadian ocean technology firms are

exploration, development, and production of offshore energy. In 2000, offshore oil

& gas exploration, development and production accounted for approximately 43%

of total domestic demand for ocean technology goods and services (Government

of Canada 2012). In Newfoundland and Labrador, offshore exploration and

development accounted for 98% of total domestic demand (Government of

Canada 2012). The presence of fast growing ocean technology clusters strongly

support the offshore oil industry in Newfoundland and Labrador and Nova Scotia.

7.4.2 Secondary Petroleum Industries

The government of Newfoundland and Labrador has acknowledged the

importance of achieving value-added and secondary petroleum industries.

Therefore, it is aggressively pursuing value-added secondary processing

opportunities in refining and petrochemicals (Newfoundland and Labrador

Department of Natural Resource 2007).


Page 88

The province only has one refinery that was built in 1970s. Very few opportunities

have been identified as feasible for adding value to oil & gas processing

(Newfoundland and Labrador Department of Natural Resource 2007). This can be

attributed to low and volatile margins on refining, which has led to low

international investment for capacity increases at refineries, or the construction of

new refineries. According to Paul Barnes, the refinery in Newfoundland and

Labrador is a sour refinery which uses sour crude oil as input, but the type of

crude oil produced in the offshore Newfoundland and Labrador is light sweet

crude oil. As a result, the local refinery is not designed to process the type of

crude oil produced offshore, and hence it would be cheaper to process offshore oil

into other products elsewhere.

1) Industrial Fabrication in Newfoundland and Labrador

Industrial fabrication is the metal fabrication process of equipment used in large-

scale construction projects (Province of New Brunswick 2012).The

Newfoundland and Labrador government is looking to promote a local

engineering and fabrication industry (Newfoundland and Labrador Department of

Natural Resource 2007). This is due to the fact that over the past 15 years, the

local workforce has accumulated intensive experience in the design, fabrication,

construction, integration, and commission of offshore production platforms

through offshore construction projects such as Hibernia, Terra Nova, and White

Rose. Major industrial fabrication infrastructures are located in Bull Arm and

Marystown, and the government plans to assist these local suppliers thrive in the

international markets when there are no large-scale projects in the vicinity

(Newfoundland and Labrador Department of Natural Resource 2007).

In 2007, a fund with an initial $5 million investment was established to provide

financial incentives and marketing avenues for export-based petroleum fabrication

and manufacturing suppliers (e.g., readily transportable module fabrication

packages) to expand (Newfoundland and Labrador Department of Natural

Resource 2007). The local government also invested in the industrial fabrication

sector through the ownership of Nalcor, which is the provincial Energy

Corporation that operates the Bull Arm industrial fabrication site.


Page 89

2) Industrial Fabrication in Fabrication in New Brunswick

The province of New Brunswick in Atlantic Canada also plans to further develop

its industrial fabrication industry. As of 2011, there were approximately 100

industrial fabrication companies in New Brunswick. This sector provides high-

skilled employment for 2,000 people (Province of New Brunswick 2012). More

than 170 local engineering firms also support the industrial fabrication industry.

3) Industrial Fabrication in Nova Scotia

The local industrial fabrication industry in Nova Scotia can create innovation

synergies for the shipbuilding industry and ocean technology sectors (Gereffi et al.

2013), which will ultimately create synergies for oil field services firms in terms

of developing technology used for offshore production. Therefore, a strong

fabrication industry in Nova Scotia will be beneficial to the OFS industry in

Atlantic Canada. Based on our interview with Svein Inge Eide from Statoil, Nova

Scotia has strong maritime and fabrication industries, but the companies in the

Nova Scotia do not autonomously have access to the construction projects in

Newfoundland and Labrador. This is because each province has a separate

petroleum board that looks after the interest of the province. As a result, the

incentive to look at the Atlantic regional development is low. This is illustrated by

the fact that the Canada – Newfoundland Offshore Petroleum Board and the

Canada – Nova Scotia Offshore Petroleum Board require operators to provide a

local benefits plan before conducting any offshore oil related activities. Both

provinces base their judgement on provincial benefits. This illustrates an approach

of provinces being concerned purely about development within their province, but

not within the region of Atlantic Canada as a whole.


7.5.1 Exports/Imports

Over 81% of oil produced offshore in Atlantic Canada is transported to refineries

located in the U.S. East Coast by ocean tankers, 16% to the U.S. Gulf Coast, and

3% to the U.K. (National Energy Board 2014). Unlike the oil produced in Western

Canada, oil production in the Atlantic Canada region is exported at the Brent

crude oil price, which is the world crude oil price benchmark.


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Source: National Energy Board of Canada, Canadian Energy Overview 2007 -

Energy Market Assessment

Although Canada is a net exporter, refineries in Atlantic Canada rely on the

imported oil as input. In 2007, 80% of the Atlantic refining inputs were met by

imports and the remaining 20% were met with oil produced in Eastern Canada

(National Energy Board 2014).

U.S. East

Coast

81%

U.S. Gulf

Coast

16%

U.K.

3%

Offshore Atlantic Canadian Oil Export by

Destinations

Imports

80%

Eastern

Canada

20%

Atlantic Canada Refining Inputs


Page 91

7.6 Diamond Summary and Cluster Map


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Canadian Offshore (St. Johns) Oil Cluster Map – Oil Production Value Chain

Operators with exploration licenses: Multi Klient Invest AS, ExxonMobil, Husky, GXT, Statoil,

Suncor, Chevron, ConocoPhillips, Petro-Canada, BP, Shell, HMDC

Operators with offshore production:

ExxonMobil, Suncor, Husky Energy,

EnCana

Irving, DOF

Subsea, ROMOR

Ocean Solutions,

Genoa Design

International, IMV

Projects Atlantic

Three refineries in

Atlantic Canada;

Over 80% of total

production goes to

refineries located

in the U.S. East

Coast via ocean

tankers

Imperial Oils,

Petro-Canada,

Devon Canada,

Gibson Energy,

Nexen, Shell

Energy, Sunwest

Oil Exploration

&

Development

Oil Completion

&

Production

Transportation

&

Vessels

Oil

Refining

Oil Distributors

& End

Customers


Page 93

Canadian Offshore (St. Johns) Oil Cluster Map

Specialized Institutions

Regulators:

The Federal &

Provincial

Governments

CNLOPB, CNSOPB,

ACOA

Associations:

CAPP, Oceans

Advance, NOIA, MEA

Research Institutions:

Marine Institute,

OERA, OSSC, OTEC,

OERC, PRAC, NRC,

NSERCC, RDC-NL

Training Centers:

Memorial University,

College of the North

Atlantic, Dalhousie

University,

SERT Centre

Oil Field Services / Contractors

Drilling & Drilling

Equipment

Business Services

Project

Development

Engineering,

Fabrication,

Construction &

Installation

Underwater

Intervention

Nalcor, WorleyParsons,

Wood Group PSN,

Pennecon Ltd., AKAC

Inc., Hyflodraulic ltd.

Wood Group PSN, Kiewit

Energy Canada Corp., Aker

Solutions, Amec Black &

McDonald

Energy Financing & Capital Market:

Canadian Banks, State-Owned Enterprises,

Private Equity

Accounting & Auditing / Law Compliance

Business Consulting

Related Industries

Ocean Observation/Science,

Marine Transportation, Mental

Fabrication

Exploration

&

Development

Completion

&

Production

Transportati

on

&

Vessels

Refining

Distribution

&

End

Customers


Page 94

8.0 Canada – OFS Diamond

The OFS sector consists of firms that perform supporting activities for upstream

operators. The interaction within this cluster along the value chain or within the

lifecycle of a project is highly complex. The figure below illustrates the value

chain within OFS.

Negotiation of

Upstream

Agreements &

Licensing

Exploration Drilling and Well

Completion

Field Development

and Production

Concession

agreements

Production

sharing

contracts

Risk service

agreements

Joint operating

agreements

Setting Fiscal

terms

Pre license

prospecting

Environmental

assessments

Geological services

Seismic surveys

(2D,3D, 4D)

Electromagnetic

techniques

Existing well data

Sedimentary

environment

analysis

Remote sensing

Scientific drilling

Well Planning

Well Design

(sections,

trajectory

subsurface

conditions)

Rigs systems

and equipment

Onshore/

Offshore

logistics

Subsurface

drilling

equipment

Remote

monitoring and

operations

support

Reservoir

management

Scheduling

Data

acquisition

interpretation,

and analysis

Reservoir

mapping

Reservoir

modeling

Subsurface

development

plan

Economic

evolution and

field

management

The OFS segment is divided into Equipment and Services. Equipment refers to all

the tools, machinery, high tech components, vehicles, vessels, and fabricated

pieces such as pipes, casing and cables that are used to locate and extract crude

oil. Equipment can be small pieces of apparatus such as handheld computer

equipment, or drill bits, while the largest equipment can be heavy machinery and

offshore platform systems. Services refer to the human resource requirements

necessary to operate the equipment in the search for, retrieval or transportation of

crude oil. Services can be general or skilled labour. Specialized expertise consists

of geophysical exploration, contract drilling, pumping, pipeline services, field

processing, transportation, engineering and geometrics.

Large extraction firms such as Imperial Oil, Husky, Shell and Statoil are highly

important in the OFS, as they represent a great portion of the demand for


Page 95

equipment and services.

8.1 Cluster Location

Alberta is Canada's principal producer of oil and petroleum products and has

approximately 68% of total Canadian oil production. According to Hathway

Management Consulting (2013), over 40 major energy companies have large

offices in Calgary, and nearly one in six working Albertans are directly or

indirectly employed in the energy sector. Many OFS companies also collocate

with operators. According to Hathway Management Consulting (2013), in

Canada, 20 operators dominate the upstream production, and there are over 8000

OFS firms with an average of 13 staff. Although we do not have an exact number

of OFS firms in Alberta, as Alberta has significant oil production, we would argue

that a large percentage of Canadian OFS firms are headquartered in Alberta. We

would argue that the Canadian Onshore Cluster (in Alberta) has reached a critical

mass due to large production, significant investment, and large number of

operators and OFS firms.

St. John’s, Newfoundland and Labrador is the location of the OFS cluster within

offshore technology. However, this cluster is very small and does not have critical

mass.

8.2 Government

8.2.1 Fiscal Environment

The province of Alberta – which is the location of the OFS onshore cluster – has

no municipal sales tax, provincial sales tax, provincial general capital tax,

inventory tax, machinery and equipment tax, or payroll tax. In Canada, Alberta

has the lowest provincial tax at 10%, while Canada’s corporate tax rate is 15%.

Alberta has a flat personal income tax rate of 10%, and is the only Canadian

province to adopt such a tax scale. As a result, low tax regimes enhance Calgary’s

attractiveness as the location of the OFS cluster.


Page 96

The province of Newfoundland and Labrador – which is the location of the

offshore cluster – does not have a fiscal environment which is as competitive as

that of Alberta. Its provincial tax rate is 14%, which is 4% higher than the

provincial tax rate in Alberta. In addition, like Alberta, there is a 15% federal tax.


8.3.1 Access to Capital

According to Chris Theal, President and CEO of Kootenay Capital Management

Corp, there has been a high acquisition trend in Canada. This can be attributed to

the challenge of attracting workers which has led to firms acquiring other firms in

order to gain access to employees. This was reiterated by Brian Pyra, Director of

Operations for Deloitte Canada, who stated that there are many large U.S. firms

such as Halliburton which acquire Canadian OFS firms. These firms see small

entrepreneurial companies develop complementary technology, which is why they

are eventually acquired. Geoff Hill, National Oil & Gas Leader for Deloitte

Canada agreed with this statement, and stated that Canadian firms struggle in the

commercialization phase due to a lack of funding and “deep pockets”. This

statement was reiterated by Anthony Patterson, CEO of Virtual Marine, who

stated that Canadian oil & gas technology companies are excellent at conducting

research and creating a prototype for a product. However, commercialization due

to a lack of capital is a significant issue and is preventing Canadian companies

from being competitive. According to Susan Hunt, Program Manager, HSE at

Petroleum Research Newfoundland and Labrador, there is a lack of capabilities

and capacities in Atlantic Canada, along with higher costs of doing business. This

leads to firms moving abroad in order to commercialize their technology.

According to Max Ruelokke, it is very difficult to grow an organization in Canada

as compared to the U.S., mainly because sources of start-up funding are limited.

He also stated that Americans are more entrepreneurial, while Canadians are risk

averse, which contributes to more innovation and start-ups being formed in the

U.S. as opposed to Canada. Anthony Patterson, CEO of Virtual Marine, stated that

all the junior venture capital companies are essentially an extension of mining


Page 97

companies – he referred to them as “The Junior Mining Board” – while there are a

significant number of venture capital companies with the software industry.

However, the venture capital market for hi-tech companies in Canada is non-

existent. He also stated that Virtual Marine requires the capital to grow and is

more likely to be acquired by an American or European company. However, this

would be unlikely if the venture capital market in Canada was strong, which

would enable Virtual Marine to expand its operations globally. According to

Kinnon Kendziora, Project Manager at Talon Energy Services, the venture capital,

and capital markets are even weaker for Atlantic Canada, as compared to the rest

of Canada, and this significantly deters companies from commercializing their

technology or growing further.

8.3.2 Investment

Between 2005 and 2011, FDI in the support activities industry has increased from

$3.6 to $11.6 billion, with the U.S. being the dominant player accounting for 72%

of the total FDI. Foreign Inflows into professional services have increased from

$9.4 billion in 2005 to $14.1 billion in 2011, while outflows of capital have not

risen significantly (The Conference Board of Canada 2012). However, Canada

performed well in engineering services exports, which totalled $3 billion in 2010,

although the number is down from $3.3 billion in 2005.

Source: The Conference Board of Canada, Fuel for Thought: The Economic

Benefits of Oil Sands Investment for Canada's Region, Page 20

Indirect investment in oil production produces jobs in six sectors as outlined in the

figure above (The Conference Board of Canada 2012). It is interesting to note that

all of the sectors in the figures outlined above pay high than average wages. The


Page 98

lowest paying sector outlined above is transportation and warehousing, and even

its earnings are 5% higher than the average. Oil field services have average

weekly wages of over $1600, which equals more than $80,000 annually (The

Conference Board of Canada 2012). The average weekly wages in Alberta are

$1140, while the average weekly wages in Canada are $932. This illustrates how

the OFS sector has significantly higher wages. This sector has been most affected

by investment in the oil sands because many of the services such as well

development and maintenance are labour intensive tasks and need to be conducted

on site.

8.3.3 Human Capital

Despite the high wages in the OFS industry, firms have had issues attracting

labour (The Conference Board of Canada 2012). 33% of large and medium sized

Canadian organizations reported difficulty in recruiting and retaining engineers

(The Conference Board of Canada 2012). This can be attributed to firms focusing

purely on the domestic market, as they do not have the resources to grow exports,

considering access to skilled labour is a significant issue for both the oil & gas

and the OFS sector. These findings were reiterated via a survey conducted by the

Petroleum Service Association of Canada, where 65% of the respondents of OFS

service firms stated that their firm was facing a shortage of labour, which led to

48% of those firms turning down new business, 65% stated that this constrained

company growth, while 45% stated that it led to succession planning challenges.

This was reiterated in a confidential Government of Canada report, which also

forecasted an increase of competition between firms for new talent, and forecasted

that operations are likely to be scaled back due to a lack of human capital. Mark

O’Bryne, President of Schlumberger Canada stated that the lack of qualified

personnel was a significant concern and had driven up labour costs

According to Kelly Morrison, from Canadian Petroleum Services Association, this

shortage is compounded with barriers to bring in workers from foreign

jurisdictions, along with workers having to work in remote towns with minimal

infrastructure which require them to have a fly-in and fly-out lifestyle, adding to

the issues in recruiting and retaining skilled labour. In a survey conducted by


Page 99

PSAC, 65% of the respondents within the OFS sector stated that they had

employees who needed to have a fly-in and fly-out lifestyle.

A confidential Government of Canada report stated that due to the depressed

prices of crude oil since 2008, there has been significant competition between

companies in regards to cost. This has put pressure on equipment and service

providers, as the sector has demanded lower costs within exploration and

extraction in order to maintain project viability. Employment costs are expected to

rise as is competition for human resources within the next 5 – 10 years, since a

number of senior employees will retire. This concern is most significant in

pipeline contracting due to recruitment challenges (seasonality, and remote

locations)

Source: The Conference Board of Canada, Fuel for Thought: The Economic

Benefits of Oil Sands Investment for Canada's Region, Page 21

The figure above illustrates the number of jobs created per $1 billion of

investment in the oil sands. Engineering falls under professional services instead

of oil field services. It is still likely that not all engineering services provided were

within for oil field services, but it can be safe to assume that a significant

percentage of engineering jobs were created in OFS (The Conference Board of

Canada 2012). The graph demonstrates that a disproportionate number of

engineering jobs are created in Alberta, which has led to a shortage of labour, and

disproportionately high wages for engineering professionals.

According to Jim Logan Forbes, Subsea Engineer at Wesi, the skill set within

upper management is not present in Atlantic Canada, which is why management

within companies in oil & gas in Atlantic Canada typically consists of individuals

from the U.K. and Norway. However, the skill set is being built and there should

be adequate human capital within this segment in the future. In addition, there is a


Page 100

lack of drilling and subsea engineers, leading to a number of small companies

such as Wesi which hire subsea and drilling engineers. In addition, the expertise in

Atlantic Canada is not present, although the skill set for managing potential

offshore platforms is present.

8.3.4 Education

There are many educational programs within petroleum management, geology,

chemical science, energy finance, and oil & gas engineering as specified in the

table below.

Programs Institute

Petroleum Energy Technology diploma Northern Alberta Institute of

Technology (NAIT)

Chemical Production & Power Engineering

Technology Diploma

Lambton College

Heavy Oil Operations Technician Diploma Lakeland College

Petroleum Engineering Technology Co-

op program

Northern College of the Atlantic

Bachelor of Commerce with a concentration

in Petroleum Land Management (One of six

such programs globally)

University of Calgary

Mineral Resource Engineering Dalhousie University

Oil & Gas Engineering University of Calgary, Dalhousie

University

Petroleum Engineering University of Alberta, University

of Calgary, Dalhousie University

Petroleum Systems Engineering University of Regina

Processing Engineering Memorial University

Bachelor of Science in Petroleum Geology University of Calgary

MBA in Energy Finance University of Calgary

Additionally there are thirty independent research institutions in Calgary (City of

Calgary 2008).


Page 101

There are a number of research facilities and specialized educational programs on

the east coast. Dalhousie University in Nova Scotia offers engineering, petroleum

studies and oceanography, Memorial University offers programs in engineering,

geology, oceanography and nine research chairs related to oceans and offshore-

related projects. There is also an NRC lab for ocean and river engineering which

develops creative and practical solutions for engineering challenges in marine

environments.

Several offshore activities and complementary clusters are located close to

offshore activities, such as University of Victoria, Ocean Engineering Research

Group, Hydraulics and Maritime Research Centre, and marine transportation

service firms like ROMOR Ocean Solutions. These activities suggest Canada has

a strong infrastructure for facilitating collaboration, research and innovation.

In the figure below, Canadian universities awarded more degrees, diplomas and

certificates in 2008 than in 1992. It is important to note that growth was most

significant at the graduate level, with an increase of 88.6% at the master’s level,

and 77.9% at the doctorate level. In addition, the field of engineering experienced

growth of 61.5%, which is an excellent sign for the OFS industry.

Educated Workforces

Source: Conference Board of Canada

8.3.5 Innovation

Porter (1998b) stated that innovation is an important element which illustrates the

168,870

244,380

67,062

159,444

11,535 18,627

1992 2008

Educated workforces

Canadian Universities: Degrees, Diplomas or

CertificatesCanadian Colleges: Degrees, Diplomas or

CertificatesEngineering Students

88.6%77.9%

61.5%44.7%

137.8%

Master's

Level

Doctorate

Level

Students in

the Field of

Engineering

Canadian

University

Graduates

Canadian

Colleges

Graduates

Educated workforces

Growth Rate from 1992 to 2008


Page 102

cluster’s performance, because it enables competitive advantage to be sustained.

In the Emerald Model, R&D activities are considered important due to their

ability to continuously develop and create new knowledge (Reve and Sasson

2012). A popular conceptual measure of innovation is the National Innovative

Capacity (NIC) defined by Porter and Stern (2001). The main elements are

infrastructure, firm specific conditions and the quality of the links between them.


within university and industry R&D collaboration (Schwab

2013), which illustrates that there is significant room for growth in order to

enhance the National Innovative Capacity.

As per the Energy Policy Institute of Canada, most of the world’s energy R&D is

undertaken in International Energy Agency (IEA) member countries. Canada’s

share is 4% of the two year average, which is not proportionate with its 11.5%

overall share of total energy production from IEA countries. However, this does

not take into account the amount invested by energy companies in their

laboratories and in field experiments, which is estimated at $1 billion annually.

There are no specific numbers on the OFS sector, but Canadian oil & gas

(extraction) has had a decrease in total R&D expenditures from $929 million in

2009 to $757 million in 2011 (- 18.6 %) (Statistic Canada 2013). Keeping in mind

low levels of R&D spending in Canada, a further reduction is a significant cause

of concern.

8.3.6 Research Programs

According to Geoff Hill, Partner at Deloitte Canada, the research credits offered

by the government are not as attractive as they used to be, as the definition of

credits has narrowed substantially. Another source also stated that the government

lacks funding, and the research credit programs are not run efficiently by the tax

authorities, while there are significant inconsistencies in terms of eligibility.

According to Richard Grant, Partner at Gowlings Law Firm, the oil & gas sector

does not have the R&D credits it used to have, and that the lack of tax incentives

for technology and research is limiting R&D. According to Mark Salkeld,

President and CEO at Petroleum Services Association of Canada, a large number

of OFS firms do not apply for research grants, while several small OFS firms do

not know that a significant portion of the work that they are performing on site is


Page 103

classified as R&D and is eligible to be subsidized by the government.

According to the Conference Board of Canada (2012), the Scientific Research and

Experimental Development (SR&ED) program is the largest source of

government support for R&D, which gives firms cash refunds or tax credit for

R&D expenditures. This accounted for $3.53 billion in 2010, of which 8.7% was

in the mining and oil & gas sector. Total federal support for R&D was $6.44

billion, and it was interesting to note that mining, and oil & gas received only

3.8% of the total support.

8.3.7 Patents

Canada had 881 oil & gas technology related patents in 2013, which is a

significant increase from 240 in 2003. However, according to Matthew Foss,

Executive Director, Economics and Markets at the Department of Energy,

Government of Alberta, this can be attributed to advancement in horizontal and

multi stage fracking, which led to several patent applications within that specific

field. This included innovations within bits, drilling apparatus and safety

equipment. He also stated that the broad range of operating conditions in the

province enable it to function as a research laboratory for OFS companies.

8.4 Firm Strategy, Structure & Rivalry

8.4.1 Structure

The Canadian OFS industry is dominated by small and medium sized firms. The

majority (75%) of Canadian oil & gas equipment and service companies can be

classified in this category. Although the number of firms might be significant, it is

important to note that the top 4 firms earn 49% of the revenue, while the top 10

firms earn 75% of the revenue, as per the figure below.


Page 104


As per a confidential Government of Canada report, 85% of the members of the

Canadian Association of Geophysical Contractors are considered as small

enterprises, while 70% of the members of the Offshore Technologies Association

of Nova Scotia are small to medium enterprises, and these small companies often

take on high-risk jobs that larger companies are not willing to undertake. It is

important to note that the oil & gas extraction business brought in $34.5 billion in

investment, making it the largest private sector investor in Canada. The number of

OFS firms cannot be established as there are a large amount of operators within

this segment who operate on a very small scale – they have anywhere between 1-5

employees.

8.4.2 Rivalry – Onshore

As per the figure below, and as stated above, four Canadian firms have dominated

the North American market. These firms are: Precision Drilling, Trican

Wellservice, Ensign Energy, and Calfrac Well Services. Precision Drilling and

Ensign Energy are large drilling firms, while Trican Wellservice and Calfrac focus

on fracturing and tubing. This illustrates that Canadians firms have expertise

within these two segments.

$356

(3%)

$6,473

(49%)

$9,859 (75%)

$13,154

(100%)

Average

37 firms

Top 4

Top 10

Total

0 5000 10000 15000

Canadian OFS Companies Revenue

Distribution 2013 (MUSD)


Page 105


According to Brian Pyra, Director of Operations at Deloitte Canada, there is

significant local competition in Canada as compared to the U.S., where 5 firms

control the market. There are 61 firms controlling the market in Canada, which

demonstrates that there is significant competition in the Canadian OFS sector. It

needs to be taken into account that 4 large firms account for most of the revenue.

The figure below illustrates the location of the headquarters of the largest OFS

companies in North America, and Canada seems to have the second highest

number of headquarters after the U.S. This is positive because headquarters are

where most of the knowledge intensive tasks take place. This suggests that a large

amount of knowledge intensive tasks within OFS are taking place in Canada.

According to Mark O’Bryne, President of Schlumberger Canada, there are a total

of 250 service companies, and 75,000 employees within this cluster. However,

profitability is lower than in other regions of the world. He also stated that this

market is very competitive due to the low entry barriers as there a large number of

producers. Although the larger firms align with the larger producers, there are a

number of smaller operators looking for alternative service providers, known to

offer cheaper services.

$1,277

$1,506

$1,893$1,797

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$600

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Revenues of Large Canadian OFS Companies

in North America Market 2013(MUSD)


Page 106


As per the figure below, U.S. firms earned the highest amount of revenue in the

North American market, followed by Canadian, Swiss, and U.K. based firms.


However, it is interesting to note that average revenue per Canadian OFS firms in

the North American market is significantly lower as compared to the U.K., Swiss,

U.S., French and Bermudan firms.

2 1 2

37

1 4 6 2 3 1 2 2 613

1 5 9

69

Headquarter of Large OFS Companies

in the North America Market 2013

$1,190 $498$5,024

$13,154

$0 $188$5,009

$428 $109 $40 $936 $1 $2,508 $1,782 $1,120

$10,294 $7,167

$90,674

Total Revenues Made by Headquarters of Large OFS Companies

in the North America Market 2013 (MUSD)


Page 107


8.4.3 Rivalry – Offshore

Many value added activities are conducted via large companies such as

Halliburton, Baker Hughes, Schlumberger and Weatherford. According to Max

Ruelokke, Senior Manager at Aker Solutions, integrated operators such as

ExxonMobil prefer having one company which conducts all the work along the

value chain under one offshore OFS contract. This is very different from the

onshore OFS environment, because onshore operators like to have multiple

contractors specializing in niches. This demonstrates that it can be challenging to

operate in offshore OFS industry as there are significant barriers to entry, the most

significant being the need to be vertically integrated.

8.4.4 Competitive Advantage – Onshore

According to a confidential Government of Canada document, Canadian onshore

drilling equipment and technology firms, which are mainly located in Western

Canada, are considered some of the best in the world. Mark Salkeld, President of

the Petroleum Services Association of Canada, stated that Canada has strict safety

and environmental regulations, and these regulations have enabled Canadian OFS

providers to become global leaders in developing environmentally sustainable

technologies while adhering to strict safety regulations. He also stated that

Canadian OFS firms are strong within the manufacturing and engineering

$595 $498

$2,512

$356Avg.$636

$835

$468 $418$137

$1,120

$2,059

$796

$1,314

Average Revenue of Large OFS Companies

in the North America Market 2013 per Firm per Country (MUSD)


Page 108

segments, and the reason for significant strength in manufacturing can be

attributed to the strong fabrication industry.

Richard Wayken, Vice President – Pipelines at Alberta Innovates, stated that OFS

firms need to enhance performance in metal fabrication, and focus on innovation

within leak detection for pipelines, which is a massive market, as over 95% of

Canada’s oil is transported via pipelines. Furthermore, OFS firms in Canada need

to increase collaboration with the Aerospace Cluster in Montreal in order to

enhance synergies.

It is important to note that most of Canada’s oil deposits are classified as

unconventional and heavy and are found in sand or shale deposits. As per a

confidential Government of Canada document, this has driven the development of

technologies that can separate oil from impurities, and other technologies such a

horizontal drilling and fracking. This can be attributed to the reason behind why

four of the largest Canadian OFS companies operate within these segments.

According to Mark Salkeld, Canadian OFS firms are global leaders in multi stage

fracking and horizontal drilling. This is consistent with Porter’s diamond, which

iterates the importance of strong local demand and sophisticated customers as

integral component of developing industry. It is interesting to note that production

of unconventional resources in both Canada and the U.S. is expected to rise

significantly over the next decade, which could enable these OFS companies to

grow further.

8.4.5 Competitive Advantage – Offshore

Offshore technologies are dominated by U.S., U.K. and Norwegian firms, while

Canadian OFS service companies lack the expertise in offshore technology.

According to Max Ruelokke, Senior Manager, Aker Solutions, Canada, this can be

attributed to the fact that there are only four offshore producing wells (three in

Newfoundland, one in Nova Scotia). This is consistent with Porter’s diamond,

which emphasizes the importance of strong local demand as a key component of

developing the industry.


Page 109

According to Max Ruelokke, Atlantic Canada has the harshest and one of the most

expensive operating environments in the world. As introduced previously in the

Canada Offshore Oil Diamond section, the cost of operating in the icebergs

environment is very high – it can cost $500,000 to drill per day, with the services

required to support drilling costing a similar amount. In addition, it is important to

have an FPSO vessel which must be able to be disconnected very quickly because

of several icebergs. This illustrates the difficulties of operating in Newfoundland

and Labrador. As per the Porter’s diamond, sophisticated local demand is a key

driver for industry development. We would argue that challenging operation

conditions would benefit the Canadian offshore OFS industry.

8.4.6 Lack of Global Canadian OFS Firms

The Canadian OFS cluster also consists of large international firms such as

National Oilwell Varco, Shell, Baker Hughes and Halliburton. However, there is a

lack of globally strong Canadian OFS firms, despite those firms having excellent

developed technologies and knowledge. According to Chris Theal and Brian Pyra,

this can be attributed to lack of access to investment capital. Geoff Hill, National

Oil & Gas Leader for Deloitte Canada, stated that there is a poor venture capital

and angel-investing infrastructure in Alberta. This was reiterated by Richard

Wayken who stated that it is essential to develop an innovation system to connect

the industry with venture capitalists. This will provide OFS firms the opportunity

to grow as opposed to being acquired by the asset heavy firms such as

Schlumberger, Haliburton and Baker Hughes. According to Tore Sorheim, General

Manager Trican Well Services Norway, when the big four firms acquire smaller

firms, they typically allow a grace period of two years, where the small firms are

allowed to conduct their operations. After that period is over, the knowledge from

these firms is absorbed into the head office. This view was reiterated by Mark

O’Bryne, President of Schlumberger Canada. This is not very beneficial for the

cluster, as it could lead to expertise leaving the local industry.

There is significant North American demand, which has led to firms going

international only when there has been a reduction in local demand. According to

Peter Tertzakian, Chief Energy Economist and Managing Director of ARC


Page 110

Financial Group, profitability within Canada is very high, which prevents firms

from going global. In addition, several firms went to international markets in the

1990s, and were unsuccessful. These failed ventures have led to other firms within

the industry being pessimistic of the international market. In addition to North

America being a comfort zone for many firms, the economy has been strong,

which is the reason why Canadian OFS firms have not needed to expand.

Furthermore, Canada is geographically distant from many markets that require oil

field services, and this makes it difficult for Canadian OFS firms to go global.

Max Ruelokke stated that Canadians are not as entrepreneurial as Americans,

while being more risk averse, which is preventing these firms from going global.

Craig Watt, Executive Director, Premier’s Office, Southern Alberta, Government

of Alberta stated that the lack of asset heavy companies in Canada is not purely

attributed to the oil & gas sector, but across other industries as well. According to

Brian Pyra, this is due to the Canadian psyche, which essentially plans for failure

by making small investments in small operations. He stated that for firms to

operate effectively in global markets they need to have production of 500,000

barrels per day. He gave an example of an undisclosed client who has an operation

in Australia but is facing difficulty being competitive because the operation is not

large enough to attain economies of scale.

Håkon Skritting, from INTSOK, also stated that Canadian companies which come

to Norway do not fully establish their operations, and take an “unserious”

approach by attending fairs with other companies from the region, and not doing

the market research and analysis required to be successful. He stated that many of

these companies have the technology and capabilities to be successful in Norway,

but their lack of commitment to the market prevents them from gaining clients.

Brian Pyra stated that in order for firms to be successful, they need to attain

economies of scale, and follow their current clients in going global. Furthermore,

firms need a combination of capital markets, strong local competition, good

management, and understanding of the global environment, while ensuring that

they sign contracts which provide them with a good return. In addition, they need

to spend time in the local environment in order to fully understand the market and

the drivers which will make them competitive. The lack of capital markets,


Page 111

venture capital and private equity has led to Canadian firms not being globally

competitive. Brian Pyra also stated that private equity firms in the U.S. have been

looking at OFS firms in Canada, and if these firms get an influx of private equity,

it could help them go global.

According to Richard Wayken, OFS firms have several projects they are working

on, hence they do not have the resources or capacity to innovate, and this could

negatively impact the industry as innovation is a significant driver in obtaining

and sustaining competitive advantage.


8.5.1 Domestic Demand

The figure below illustrates that demand conditions in Canada within OFS, and it

is clear that demand is expected to rise within the next decade as production

increases.


As per the figure below demand conditions for onshore OFS are very strong and

demand is expected to increase in all components within onshore OFS, especially

within maintenance, operational and provincial services, well services, drilling

tools and internal EP expenditure. However, demand conditions within offshore

OFS are poor as reflected by the demand for subsea equipment and installation

0

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Page 112

expenditure. This can be attributed to the small number of wells in Atlantic

Canada. However, it is important to note that BP and Shell have spent $1 billion

each on exploration in Atlantic Canada and are expecting very large finds.

Therefore, there could be a significant increase in demand, although it could be

after 2025. According to Mark O’Bryne, President of Schlumberger Canada, the

Canadian oilfield market has changed dramatically since the “shale revolution”.

From shallow gas dominated market it has moved to capital intensive horizontal

drilling environment. The fastest growing segments of the market are hydraulic

fracturing, horizontal drilling, supply logistics, high temperature artificial lift &

associated measurements.

Distribution of OFS Expenditures

2000 – 2005


According to Svein Inge Eide, Canadian OFS companies in Atlantic Canada face a

significant disadvantage because projects are unstable. This is not beneficial as it

Distribution of OFS Expenditures

2000 - 2025

Maintenance Services EP Expenditure (MUSD)

Operational and Professional Services EP Expenditure (MUSD)

Engineering EP Expenditure (MUSD)

Procurement, Construction and Installation EP Expenditure (MUSD)

Well Service EP Expenditure (MUSD)

Drilling Tools and Commodities EP Expenditure (MUSD)

Rigs and Drilling Contractors EP Expenditure (MUSD)

Topside and Processing Equipment EP Expenditure (MUSD)

Subsea Equipment and Installation EP Expenditure (MUSD)

Transportation and Logistics EP Expenditure (MUSD)

Seismic and G&G EP Expenditure (MUSD)

Internal EP Expenditure (MUSD)


Page 113

prevents the accumulation of knowledge and drives away human capital.

Ultimately, it prevents companies in Atlantic Canada from growing. This was

reiterated by Kinnon Kendziora, Project Manager at Talon Energy Services, who

stated that this prevented investment, especially significant investment by Subsea

companies. He attributed this to being the reason why large offshore machinery

comes from overseas.

8.5.2 International Demand

As per the figure below, the large four Canadian OFS firms earn the most amount

of revenue abroad, and there appears to be only ten firms which earn in excess of

$ U.S. 500 million in revenue from international operations.


The Canadian Energy Research Institute (2013a) estimated that in 2006, the

Canadian petroleum services sector contributed $65 billion to the Canadian GDP

(4.8% of Canada’s GDP), which is second only to the producers in the resource

sector (Angevine and Green 2013). In 2011, oil & gas extraction (exploding OFS)

contributed to 6% (about $94 billion in 2011 nominal term, or $ U.S. 89 billion,

based on 2014 July exchange rate) of Canada’s GDP (Angevine and Green 2013).

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2013 (MUSD)


Page 114

The total revenue of Canadian OFS firms is $ U.S. 16.5 billion. The figure below

demonstrates that 77% of the revenue distribution of Canadian OFS firms comes

from the North American market, while 6% is generated from the European

market and 5% from the South American market. This figure further reinforces the

statement made by Brian Pyra, that Canadian firms prefer conducting business in

North America as the market is favourable, and it is within their comfort zone.

However, this can also be attributed to the fact that Canadian OFS firms have

strengths within unconventional resources, and as per the data above, production

of most of the unconventional resources is located in North America. In addition,

production within this region is expected to rise. Therefore, it is likely that we can

see an increased percentage of revenue from this market.


8.5.3 Sophisticated Customers

As mentioned above, Canadian oil producers are sophisticated producers, and this

has led to the development and innovation within hydraulic fracturing and

horizontal drilling. According to Matthew Foss, Canadian firms are pioneers

within enhanced recovery techniques. It is also important to note that there are a

broad range of operating conditions ranging from shallow to deep operating

depths within Canada. This has led some oil fields in Western Canada serving as a

$852,

5%

$12689,

77%

$1018,

6%

Revenue Distribution of Canadian OFS

Companies by Regions

2013 (MUSD)

Australia Asia

Middle East Africa

America S America N

Europe Russia

Unknown N/A


Page 115

laboratory for operators interested in innovating. As per the Diamond Model,

onshore wells have both sophisticated customers and strong demand conditions,

and demand is expected to increase substantially within the next decade.

Therefore, we can expect the OFS sector to grow significantly in the future.

As mentioned above, the operating environment in Atlantic Canada is one of the

harshest in the world within offshore oil & gas. Therefore, in order for OFS firms

to be successful they have to innovate. However, the demand conditions are not

strong due to the presence of four offshore wells currently. Therefore, in order for

the OFS industry in Atlantic Canada to develop, it is important to enhance

exploration, which will ultimately enhance production, leading to stronger

demand for OFS, which will ultimately help the industry grow.

It is important to note that the Canadian oil & gas sector has very stringent safety

and environmental regulations. This has led to Canadian OFS firms developing

competencies in terms of developing technology which takes into account the

safety and environmental regulations.


8.6.1 Onshore Cluster – Value Chain

According to Richard Wayken the biggest gap within the value chain is in terms of

understanding the adopters and users of technology. Therefore, it is essential to

create models for companies to develop or validate the technology they eventually

develop. He stated that Alberta’s strength is that it has a comprehensive value

chain within oil field services. However, areas for improvement include leakage

detection in pipelines and spill response, along with greater collaboration between

the aerospace and oil & gas industries could lead to synergies within both

industries. In addition, improvement within metal fabrication is required as there

are a large number of small metal fabrication companies which use old

technology. Richard Wayken also stated that there are many small companies

within the OFS sector which can put together pilot projects within weeks, and this

illustrates that there are several early adopters within the province, which is


Page 116

beneficial for the innovation environment.

8.6.2 Onshore Cluster – Related industries

Related industries within this cluster are fabrication, and petrochemicals, and

Alberta has a very strong industry within both sectors. There is significant

fabrication expertise from Edmonton to Calgary. Greater detail about related

industries within this cluster has been stated above.

8.6.3 Offshore Cluster – Value Chain

The value chain within the offshore cluster in Atlantic Canada is not as

comprehensive as the value chain within the onshore cluster. According to Max

Ruelokke, Senior Manager, Aker Solutions, the strength within the value chain is

in providing services and capabilities to support both the project development and

operations phases, while a weakness due to the small labour pool is a shortage of

both skills and non-competitive compensation expectation in some sectors.

According to Kinnon Kendziora, Project Manager at Talon Energy Services, there

is a lack of Subsea companies, which is why this work is outsourced to foreign

firms. In addition, local firms lack the capital and machinery required for most

capital intensive projects, which is why most of the machinery in Atlantic Canada

is from overseas.

8.6.4 Offshore Cluster – Related Industries

An Ocean Technology Cluster is in its infancy stage in Newfoundland and

Labrador, but is expected to grow gradually. Nova Scotia has a strong maritime

industry, but due to the Atlantic Accord and local content requirements, the oil &

gas industry in Newfoundland and Labrador has not been able to benefit from this

expertise. Greater detail about related industries within the offshore cluster has

been stated previously in the Offshore Oil Diamond section.


Page 117

8.7 Diamond Summary


Page 118

9.0 Norwegian National Diamond

9.1 Government

9.1.1 Governance Structure

The Ministry of Petroleum and Energy has the overall responsibility in organizing

production of the Norwegian petroleum sector (Ministry of Petroleum and Energy

2013). Under the Ministry of Petroleum and Energy, the Norwegian Petroleum

Directorate provides technical support, including resource estimates and other

geological and engineering support.

In addition to the Norwegian Petroleum Directorate, Petoro AS and Gassco AS are

responsible for oil & gas transportation, while Statoil ASA is the partially

privatized national operator. Parallel to the Ministry of Petroleum and Energy, the

state organization of the petroleum sector also involves the Ministry of the

Environment (regulating emissions), Ministry of Labour (ensuring health and

safety conditions), Ministry of Fisheries and Coastal Affairs (governing spill

emergency and preparedness), and Ministry of Finance (managing petroleum tax

and government global pension fund) (Ministry of Petroleum and Energy 2013).


Page 119

Source: Ministry of Petroleum and Energy

The State holds shares in oil & gas fields, and related infrastructures. The State’s

Direct Financial Interest (SDFI) is a cash-flow system that is managed by Petoro

AS under the Ministry of Petroleum and Energy, owned by Ministry of Finance,

and funded by the State’s fiscal budget (Ministry of Petroleum and Energy 2013).

Net cash flow from SDFI portfolio is transferred to the Government Pension Fund

– Global which invests globally. Although the Government Pension Fund – Global

is part of the State’s fiscal budget, no more than 4% of the fund’s return can be

spent annually (Ministry of Petroleum and Energy 2013). The purpose of the

Government Pension Fund – Global is to stabilize the impact of the petroleum

sector on the Norwegian economy and manage the financial challenges of an

aging population (Ministry of Petroleum and Energy 2013).

Stortinget (Parliament)

The Government

Ministry of

Petroleum and

Energy

Ministry of

Climate and

Environment

The

Norwegian

Petroleum

Directorate

Norwegian

Environment

Agency

Petoro AS

Ministry of

Labour and

Social Affairs

Ministry of

Transport and

Communication

Ministry

of

Finance

Gassco AS

Statoil ASA

The

Petroleum

Safety

Authority

The Norwegian

Coastal

Administration

Government

Pension

Fund –

Global

The

Petroleum

Tax office


Page 120

9.1.2 Industry Specialization

Norway has a strong industry specialization – which is oil & gas, as illustrated by

the diagram below. Over 50% of its exports are oil & gas, and this industry has

positively affected the Norwegian economy significantly. GDP per Capita in

Norway has increased by approximately 350% since 1960 which is prior to when

oil was discovered. At that time Norway’s GDP per Capita was below countries

such as Italy and Ireland and was ranked 17th

in the world. However, GDP per

Capita in Norway is within the top 3 countries currently. The figure below

illustrates the impact of the oil & gas industry in Norway.

Source: National Accounts, Statistics Norway, Facts 2013, Norwegian Petroleum

Directorate 2013


This study has not included a quantitative study of the articles written by the

industry, however, based on our knowledge and conversations with interviewees,

it can be stated that the Norwegian oil & gas industry is incredibly sexy.

9.1.4 Political Consensus

Since the early stages of the Norwegian oil & gas industry, there has been political

consensus about the importance of finding optimal socioeconomic development


Page 121

that benefits most coastal cities on the NCS. Prior to the 1980s, it was widely

acknowledged that the State would be the ideal candidate to ensure the

foundations for monetizing resources are well laid out, and this was later

recognized as the “infant industry” protection, which the Norwegian oil regime

shared with other European oil policies at that time (Sasson and Blomgren 2011).

However, what differentiates Norwegian petroleum policy from other “infant

industry” protections in the1970s and 1980s are threefold:

(1) Although the State requires local content, the policy favours Norwegian-based

but not necessarily Norwegian-owned inputs (Heum 2008, Sasson and Blomgren

2011). As a result, in 2011, the foreign ownership among Norwegian OFS

suppliers was about 51% (Sasson and Blomgren 2011).

(2) The State signed a “goodwill agreement” with operators, requiring foreign

operators to conduct as much oil & gas R&D in Norway as possible (Sasson and

Blomgren 2011). As a result, foreign operators conducted significant R&D on

NCS. It is argued that while other oil-rich nations focused on providing works for

nationally owned companies, the Norwegian petroleum policy focused on value

creation and facilitating extensive collaboration between multinational companies

(Heum 2008, Sasson and Blomgren 2011). The State’s petroleum policy

maximized the value created by the petroleum sector through creating stability

and helping local players gain competitiveness in collaboration with foreign

operators. When the NCS was deregulated in 1994, the local competitiveness in

the OFS had been established (Sasson and Blomgren 2011). This “goodwill

agreement” laid the foundation for the Norwegian oil & gas innovation (Heum

2008). This pro-innovation mentality was further reflected in the generous tax

credits given for oil & gas R&D on the NCS. Since the tax rate on the net profit is

extremely high (50% on oil tax in addition to 28% corporate tax), R&D tax credits

provide operators with a strong incentive to innovate. As a result, the NCS is an

attractive place for oil & gas R&D (Sasson and Blomgren 2011). It is said that as

of 2011, 31% of all Norwegian-based oil & gas companies use 4% or more of

sales on R&D, and innovate more than other Norwegian industries (Sasson and

Blomgren 2011).


Page 122

(3) Although the State has the right to grant licenses and require local content, and

decide tax credits, the state has acted in a understandable and friendly manner by

providing transparency and stability for foreign operators on the NCS (Sasson and

Blomgren 2011), which are key features of Norwegian petroleum policy (Ministry

of Petroleum and Energy 2013). Today, as outlined in the Ten Commandments,

the goal, the general licensing process, and the governance structure of the

Norwegian petroleum sector are largely the same as what they were 50 years ago.

This shows that there is consistency in the Norwegian Petroleum policy, which

has provided stability to the industry. Public hearings are in place for each

decision made by the State regarding each block. The state does not discriminate

between domestic or foreign operators and bases the licensing decision on the best

geological understanding, technical expertise and past records (Ministry of

Petroleum and Energy 2013). Although the State has a 67% ownership in Statoil,

Statoil is taxed the same as and competes with other foreign operators. The

conflict of interest is further diminished as dividend income from national

operator, Statoil, is only a small portion of overall cash flow generated in the

petroleum sector to the State (Ministry of Petroleum and Energy 2013).

Despite the governance continuity in the Norwegian model, as the production in

the North Sea entered mature stage, and technologies became more obtainable, the

State reduced its participation in the industry. This is reflected in progressive

policy easing since the 1990s, the deregulation of the petroleum sector in 1994,

and the privatization of Statoil in 2001. The policy shifts are further explained in

the figure below.


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Source: McKinsey Global Institute report

9.1.5 Licensing System

The licensing system is based on discretion instead of auctions (Ministry of

Petroleum and Energy 2013). Integrated companies with the required experience,

technology expertise, and financial strength were preferred at the initial stage

(priory to 1970s). It was a necessary strategy at the beginning, because in the late

1960s and early 1970s, Norway possessed little national expertise in developing

oil & gas (Ministry of Petroleum and Energy 2013).

Local cont legislation 1970-1975-1980s

Introduced targeted regulation, and created local oil companies

Goodwill agreement with foreign operators / Statoil established

strategic collaboration with foreign operators (BP) / Statoil built

partnership with Norwegian OFS companies

The state invested heavily in R&D and new technologies

Policy easing since 1990

Accumulating local

competitiveness in the OFS

Globally competitive

OFS industry in the

2000s:

Aker Solutions, Fred

Olsen Energy ASA

Songa Offshore,

Statoil

First oil field discovery in 1969

Fields licensed to foreign

operators

No domestic capacity

0% local content requirement in 1969, increased to

60% in the 1980s, deregulated in 1994

The Norwegian Petroleum Model in Developing OFS industries


Page 124

As per a confidential EY report, the authorities realized very early that they had

the opportunity to influence the pattern of the players on the NCS through policies

of awarding new production licenses, and by approving or withholding approval

of transfers. The overall policy objective was to help secure a pattern which

ultimately promoted the most effective resource management, while laying the

basis for maximizing value and government revenues. As per this confidential EY

report, the government searched for a concession system where the companies

chosen as operators were evaluated strictly based on their experience and

competence, and their plans for the development and production of that specific

field. Therefore, instead of the auction system, companies were invited to seek

permission to explore for and exploit submarine deposits in the first licensing

round in 1965.

According to the confidential EY report, the concession regulations were the

principal controlling instrument for the Norwegian state in determining which

companies should be granted permission to operate on the NCS, and where the

operations should be concentrated. Therefore, this system strengthened Statoil’s

dominance, as it received big shares and privileges for different licenses. For the

Norwegian industry, this meant that the knowledge of domestic industrial capacity

and competence was present in different licensing groups, as these were

represented by both foreign and Norwegian oil companies. Statoil also received

50% interest in oil licenses, and had no development costs. The sliding scale

meant that this interest could increase to 80% on larger finds. In addition, skills

transfer and local R&D were rewarded in the subsequent licensing rounds. The

figure below illustrates how licenses were awarded.


Page 125

Source: Confidential EY Report

9.1.6 Stepwise Opening

The opening of new blocks was a structured process (Ministry of Petroleum and

Energy 2013). The purpose was to ensure geological knowledge, experience and

technological developments and accumulation before moving into new regions.

Over time, the opening moved north, starting with the southern parts of the North

Sea and moving up to the Norwegian Sea and the Barents Sea. The purpose was to

ensure that local players involved in the initial production area had sufficient time

to absorb global best practices, and then develop local competences. In addition,

stepwise opening helped in maximizing the recovery rate in the initial production

area before moving north.

Currently, stepwise opening is no longer a concern on the North Sea, which is

considered a mature area, because geological knowledge, experience, and

technologies are mature. This is reflected by emergence of a strong local OFS

supply industry, which gained experience as the NCS functioned like a laboratory

for technology development (Ministry of Petroleum and Energy 2013). According

to Jon Myran of BW Offshore, Norwegian companies developed technology and

immediately employed them on an oil field, unlike other foreign companies,

which did not move forward as rapidly in terms of applying their innovations.

Development

Plans

Production

Plans

Knowledge

Transfer

Experience

Competence Good Will

Points

R&D

Award of Licenses


Page 126

This led to rapid technological development on the NCS. In the North Sea priority

has shifted to improving recovery rates and utilizing existing infrastructure

(Ministry of Petroleum and Energy 2013). This is because a small percentage

improvement in recovery rate means an exponential increase in revenue for the

state, due to significant quantities of oil. As the production technologies mature,

best utilizing existing infrastructures would provide new opportunities for

reducing production costs on the NCS.

9.1.7 Consistent Policies

The State put in place the “Ten Oil Commandments” in 1971. These oil

commandments have significantly influenced the direction of the Norwegian

petroleum sector, because the State’s strong participation in the energy sector was

enforced (Norwegian Petroleum Directorate 2010). The ultimate goal is to ensure

the energy sector benefits the entire Norwegian community, and the State was the

best candidate to safeguard the national interests. The oil commandments are as

follows:

1. National supervision and control must be ensured for all operations on the

NCS.

2. Petroleum discoveries must be exploited in a way which makes Norway as

independent as possible of others for its supplies of crude oil.

3. New industry will be developed on the basis of petroleum.

4. The development of an oil industry must take necessary account of existing

industrial activities and the protection of nature and the environment.

5. Flaring of exploitable gas on the NCS must not be accepted except during brief

periods of testing.

6. Petroleum from the NCS must as a general rule be landed in Norway, except in

those cases where socio-political considerations dictate a different solution.

7. The state must become involved at all appropriate levels and contribute to a

coordination of Norwegian interests in Norway’s petroleum industry as well as the

creation of an integrated oil community which sets its sights both nationally and

internationally.

8. A state oil company will be established which can look after the government’s


Page 127

commercial interests and pursue appropriate collaboration with domestic and

foreign oil interests.

9. A pattern of activities must be selected north of the 62nd parallel which reflects

the special socio-political conditions prevailing in that part of the country.

10. Large Norwegian petroleum discoveries could present new tasks for Norway’s

foreign policy.

Source: NPD

The ten principles can be considered fulfilled, especially the first and the seventh

commandment regarding national supervision (Norwegian Petroleum Directorate

2010). The state has managed and controlled the energy sector through a tripartite

model, including central management (Ministry of Industry, and replaced by

Ministry of Petroleum and Energy in 1972), administrative (NPD), and

commercial functions (Statoil). Despite the fact that changes have taken place

with these functions when the SDFI cash flow system was created in 1984, and

when Statoil was listed in 2001 (i.e. Petoro was created to manage the SDFI

portfolio and Gassco was created to operate the gas transport network), the state

has still played an integral role in managing and controlling the offshore energy

sector (Norwegian Petroleum Directorate 2010).

9.1.8 Industry Promotion – INSTOK

The Norwegian energy industry jointly made strong efforts to expand

internationally. It did so by establishing INTSOK, which is a network based

organization that aims to enable Norwegian oil & gas companies to go global. It

represents approximately 90% of the Norwegian companies with international

presence. It acts as a local advisor for international markets, provides market entry

strategies, organizes workshops and provides an in-depth market report on an

annual basis. INTSOK also allows its partners to exchange experience and

knowledge of market developments internationally by encouraging dialogue

between oil companies, technology suppliers, service companies and

governments. This is an interesting aspect and illustrates how the Norwegian

industry has benefited from a collaborative approach.


Page 128

It is important to note that Norwegian embassies promote trade in various

countries across multiple industries. INTSOK differs as it consists of oil & gas

professionals and provides assistance only to the oil & gas industry.


9.2.1 Reserves and Production

In 1969, the first commercial discovery, Ekofisk, was announced. Since then, the

reserves have increased significantly, due to a number of big discoveries.

Source: Facts 2014, the Norwegian Petroleum Sector, page 10

As of December 2013, the total reserves (i.e., oil, gas, NGL, and condensate) on

the Norwegian Continental Shelf (NCS), which includes North Sea, Norwegian

Sea, and Barents Sea, had an expected value of about 14.2 billion standard cubic

metres of oil equivalent (billion Sm3o.e.) (Norwegian Petroleum Directorate

2010), which is equivalent to approximately 89 billion barrels, of which crude oil

amounted to 7.2 billion Sm3 o.e., which is equivalent to another 45 billion barrels.

The majority of the crude oil reserves are located in the North Sea (Norwegian

Petroleum Directorate 2014b). The figure below illustrates total crude oil reserves

in Norway.


Page 129

Source: Facts 2014, the Norwegian Petroleum Sector

Only 44% of the total reserves on the NCS have been extracted (Norwegian

Petroleum Directorate 2010). The North Sea area has accounted for the majority

of oil & gas produced on the NCS and is considered to be a mature region for oil

exploration. As of December 2012, 615 wildcats have been drilled (Norwegian

Petroleum Directorate 2014a). As of February 2014, there were 12 active

exploration wells on the NCS, 8 of which were located on the North Sea, and 2

each in the Norwegian and Barents Seas (Norwegian Petroleum Directorate

2014a). At the end of 2013, the North Sea had 60 producing oil fields, while the

Norwegian Sea and Barents Sea together had 17 producing fields (Norwegian

Petroleum Directorate 2014a).

9.2.2 Historical Production

Since 2000, crude oil production has fallen significantly. Crude oil production in

2013 was roughly half of what it was in 2001 (Norwegian Petroleum Directorate

2013a). Over the same period, gas production has increased significantly, and this

has helped keep the total production on the NCS constant over the last decade.

5,384

1,095 598

155

Total Crude Oil Reserves

as of December 2013(million Sm3o.e.)

North Sea

Norwegian Sea

Barent Sea

Potentialfrom improved recovery (have not been broken down by area)


Page 130

Source: Facts 2014, the Norwegian Petroleum Sector, page 63

The NCS has about 50 years of oil & gas production history. Over the first 30

years, 1967 – 1997, on average, the production rate was less than discoveries.

Over the most recent 15 years period, 1998 – 2012, production has been

significantly higher than new discoveries. Most recently, the production between

2008 and 2012 was roughly on par with new discoveries. This improved ratio

between discoveries and production is largely due to the significant discovery in

the Johan Sverdrup field, located in the central North Sea (Norwegian Petroleum

Directorate 2013b). Over time, the average size of discoveries has decreased

significantly, and this indicates that the petroleum production on the North Sea has

entered the mature stage as the early oil fields have reached peak production. To

address the anticipated trend in petroleum production on the NCS, the government

has come up with three solutions: improving the recovery rate, increasing the

number of production wells, and considering opening new areas (Sasson and

Blomgren 2011). The figure below illustrates the reduction in new discoveries.

Production and Discoveries


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Source: The Petroleum Resources on the Norwegian Continental Shelf 2013

Exploration, Norwegian Petroleum Directorate

9.2.3 Operating Conditions

The operating conditions on the NCS are considered to be very harsh and this has

led to Norwegian companies having to develop innovative technology in order to

operate in these conditions. According to Porter, sophisticated customers within a

local industry enhance the competitiveness of the industry, as they require

companies to innovate. This ultimately enhances the competitiveness of the

industry.

9.2.4 Labour and Human Capital

According to the McKinsey Global Institute report, in the early years of offshore

energy development, the offshore energy industry tapped into manpower from

other related industries, such as maritime services, finishing, and construction

(Dobbs et al. 2013).

From 2005 to 2008, the energy-related education attractiveness has improved at

the bachelor and master level, while worsened at the PhD level (Sasson and

Blomgren 2011). A declining number of PhD students might be an early sign

indicating lower advanced R&D-based value addition (Sasson and Blomgren

2011).


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According to Sasson and Blomgren (2011), over the last few decades, demand for

a higher educated workforce in the oil & gas industry has increased significantly.

As a result an increasing number of engineers work in this industry. There is also

a significant increase of employees with a business or economics education

background. The number of foreign workers has also increased significantly over

the last decade.

9.2.5 Efficiency of Human Capital

According to Håkon Skretting, Regional Director, INTSOK, Norway has

developed competencies within the oil & gas sector because companies in Norway

are more efficient than companies in other parts of the world. He compared

efficiencies in Canada and Norway, and stated that as per his industry experience,

it takes approximately five times longer to install pipelines in Canada as compared

to Norway, and this illustrates how efficient the Norwegian industry is, and how

inefficient the Canadian oil & gas industry can be.

9.2.6 Access to Capital

The Oslo Børs Stock Exchange and the Oslo Axess Stock Exchange are two

listing markets in Norway. Oslo Børs Stock Exchange is preferred by more

established companies, whereas Oslo Axess Stock Exchange is suitable for

companies that have less than three years of history. As of June 2014, the number

of issuers is 179 on the Oslo Børs Stock Exchange, and 34 on the Oslo Axess

Stock Exchange (Oslo Børs Stock Exchange 2014b). In addition, the energy sector

accounts for around half of the market on Oslo Børs Stock Exchange. Based on

the number of firms listed, the TSX, NYSE, and Oslo Børs Stock Exchange are

among the top three stock exchanges for OFS firms (TMX Group 2014). Other

than the energy sector, the Oslo Børs Stock Exchange consists of a variety of

companies within the shipping and seafood sectors (Oslo Børs Stock Exchange

2014a). More than half of the brokerage firms active on Oslo Børs Stock

Exchange are international firms, and this indicates that firms listed on the


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exchange have access to international capital (Oslo Børs Stock Exchange 2014b).

Over the last decade, accesses to capital and quality of financial services have

improved (Sasson and Blomgren 2011). According to Håkon Skretting, Regional

Director, INTSOK, it is easy to grow a new business within OFS, because

entrepreneurs with great ideas can utilize many local resources, such as seminars,

factories, and engineers. The whole supply chain understands the elements

required to grow a new enterprise. In addition, there are well documented

standards for all processes to test new technologies. Local investors and financial

institutions are important in the entrepreneurial phase, but when the capital needed

surpasses the amount that local investors could provide, firms often turns to

foreign banks (Sasson and Blomgren 2011).

According to the McKinsey Global Institute report, the State also provided direct

funding to universities on a large scale, such as the University of Stavanger and

RF-Rogaland Research programs (Dobbs et al. 2013). Statoil’s LOOP program is

a venture capital fund that supports high-tech start-ups in the OFS. Over the last

20 years, this program has provided over 600 million NOK (about $104 million)

to support more than 260 companies and technologies. Based on our interview

with Arnt Inge Enoksen, from EY, venture capital from operators and government

has provided good access to capital for OFS firms. However, the funding from

government has reduced overtime, which has led to the current debate about

whether the support from the Norwegian government is adequate.


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9.2.7 Infrastructure

According to the U.S. Energy Information Aministration (2014), the offshore oil

fields are connected to onshore processing terminals via pipelines. There are eight

major domestic oil pipelines with a total capacity of around 2 million barrels per

day. In addition to eight major domestic pipelines, ConocoPhillips operates the

Norpipe pipelines that connect the Ekofisk oil field to the oil terminal and refinery

at Teesside, England. The Oseberg Transport System and the Troll I and II

pipeline systems are the major pipelines systems, and Statoil is the operator for

these major pipeline systems.

Norway has an excellent rail infrastructure which connects Oslo with Stavanger

and Bergen – which are the largest cities in Norway and the locations of multiple

aspects of the oil & gas cluster. In addition, Oslo has three airports, which have

high frequencies of international flights. The airport in Stavanger is well

established and connects with other international and local destinations, including

a direct flight to Houston, Texas. The airport in Bergen is also well developed. It

is important to note that costs of local air travel can be considered significant after

taking into account the distance and travel time between these cities.

9.2.8 Innovation

Norway has strong oil & gas oriented research institutes. The state, oil companies,

and educational and research institutions together drive innovation in Norway. As

per a confidential EY report, these institutions are also responsible for the largest

amount of R&D investments. It is also important to note that Statoil is a

demanding user, and acts as a project sponsor and provider of information of

expertise. Therefore, it can ensure that the necessary technology is developed and

can be utilized to develop the entire petroleum sector. Most entities are dependent

on each other. Therefore, there are not only linkages between various entities, but

also between national and international oil companies, and between SMEs and

new technology based firms.

As per the confidential EY report, this has facilitated knowledge transfer and led


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to the creation of science parks in the oil & gas cluster. It is also important to note

that there is strong collaboration between academia, government, and industry,

and this has led to several relevant research projects within oil & gas.

According to Jon Myran from BW Offshore, a percentage of all investment was

given back to companies for investment within R&D in purely offshore oil & gas,

not downstream oil & gas. He also stated that once the technology was developed,

there was significant collaboration with the supplier industry about drilling and

seismic models. As per Jon Myran, this reiterated the importance of jumping from

laboratory research to pilot projects, and enabled Norwegian companies to

establish competencies within those fields.

9.2.9 Laboratory for Technologies Development

Together with the Gulf of Mexico, the North Sea retains leadership position in

demonstrating continuing technology advancements in the offshore oil & gas

industry (Pinder 2001). Boosting recovery rates in mature fields has become

increasingly important in the North Sea, because the state plans to maintain the

same level of oil & gas production through gradually opening new areas, and

improving recovery rates of mature fields (Ministry of Petroleum and Energy

2013).

The NCS has functioned as a laboratory for technologies development, because

innovative solutions were needed as the costs of developing and producing in the

offshore oil fields were very high and complex. Without creating innovative

technologies in order to make production feasible, the NCS would not be an

attractive location for oil & gas production. It is important to note that several key

stepwise technologies changes (i.e. platform-based, subsea & floating, and subsea

to shore) were implemented in one pilot project in an oil field. Due to their

success, these technologies became standard across the industry. Using the NCS

as a laboratory for technology development has lead to a strong local OFS supply

industry that competes globally (Ministry of Petroleum and Energy 2013).


Page 136

9.3 Firm Strategy and Rivalry

9.3.1 Structure

Over the past 20 years, technology on the NCS has matured, and an increasing

percentage of small to medium size operators have been present on the NCS. This

is because offshore exploration technology has advanced over time, making

operation more feasible for operators who are not fully integrated (Norwegian

Petroleum Directorate 2013a) As a result, the state no longer prefers integrated

multinational operators. Another reason that contributes to the increasing presence

of small-to-medium sized operators is that the NCS has a competitive local OFS

supplier industry, which has ultimately reduced the advantages of being an

integrated operator.

9.3.2 Competition

As of 2008, there were 2,500 firms in the oil & gas cluster (Sasson and Blomgren

2011). In 2009, 10 operators earned in excess of 1 billion NOK in revenue (which

is roughly equivalent to $173 million), while 94 operators reported negative

revenue (Sasson and Blomgren 2011). The large number of firms on the NCS

prove that the Norwegian oil & gas cluster has achieved a critical mass (Sasson

and Blomgren 2011). The large spread of revenue earned also demonstrates a

healthy diversity of large, medium, and small size firms across the value chain

(Sasson and Blomgren 2011). It can be stated that large numbers of firms in each

category within the value chain indicate strong local competition.


Page 137

Source: Knowledge Based Oil & gas Industry

9.3.3 Effective Private and Public Collaboration

An important success factor of the Norwegian Model is the close R&D

collaboration between public R&D institutions and firms. According to Jon

Myran, Head of Best Practice and Start-Up at BW Offshore, programs promoting

innovation, such as DEMO 2000 have led to technology breakthroughs. Private

firms’ close collaboration and willingness to participate in these research

178 142 191

376

84

1,229

Operators Geo &

Seismic

Drill & Well Topside Subsea Operations

Support

Distribution of Firms in Clusters

53%18%

11%

12%6%

Operators

Unprofitable

0-10 MNOK

10-1O0MNOK

100-1BNOK

1BNOK or above

11%

67%

18%

4% 0%

Geo & Seismic

13%

47%

32%

8% 0%

Drill & Well

8%

59%

27%

6%0%

Topside

7%

50%33%

10% 0%

Subsea

18%

66%

15%

1%0%

Operations Support


Page 138

programs has increased the usefulness of technologies developed. Some of these

programs are listed below:

1) Research Council

Started in 2003, the Research Council of Norway provides long-term funding for

Centre of Excellence programs in order to improve the quality of Norwegian

research (The Research Council of Norway 2014a). Thirteen programs were

initially funded. Today, there are 21 Norwegian Centers of Excellence. The host

institutions are universities, university colleges, or research institutes. The host

institutions cooperate with other research entities and enterprises. Among the 21

Centers of Excellence, Centre for Arctic Gas Hydrate which focuses on gas

hydrate research and Centre for Autonomous Marine Operations and Systems

which focuses on autonomous marine operations and systems directly benefit

from the offshore energy sector (The Research Council of Norway 2014a).

2) DEMO 2000

The Norwegian Ministry of Petroleum and Energy initiated the DEMO 2000

program in 1999 (The Research Council of Norway 2010). This program aims to

improve the production attractiveness on the NCS by lowering production costs.

This program funds collaborative projects with participants from OFS, operators,

and Norwegian research institutions. By 2005, the government had provided 342

million NOK in funding (about $59 million), while industry provided additional

investment. The total funding was around 1.5 billion NOK, which is about $260

million (Hansen, Karlsson, and Godø 2005). This program is considered

successful, because based on the evaluation survey among 612 project

representatives, 97 (or 16%) project representatives categorized the DEMO 2000

project as having a high or extremely high direct impact on cost reduction and

enhancing recovery (Hansen, Karlsson, and Godø 2005).

As of 2005, it is estimated that DEMO 2000 program has increased participating

firms’ sales between 900 million NOK and 1.3 billion NOK (about between $156

million and $225 million). International sales based on technology developed

through the DEMO 2000 program accumulated to at least 800 million NOK.


Page 139

4) PETROMAKS

The PETROMAKS programme was launched in 2004 by the Norwegian

government. The Research Council of Norway had an annual budget of $50

million for petroleum R&D in 2006. This project assisted in implementation of the

strategies and plans for the government’s strategy initiative titled Oil & Gas in the

21st century (The Research Council of Norway 2014b). According to the

Research Council of Norway, this programme has helped bring the Norwegian

petroleum related research and industry together, while enabling Norwegian

companies to become market leaders in innovative technologies.

This was a ten year programme where the Research Council was awarded NOK 2

billion ($325 million USD) in funding to focus on the following areas of research

(Criscione 2013):

• Environmental technology for the future

• Exploration and reservoir characterization

• Enhanced recovery

• Cost effective drilling and intervention

• Integrated operations and real time reservoir management

• Subsea processing and transportation

• Deep water and subsea production technology

• Gas technology

• Health, Safety and Environment (HSE)

Public funding for this programme has been matched 50/50 with the industry via a

collaborative cost sharing model. The programme eventually attracted more

industry funding than initially anticipated in similar public research programmes

in Norway, which ultimately lowered the threshold of high risk projects which

would have never taken place via co-operation between the academic and private

sectors.

9.3.4 Technology

According to Jarand Rystad, Partner at Rystad Energy, in 1970s, only the


Page 140

American oil companies were present in Norway, and the industry was influenced

by craftsmanship. Craftsmen could smell if the oil was viable, and based on the

smell, they would start conducting calculations. The Norwegian companies turned

this craftsmanship into a scientific methodology because the fields were

significantly larger. In Jarand Rystad’s words “we took what we learned from the

Americans and took it to the next level”.


9.4.1 Oil Field Services

As of 2012, the Norwegian petroleum sector contributed 23% of GDP, 30% to the

state’s revenue, 29% of total investment, and 52% of total exports (Ministry of

Petroleum and Energy 2013). In 2012, oil & gas extraction including services

created approximately 700 billion NOK (about $123 billion) in revenue. This

illustrates that Norway has developed a very strong oil & gas supply and service

industry. In 2012, the market share of Norwegian suppliers in global markets was

close to 80% on drilling equipment, and 50% on seismic and subsea equipment

(Hansen, Karlsson, and Godø 2005). Norwegian companies, such as PGS

Geophysical AS, Aibel AS, FMC Kongsberg Subsea AS, Subsea 7 Norway NUF,

Schlumberger Norge AS and Aker Solutions MMO AS are benchmarks in the

subsea supply and service industry.

After the financial crisis in 2008, a high oil price improved the margins of both

operators, on the demand side, and oilfield service providers on the supply side of

the offshore oil & gas industry (EY 2014). From 2008 to 2012, the oil-related

supply and service industry increased revenue and employment by approximately

20% (EY 2014). In 2012, the oilfield service industry earned 385 billion NOK,

which is equivalent to about $70 billion, in revenue, employed 4% of the

employees, and accounted for 7% of value creation and 39% of exports in

mainland Norway (EY 2014).

According to Jarand Rystad, there is significant vertical integration within the


Page 141

Norwegian oil & gas industry. Companies such as Statoil, Norsk Hydro, and Saga

are all vertically integrated. In addition, it is important to note that there were joint

ventures between the largest players in the industry, (Statoil with FMC, Norsk

Hydro with Aker Solutions, and Saga with GE/Vetco) which led to stronger

competition, enabling Norwegian oil & gas companies to become market leaders.

This enabled Norwegian companies to develop very complex subsea equipment,

such as automated equipment which didn’t require divers. According to Jarand

Rystad, this is why three of the four biggest players in subsea are Norwegian

companies.

As per Jarand Rystad, there was a similar pattern within the Seismic industry. An

oil field was mapped within the U.K. side, while there were no significant

amounts developed on the Norwegian side. Therefore, Norway had to quickly

develop that field. The industry invested a very significant amount in developing

Seismic equipment, and this has enabled Norwegian companies to develop

competitive advantages in Seismic equipment.

9.4.2 International Operations of OFS

The figure below illustrates revenues of Norwegian OFS firms from international

vs. local operations in 2012. The total revenue of Norwegian OFS firms in 2012

was 461 million NOK (which is about $U.S. 74 million), out of which 60%

percent was from local operations, and 40% percent from international operations.

As per the figure, it is clear that Norwegian firms earn a significant portion of

their revenue from international operations. It is also clear that total revenue of

Norwegian OFS firms has increased significantly over the past decade.


Page 142


As per Rystad Energy, the top 20 Norwegian OFS firms earned the majority of the

international revenue, which amounted to 75% of total international revenue. It is

interesting to note that the top 20 companies earned 69 billion NOK (about $U.S.

11 billion) via local sales, which was 68% less than their revenue from

international operations. The remaining OFS companies in Norway had local

revenue of 206 billion NOK (about $U.S. 33 billion) and 17% of local revenue

came from international operations.

As per the figure below, it is clear that Norwegian OFS firms earn the majority of

their revenue in four regions, East Asia, Western Europe (excluding Norway),

South America and North America. The countries generating the most revenues

for Norwegian OFS firms are South Korea, U.K., Brazil and the U.S.

1319 15 19

32 35 3844 MUSD

(275 MNOK)3

67

10

13

2226

30MUSD (186 MNOK)

1995 1998 2001 2004 2007 2010 2011 2012

Revenues of Norwegian OFS Firms

International and Local Operations1995 - 2012 (MUSD)

1 NOK = 0.16 USD

Local International

23 MUSD (143 MNOK)

7 MUSD(42 MNOK)

2012

International Revenue

2012 (MUSD)

Others To 20 OFS fimrs


Page 143


As per a Rystad Energy report, out of the 20 largest companies, 8 are

characterized as rig and ship owners, 1 yard, and the remaining 11 fall under the

equipment and services category. International revenue divided into categories is

shown below, and the figure illustrates that 100 billion NOK (about $U.S. 16

billion) in international sales come from four main segments, rig and drilling,

services, topside and processing equipment, and subsea installation and seismic.

The learning from the following figure is that Norway has benefited from related

and supporting industries to oil & gas, one of these industries is the maritime

industry, and knowledge sharing has helped develop strong rig and ship owners.

2.4

0.6

1.4

2.6

2.7

3.4 MUSD (21 MNOK)

5.3 MUSD (33 MNOK)

5.6 MUSD (35 MNOK)

5.9 MUSD (37 MNOK)

Other 9 Regions

Russia

Australia

Southeast Asia

Western Africa

North America

South America

Western Europe (Excluding Norway)

East Asia

International Revenue by Region

(MUSD)

Other 9 Regions

8%

Russia2%

Australia5%

Southeast Asia8%

Western Africa

9%

North America

11%

South America

18%

Western Europe

(Excluding

Norway)19%

East Asia20%


Page 144


9.4.3 Shipping

Norway has a strong shipping and maritime industry, which is Norway’s second

largest export industry after the energy sector. According to the Norwegian

Maritime department, Norway has been a major player for more than 150 years,

and the Norwegian maritime industry controls one of the world’s largest merchant

fleets (Norway's official websites abroad 2014). The Norwegian maritime industry

is an internationally competitive cluster, including leading shipping companies,

shipbuilding yards, equipment manufacturers, designers, service providers,

universities, research and development centers and regulatory bodies (Norway's

official websites abroad 2014).

According to Jarand Rystad, Managing Partner, Rystad Energy, Norwegian

shipyards are globally competitive, despite the competition from low-cost

shipyards. He said that this is because Norwegian shipyards focus on value-adding

activities, and gained construction contracts based on their technological

competencies. These related industries strongly support the development of the

offshore energy cluster, because the shipping companies participate in all phases

of offshore petroleum activities.

0.2

0.3

0.5

1.4

1.6

1.8

3.0 MUSD (19 MNOK)

3.4 MUSD(21 MNOK)

3.5 MUSD(22 MNOK)

7.0 MUSD(44 MNOK)

7.2 MUSD (45 MNOK)

Downhole drilling equipment and …

Maintenance Services

Engineering Services

Well services

Procurement, construction and …

Operational and professional …

Seismic and G&G

Transport and Logistics

Subsea equipment and installation

Topside and Process Equipment

Rig and drilling services

International Revenue by Segment

(MUSD)

Seismic and G&G10%

Transport and Logistics

11%Subsea

equipment and

installation12%

Topside and Process

Equipment

23%

Rig and drilling services

24%


Page 145


9.5.1 Local Consumption

Due to a small population, the local consumption of crude oil accounts for an

extremely small percentage of total production, as illustrated in the figure below.

Source: Short-Term Energy Outlook, the U.S. Energy Information Administration

9.5.2 Export Markets

In 2013, the major crude oil export markets were: U.K. (42%), Netherlands

(21%), and Germany (10%). It is important to note that Norway is not dependent

on a certain market to purchase its oil, and has access to several export markets as

illustrated in the figure below.


Page 146

Source: The US Energy Information Administration

United

Kingdom

42%

Netherlands

21%

Germany

10%

Sweden

6%

United States

5%

France

5%

Ireland

2%Rest of the

world

9%

2013 Norway Crude Oil Exports by Destination


Page 147

9.6 Diamond Summary


Page 148

10.0 Oil Costs – Canada vs. Norway

10.1 Cost Analysis

Production Costs Fiscal Burden

Operating Costs

o Labour Wages

o General & Administrative

Costs

o Finding & Development

Costs

o Interest

o Transportation Costs

Royalties

Taxes

Source: Team Analysis

10.1.1 Operating cost

In Canada, operating costs for both traditional energy production and oil sands

products are increasing. For traditional energy production, the industry average

operating cost was $7.7 per barrel of oil equivalent (BOE) in 2006, and increased

to $10.2/BOE in 2010; for oil sands production, the industry average operating

cost was $19.6/BOE in 2006, and increased to $25.5/BOE in 2010 (Tertzakian

and Baynton 2011). From 2005 to 2010, the operating costs for both oil sands and

conventional oil & gas increased over 50%.

In Alberta, the development of the energy sector leads to continuous wage

increases. From 2002 to 2010, the weekly wage earning for energy-related

occupations increased at any annual rate of 5.5% (McKibbon, Mortlock, and

Robinson 2011). As discussed in the cluster diamond section, labour supply

shortage, aging workforce, and high mobility within the energy sector all led to

wage increases.


Page 149

In the late 1990s, the general rule of thumb for General & Administrative Costs

(dominated by office salaries, leases and software licenses) in Canada was

$1/BOE. The industry average General & Administrative Costs was $1.7/BOE in

2005, and increased to $2.7/BOE in 2009 (Tertzakian and Baynton 2011). As of

2011, a $2.25/BOE General & Administrative Costs burden is considered

competitive in Canada (Tertzakian and Baynton 2011).

From 1996 to 2007, Finding & Development Costs increased 8% per year on

average in Canada (Tertzakian and Baynton 2011). According to Matthew Foss,

the Finding & Development Costs in Alberta are very competitive relative to the

global average. For instance, the success rate of drilling in Alberta is about 70% to

80% and is much higher than the international average, 10 – 20%. High finding

rate is a result of significant drilling activities in Alberta. According to the

Government of Alberta, since 1990, more than 300,000 wells have been drilled in

Alberta, and therefore geology has been reasonably mapped out.

Due to increasing financial capital supply, especially from Asian investors, the

cost of financing has decreased over time (Tertzakian and Baynton 2011).

However, costs of financing vary largely across operators due to different capital

structures, cash flows, corporate governances, and other company-specific factors.

Source: Turmoil and Renewal: The fiscal pulse of the Canadian upstream oil and

gas industry

Since 2009, the increase of Asian investment in Canadian oil sands has been

significant. From August 2009 to May 2011, $18.5 billion foreign capital, mainly

from China, South Korea, Thailand, and Japan, has been invested to the Canadian


Page 150

energy sector. About 55% of the $18.5 billion foreign investment targets the oil

sands (Tertzakian and Baynton 2011).

10.1.2 Transportation Costs

As stated above, lack of infrastructure to transport the resources produced in

Western Canada is a major challenge to the Canadian energy sector. The

consequence is that resources extracted in Western Canada are sold at a discount

to the U.S. market, while refineries located in Eastern Canada have to rely

primarily on more expensive imported oil.

Pipelines transports about 95% of Canada’s crude oil and natural production

(Canadian Centre for Energy Information 2014b). This is because pipelines are

the least expensive and most efficient way to transport petroleum on land. Pipeline

tolls for heavy oil of the same routes are more expensive than light oil. There are

multiple routes available to transport the petroleum products to the target markets,

and the costs vary according to the routes. According to Matthew Foss, it takes

about $7 per barrel to $8 per barrel to transport heavy oil produced in Alberta to

the Midwest U.S. market, and about $10 per barrel to the U.S. Gulf Coast.

10.1.3 Royalties and Taxes

As discussed in the cluster diamond, the royalties of Canadian energy production

vary across provinces. Compared with conventional oil, oil sands projects are

characterized with higher risk. Therefore, the fiscal regimes for oil sands

production are featured with low tax and royalty rates, when the costs have not

been recovered.

10.1.4 Breakeven Costs

According to Matthew Foss, from Department of Energy, Government of Alberta,

the estimated breakeven WTI price of oil sands is between $65 per barrel to $90

per barrel. The production cost of expansion projects could be as low as $30 per

barrel.


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10.1.5 Increasing Costs

Production costs increased dramatically over the last decade for upstream

operators. The figure below of Husky Energy shows the extent of operating cost

increase. In FY 2013, Husky Energy produced 175.1 mbbls/day conventional oil

and oil sands in Western Canada, and 44.1 mbbls/day light crude oil in the White

Rose and Terra Nova oilfields that are located on the offshore Atlantic Canada.

The unit operating cost of Husky Energy was $6.24/BOE in 2003, and the cost

increased to $16.28/BOE in 2013, a 159% increase over ten years.

Source: Husky Energy Annual Reports 2000 – 2013

Several reasons can be attributed to the increase in costs. Rising oil prices are an

important factor behind the increase in costs. Edmonton light oil is a prime

example, where prices have increased from $40 per barrel to $90 per barrel, a

125% increase.


Page 152

Source: Alberta Oil, Economist Andrew Leach and Kirsten Smith pop the notion

of a bitumen bubble

Based on our interview with Shannon Chmelyk from AER, Alberta's strong

economy and tight labour market has driven wages up. In addition, increasing oil

prices have lead to more focus on output, exploration, and other activities than

cost control. Multiple mega projects being developed concurrently in Alberta have

bid up the price of inputs like skilled labour, steel and copper. Development in

China with their major engineering projects has also been putting high demands

on the pool of inputs over the last decade. In addition, increasing oil prices have

allowed higher cost projects to be developed and continued.

Moreover, the operating costs increase with energy prices, but do not necessarily

decrease if the energy price goes down in the sense that wages are sticky

(Tertzakian and Baynton 2011). For example, in 2009, energy prices dropped due

to the financial crisis, while the unit operating costs did not. The average

Edmonton light oil prices peaked at an average of $100 per barrel in 2008, and

dropped to an average of $60 per barrel in 2009. However, in the post-financial

crisis period, the unit operating costs continued to increase by 2%, which is a

conservative estimate (Tertzakian and Baynton 2011).

10.2 Cost Discussion – Canada vs. Norway

Costs are broken down in two categories – production costs and fiscal burden. As

per Mackenzie’s analysis of resource resource-driven economies (Dobbs et al.


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2013), Canadian energy production costs from 2013 to 2014, relative to Norway

are higher while the fiscal burden is lower. As per an interview with Håkon

Skritting, this can be attributed to both inefficiencies, and more intensive

operating conditions in Canada. The comparative analysis illustrates the

differences in the following figure.

Canada Norway

Production Costs1 52% 29%

Fiscal Burden2 8% 52%

Overall Costs 60% 81%

1Production costs include capital, operational and logistic costs

2 Fiscal Burden include profit sharing, royalty, and corporate taxes

Source: Maximizing the potential of resource-driven economies McKinsey Global

Institute

Forward-looking production costs (capital, operational and logistic costs) as a

percentage of revenue are higher in Canada (52%) than Norway (29%). However,

fiscal burden (profit sharing, royalty, and corporate taxes), is lower in Canada

(8%) than in Norway (52%). This illustrates that, oil production in Canada (60%)

has a cost advantage over oil production in Norway (81%). However, it is

important to take into account that the cost of production might not be as relevant

as ROI, and based on our estimates, we assume that Norway has a higher ROI

because it is able to charge a higher price for its oil.

The cost structure in Canada demonstrates that the operating costs in Canada on

average are significantly higher than that in Norway, while keeping in mind that

GDP per Capita in Norway is almost twice as high. This illustrates that the cost of

production in Canada is significantly higher, and this can be attributed to the fact

that it is more expensive to operate in the oil sands than other locations. However,

this also demonstrates that there is significant room for improvement in terms of

efficiency and technological enhancement.

This also demonstrates that the more expensive cost structure in Canada has led to

the government having lower royalties and taxes. Therefore, enhancements in


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efficiency will directly benefit the Government of Canada, and Provincial

Governments as it will enable them to charge a higher economic rent for their

resource.


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11.0 Comparing the Canadian and Norwegian Oil Clusters

11.1 Cluster Attractiveness

In this section, we compare the NCS Oil Cluster, Canadian Onshore Cluster, and

Canadian Offshore Clusters through the lens of the Emerald Model.

11.1.1 Reserves

Canadian Onshore Cluster: This cluster has the largest reserves out of the three

clusters. Alberta has an estimated 1.49 billion barrels of conventional crude oil

reserves and 169.3 billion barrels oil sands reserves. According to CAPP, in 2012,

Alberta produced 556,000 barrels per day of conventional oil, and 1.74 million

barrels per day from oil sands. As per analysts, the oil sands have reserves for the

next 200 years. Unconventional production is expected to increase by 100%,

while conventional production is expected to stay stable over the next twenty

years.

Canadian Offshore Cluster: There are only four production wells in the offshore

cluster located in Atlantic Canada. According to the National Energy Board,

Initial oil reserves in Newfoundland and Grand Banks totalled 2,152 million

barrels, out of which 1,290 million barrels (or 60% of initial reserves) have been

explored, and 862 million barrels (or 40% of initial reserves) of established

reserves are remaining. In Nova Scotia, cumulative oil production totalled 44

million barrels, and the area offshore Nova Scotia has no significant remaining

established oil reserves. According to CAPP, in 2012, Newfoundland & Labrador

produced 197,000 barrels per day of oil. Nova Scotia has no major crude oil

production. Compared with Alberta, the production in the Atlantic Canada region

is small in scale. This suggests that there is no critical mass. Production is

expected to stay stable over the next twenty years. However, it is important to

note that Statoil has had a major discovery in Atlantic Canada over the past year,

and this is expected to enhance the interest of oil companies in Atlantic Canada. In

addition, BP and Shell have invested $1 billion each in exploration in Nova


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Scotia, and the local industry is expecting a huge find, perhaps equal to Norway’s

total reserves.

Norwegian Oil & Gas Cluster: Crude oil amounted to about 45 billion barrels,

and the majority of the crude oil reserves are located in the North Sea. Norway

has been producing a significant amount of oil over the past few decades, which

has led to 44% of the total reserves on the NCS having been produced. Since

2000, crude oil production has fallen significantly. Crude oil production in 2013

was roughly half of what it was in 2001. Oil production is expected to stay

constant, if not declining, unless there are major finds.

11.1.2 Location

Canadian Onshore Cluster: Over 98% of Canada’s oil reserves are located in

Alberta, which is located in Western Canada. It is important to note that Alberta

is a landlocked province. Therefore, oil needs to be transported to markets via

pipeline or rail. This has limited oil producers in Alberta from diversifying their

markets.

Canadian Offshore Cluster: This cluster is located in Atlantic Canada, in the

city of St John’s in the province of Newfoundland & Labrador. These oil reserves

are linked close to the ports and can be transported.

Norwegian Oil & Gas Cluster: Norway has the ports necessary to transport the

oil to energy hungry markets in Europe.

11.1.3 Infrastructure

Canadian Onshore Cluster: Transportation of oil via rail is more expensive and

Canada does not have the required infrastructure. Transportation via pipeline is

the most viable option. However, there is limited capacity with current pipelines.

These pipelines are not owned by the government, but are owned by private

companies such as Enbridge and TransCanada.


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Canadian Offshore Cluster: Oil is transported via tankers and the infrastructure

is adequate for transportation. However, the oil is between 1500 and 2000 feet

under water in some wells, so it is challenging to drill. There is also a long drop

off and unstable bank which prevents pipelines from being used. Therefore,

floating offshore structures and FPSOs are needed. Oil needs to be loaded into

tankers, but weather conditions do not permit that during certain months, which

ultimately leads to a reduction in production.

Norwegian Oil & Gas Cluster: Offshore oilfields are connected to onshore

processing terminals via pipelines. Oil is mainly transported to international

markets via tankers. The infrastructure is considered adequate. The Oseberg

Transport System and the Troll I and II pipeline systems are the major pipelines

systems, and Statoil operates these major pipeline systems.

11.1.4 Demand

Canadian Onshore Cluster: Most of the oil produced in the onshore cluster is

either consumed locally or transported to the US. The oil produced in the oil sands

is classified as heavy crude and 97% of it is transported to specific refineries that

are capable of processing this oil. These refineries are located in the U.S. Midwest

and the Gulf Coast. However, most of this oil (72%) was transported to the U.S.

Midwest. It is important to note that Canada is largely dependent on the U.S. to

purchase its oil.

Canadian Offshore Cluster: 81% of this oil is transported to the U.S. East Coast,

which makes it the largest market for oil from Atlantic Canada. The remaining oil

is exported to the U.S. Gulf Coast (16%) and the U.K. (3%).

Norwegian Oil & Gas Cluster: Due to a population of approximately 5 million,

local consumption of crude oil accounts for an extremely small percentage of total

production. The major crude oil export markets are the U.K. (42%), Netherlands

(21%), and Germany (10%). It is important to note that Norway is not dependent

on one country to purchase its oil, and this is a significant advantage as it

mitigates risk.


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11.1.5 Competition

Canadian Onshore Cluster: The biggest customer is the U.S. Midwest.

However, Canadian oil competes with the WTI, and the Maya from Mexico. Oil

production has increased significantly within the U.S. It is also important to note

that Canadian oil does not have the pipelines to transport to the Gulf Coast, which

has led to oversupply to the U.S. Midwest. This has led to a differential of 21%

between the WCS and WTI. As per Hathway Management Consulting (2013), 20

operators dominate production, while there are 800 OFS firms in Canada with an

average of 13 staff. This is not divided into onshore or offshore OFS, but we can

assume that most of it is based in onshore as that is where most of the production

takes place. Therefore, we can argue that there is a critical mass in this cluster.

Canadian Offshore Cluster: Current operators in this area are ExxonMobil,

Husky Energy, Suncor, and Encana. Competition on the operators’ side is limited

as production level is low. This has led to the cluster not having developed a

critical mass.

Norwegian O&G Cluster: As of 2008, there were 2,500 firms in the oil & gas

cluster, and this demonstrates that the Norwegian oil & gas cluster has achieved a

critical mass (Sasson and Blomgren 2011). There is a large spread of revenue

earned, and it demonstrates a healthy diversity of large, medium, and small size

firms across the value chain (Sasson and Blomgren 2011). In addition, the large

numbers of firms in each category along the value chain indicates strong local

competition (Sasson and Blomgren 2011). Competition for the purchase of the

final product (oil) is not significant as Norway is located close to energy hungry

markets.

11.1.6 OFS Value Chain

Canadian Onshore Cluster: There are several companies within the Canadian

Onshore Cluster, and most of these companies specialize in hydraulic fracking

and horizontal drilling – the marriage between these two technologies has


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significantly improved recovery rates. It is important to note that there is a

comprehensive value chain in oil field services for onshore activities in Canada.

Canadian Offshore Cluster: There is no comprehensive value chain within this

cluster, especially in terms of capital equipment and subsea technology. There are

a lot of suppliers within this industry who are also present in Stavanger, Norway.

Norwegian Oil & Gas Cluster: The value chain and supplier list is very

comprehensive.

11.1.7 International OFS Firms

Canadian Onshore Cluster: There are several Canadian OFS firms with

international operations. However, the large four firms are not all present in all

regions. In addition, their proportion of international to domestic revenue in 2013

was 15%. It is important to note that 77% of the revenue of Canadian OFS firms

in 2013 came from the North American market, while the European market placed

second with 6% of total revenue. This illustrates that Canadian OFS firms do not

have a strong international presence.

Canadian Offshore Cluster: There is not a large number of globally competitive

firms. This can be attributed to a small number of projects, and the industry in

Atlantic Canada being on and off. This prevents companies from growing.

Norwegian Oil & Gas Cluster: Norwegian firms are market leaders in multiple

segments of the value chain within offshore technology. They also have

significant global presence, which is demonstrated by the fact that over 40% of

the revenue with OFS came from international operations in 2012. In addition,

68% of the revenue of the large four firms came from international operations,

which is a stark difference from the largest Canadian firms.

11.1.8 Supporting Industry


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Canadian Onshore Cluster: Fabrication is a supporting industry and expertise

within fabrication has been beneficial. However, the Canadian fabrication sector

is not considered very innovative as it still uses very old methods, and is not a

global market leader.

Canadian Offshore Cluster: The maritime and shipping industries strongly

support the offshore industry. However, most of the OFS companies are located in

Newfoundland & Labrador, where the shipyards are small, while the large

shipyards are located in Nova Scotia. Due to the Atlantic Accords, Nova Scotia

shipyards have had minimal access to the OFS companies in Newfoundland &

Labrador. The Ocean Technology cluster in Newfoundland & Labrador has

recently gained importance and is in the process of growing. Its growth could be

beneficial for the OFS industry, and collaboration could lead to synergies.

Norwegian Oil & Gas Cluster: Norway has a very strong shipping and maritime

industry and this has been beneficial for the oil & gas industry. There has been

significant collaboration between shipping and maritime, and the oil & gas

industries.

11.2 Education Attractiveness

Canadian Onshore Cluster: In Alberta, the University of Alberta and University

of Calgary offer energy-related programs at bachelor, master, and PhD levels.

Canadian education has a good international reputation. According to Richard

Wayken, Vice Present of Alberta Innovates, Alberta has a rich engineering asset.

Many interviewees also confirm this. However, as discussed in the Canadian

National Diamond section, Canada has a low number of PhD graduates (88 PhD

graduates per 1million population aged 25 to 39, in 2011). This could mean a lack

of interests in performing high intensity R&D.

Canadian Offshore Cluster: University of Dalhousie and Memorial University

offer energy-related programs at the bachelor, master, and PhD level. Similar to

the onshore cluster, a lack of PhD graduates negatively impact the cluster

competitiveness. It is safe to say that all of the three clusters have good general


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and oil-specific education systems to support energy industry development.

However, since the market size is relatively small in Atlantic Canada, we would

argue that this would negatively influence the oil-related education attractiveness

in the offshore cluster.

Norwegian Oil & Gas Cluster: Compated to Canada, Norway has a high number

of PhDs (132 PhD graduates per 1million population aged 25 to 39, in 2011),

which demonstrate a strong willingness of performing high intensity R&D and a

high degree of education attractiveness. However, from 2005 to 2008, the energy-

related education attractiveness has improved at the bachelor and master level,

while worsened at the PhD level (Sasson and Blomgren 2011). It is argued that

declining PhD students might be an early sign of declining advanced R&D-based

value addition in the energy sector (Sasson and Blomgren 2011).

11.3 Talent Attractiveness

11.3.1 Human Capital

Canadian Onshore Cluster: In Alberta, labour shortage is an ongoing issue

without a short-term fix. As we have discussed in the Onshore Diamond section.

Although Canada has various immigration policies, new immigrants tend to stay

in big cities like Toronto, Montreal, and Vancouver. Provinces like Alberta are not

a popular choice. Lack of lifestyle attractiveness also contributes to the fact that

Canada in general does not prefer energy production occupations, such as field

managers, truck drivers, operators, and controllers. Labour shortage also

contributes to significant wage increases in Alberta. Wages in Western Canada are

significantly higher than the rest of Canada because of a shortage of both skilled

and unskilled workers. Lack of qualified workers would be the major challenge

for the cluster to develop further.

Canadian Offshore Cluster: There is a shortage of skilled labour in Atlantic

Canada, while wages in Newfoundland & Labrador are higher than the average

wages in Canada.


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Norwegian Oil & Gas Cluster: The industry has gone through a professional

process over the last few decades, many engineers, and employees with business

education backgrounds work in this industry (Sasson and Blomgren 2011).

Similar to the other two clusters, there is a shortage of both skilled and unskilled

labour within the oil & gas cluster in Norway.

11.4 R&D and Innovation Attractiveness

11.4.1 R&D Requirement

Canadian Onshore Cluster: Companies are not required to invest a percentage

of their revenue or expenditure into R&D

Canadian Offshore Cluster: As per the Atlantic Accord, companies are expected

to invest a percentage of their production revenue, or exploration expenditure in

R&D within the province.

Norwegian Oil & Gas Cluster: There is a goodwill agreement between the state

and the operators about allocating as much R&D as possible in Norway. As of

2011, 31% of Norwegian based oil & gas companies used 4% or more of their

sales on R&D (Sasson and Blomgren 2011).

11.4.2 Innovation

Canadian Onshore Cluster: R&D grants have decreased significantly over the

past year, which has led to a reduction in R&D spending. However, there has been

an increase in patents over the past decade.

Canadian offshore Cluster: Industry investment in the Canadian offshore is very

low. According to CAPP, in 2013, the Atlantic Canada region only received $1.5

billion, or 2.4% of national energy industry capital spending. As production levels


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are low, we would argue that low production levels and small industry capital

spending negatively influence the innovation attractiveness of the Atlantic Canada

region.

Norwegian Oil & Gas Cluster: Norway has strong oil & gas oriented research

institutes. The state, oil companies, educational and research institutions together

drive innovation in Norway, and according to a confidential EY report, they are

also responsible for the biggest amount of R&D investments.

11.4.3 Collaboration

Canadian Onshore Cluster: There is minimal collaboration among operators,

and between operators and OFS providers. However, the largest oil producers

have collaborated to form the Canadian Oil Sands Innovation Alliance (COSIA),

which is a joint initiative to develop environmentally friendly technology. In

addition, there appears to be minimal cooperation between the industry, academia

and government.

Canadian Offshore Cluster: There is no real long term collaboration between

the cluster members. However, there are joint bids. Some examples include GJ

Cahill bidding for EPC services with Wood Group PSN, Keiwit and Kvaerner

performing on the Hebron GBS construction, and Kiewit and Kvaerner/Kentz

bidding on the Hebron module integration. There appears to be greater

collaboration between industry and academia within this cluster. However, there

is minimal collaboration with the government.

Norwegian O&G industry: There is significant collaboration in the Norwegian

industry as stated above within the diamond. The largest companies have

collaborated and have had several joint ventures as specified above. In addition,

there has been significant collaboration between industry, academia and

government. Programs such as DEMO 2000, GCEs/NCEs, and Research Councils

have enabled the industry to become more competitive.


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11.4.4 Sophisticated Customers

Canadian Onshore Cluster: The geological landscape in this cluster is variable.

However, the oil sands makeup a significant part of this cluster, and are

characterized by high production costs as stated above. Therefore, the

development of efficient technology to enhance recovery rates and reduce costs is

essential. In addition, operating conditions in this cluster are complex and require

innovative technology.

Canadian Offshore Cluster: As stated above, this cluster has one of the most

complex and harsh operating conditions in the world. In addition, operating costs

within this cluster are the highest within the offshore oil segment.

Norwegian Offshore Cluster: The operating conditions within this cluster are

very complex, and this has led to the development of innovative technologies

specifically for this cluster.

11.5 Ownership Attractiveness

11.5.1 Fiscal environment

Canadian Onshore Cluster: Canadian oil & gas producers pay tax and royalty to

federal and provincial governments. The federal corporate tax rate is 15%. The

provincial fiscal environment in Alberta is very favourable; the corporate tax rate

in Alberta is 10%, which is the lowest in Canada. In Alberta, the royalty for

conventional oil varies with the price of oil, ranging from 29% ($50 per barrel) to

47% ($95 per barrel) of the gross profit. Royalties for oil sands are 1% when

development costs are not recovered. Once development costs are recovered,

royalties range from 25% to 40% of net profit. Royalties, exploration costs, and

development costs are tax deductible for both conventional and oil sands

production. Royalties for energy production on First Nations reserves are

negotiated on a case-by-case basis. In addition, the 20% federal tax credit on


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Scientific Research and Experimental Development expenditures was eliminated

in 2013 and this is likely to negatively influence innovation.

Canadian Offshore Cluster: The fiscal environment is favourable. The corporate

tax rate in Newfoundland & Labrador is 14%, while the corporate tax rate in Nova

Scotia is 16%. Similar to Alberta, royalties, exploration costs, and development

costs are tax deductible. In Newfoundland & Labrador, royalties on gross revenue

range from 1% to 7.5% as cumulative production increases. Once the project

breaks-even, royalties on net profit range from 20% to 30% and rise as project

profitability rises. In Nova Scotia, royalties on gross revenue range from 2% to

5% before the offshore project breaks-even, and increases to 20% of net profit

after offshore project breaks-even.

Norwegian Oil & Gas Cluster: The tax rate on the net profit is extremely high

(50% on oil tax in addition to 28% corporate tax), and R&D tax credits provide

operators with a strong incentive to innovate.

11.5.2 Licensing

Canadian Onshore Cluster: Licenses are awarded to the highest bidder.

Canadian Offshore Cluster: Offshore Regulatory Boards issue exploration,

discovery and production licenses for offshore energy production. Operators have

to present local benefit plans in order to get exploration and production licenses.

Norwegian Oil & Gas Cluster: Licenses are not awarded to the best bidder, but

to the most suitable company. The company’s record of accomplishments and

technology play a significant role.

11.5.3 Protectionist Policy


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Canadian Onshore Cluster: Foreign companies have to pay higher taxes, while

local content is preferred for projects. In addition, there is a requirement for

foreign companies to have a head office in the province in order to operate oil &

gas properties. There are some trade agreements with other provinces, where

offices in those provinces are recognized by the Government of Alberta. There is

a 25% surtax in terms of income tax for foreign companies.

Canadian Offshore Cluster: Regional content is preferred, which puts Canadian

and international companies at a disadvantage.

Norwegian Oil & Gas Cluster: Local content requirement was as high as 60% in

1980s, but the industry was deregulated in 1994. Currently, there are no

protectionist policies. As per Porter’s Diamond, competition is encouraged and

this has led to the creation of several market leading Norwegian companies.

11.5.4 Capital Markets

Canadian Onshore Cluster: Calgary is the hub of energy finance, and 17 of the

top 20 banks are located in Calgary. The TSX and TSXV are also very strong

sources of capital within energy in Canada. The capital market is considered very

weak for oil & gas technology companies in Canada. The venture capital market

has been referred to as “The Junior Mining Board” by several individuals in the

industry, due to its stronger focus on mining, and not technology.

Canadian Offshore Cluster: Capital markets are located in Calgary and Toronto,

and the offshore cluster can benefit from it. However, the capital market is strong

for mining and software, but not oil & gas technology. Access to capital is a

significant issue for several companies within Canada.

Norwegian Oil & Gas Cluster: Measured by number of firms listed, the Oslo

Børs Stock exchange, along with TSX and NYSE, are among the top three stock

exchanges for OFS firms list their firms. Other than the energy sector, the Oslo

Børs Stock Exchange is a popular place for companies within the shipping and

seafood sectors. More than half of the brokerage firms active on Oslo Børs Stock


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Exchange are international firms. This indicates that firms listed on the exchange

have strong capital access to international capital.

11.6 Environmental Attractiveness


Canadian Onshore Cluster: The industry sexiness is very low for this particular

cluster, as several articles portraying the industry poorly have been written. In

addition, the environmentalists have strongly opposed the development of the oil

sands. In addition, there has been strong opposition due to environmental reasons

to Keystone XL.

Canadian Offshore Cluster: This industry can be considered “sexier” than the

onshore industry due to the lower perceived environmental impact. In addition,

the industry is small and is not expected to grow significantly.

Norwegian Oil & Gas Cluster: Industry sexiness for this cluster is very high. It

can be attributed to how this industry has positively impacted the economy of

Norway, making it one of the world’s strongest economies, with a GDP per

Capita within the top three countries.

11.6.2 Environmental Awareness

Canadian Onshore Cluster: Despite of the economic benefits, the current debate

concerns whether the oil sands development is at the optimal rate that balances

economic and environmental outcomes, and Environmental organizations (i.e.

Greenpeace and Pembina Institute) and local First Nations have been strong forces

against oil sand projects (Best and Hoberg 2008). To ease the burden of

greenhouse emissions, water consumption and tailings pond management related

to the oil sands production, the current solution proposed by the provincial and

municipal governments is to support the development of renewable energy and to

produce and consume fossil fuels in a cleaner way (Government of Alberta


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2014a). These efforts would improve the environmental attractiveness of energy

production.

Canadian Offshore Cluster: The environmental debate seems less heated in

Atlantic Canada due to its smaller market size. The government also focuses on

developing renewable energy and cleaner fossil fuels production and consumption

to improve the environmental attractiveness.

Norwegian Oil & Gas Cluster: It is suggested that the Norwegian energy

industry could develop more environmental friendly solutions and introduce more

environmentally friendly standards (Sasson and Blomgren 2011). The rationale is

to create a strong incentive to make sure NCS is at the far front of technology

development. We would argue that strong environmental awareness positively

impacts cluster development.


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11.7 Comparative Analysis Summary

Comparing Three Clusters Based on Emerald Model


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Canadian Onshore

Cluster

Canadian Offshore

Cluster

Norwegian Oil & Gas

Cluster

Cluster

Attractiveness

o Reserves

o Location

o Infrastructure

o Demand

o Competition

o OFS value

chain

o International

OFS firms

o Supporting

industry

+ High Reserves

+ Strong local OFS

industry

+ Critical Mass

- Landlocked province,

lack of market access

- Exported to the U.S,

which has declining

demand

- Limited pipeline and

transportation capacity

+ Access to markets

- Low Reserves

- Weak local OFS

industry

- Lack of Critical Mass

- Protectionism tendency

+ Access to energy

hungry markets in Europe

+ Critical mass

+ Internationally

competitive OFS industry

+ Sufficient infrastructure

- Declining production

Education

Attractiveness

+ Specialized programs

+ Excellent schools

- Low number of PhD

students

Similar to onshore + High number of PhD

students

- Declining number of

PhD applications

Talent

Attractiveness

- Short of both skilled and

unskilled workers

- Lack of lifestyle

attractiveness

Similar to onshore - Short of both skilled and

unskilled workers

R&D and

Innovation

Attractiveness

o R&D

requirement

o Innovation

o Collaboration

o Sophisticated

customers

+ R&D requirement

- Weak industry,

government and academia

collaboration

Similar to onshore + R&D requirement

+ Strong public and

private collaboration

Ownership

Attractiveness

o Fiscal

environment

o Licensing

o Protectionist

policy

o Capital

markets

+ Favourable fiscal

environment

- Local content

requirement

- Week local and

domestic venture capital

- Local content

requirement

- Week local and

domestic venture capital

- Absence of local stock

exchange

- High royalty rate

+ Generous credits for

R&D

+ Venture capital for OFS

technology start-ups

+ Strong government

support in OFS

technology

commercialization

Environmental

Attractiveness

o Industry

Sexiness

o Environmental

awareness

- Negative public

impression

+/- Less discussed due to

small market size

+ Good reputation locally


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12.0 Recommendations to Upgrade the Canadian Oil Clusters

12.1 Cluster Attractiveness

1) Infrastructure improvements across the cluster

In order to enhance the cluster attractiveness, it is recommended that both

provincial and federal governments partake in infrastructure improvements in the

cities and towns where oil is located. Both Calgary and St John’s have an

insufficient frequency of flights, and a lack of destinations for flights. Fort

McMurray, the location of an extremely large oil field has only two international

destinations; Las Vegas and Cancun, and it is safe to assume that travellers to

these destinations are very likely to go for leisure purposes. In addition, it is

important to note that the highway connecting Fort McMurray to other parts of

Alberta is a single lane highway. This can make transportation of inputs and

outputs, and individuals more time consuming and costly.

2) Create venture fund to fund start-ups filling the gaps within the value chain

The value chain in Atlantic Canada is not as comprehensive as the value chain for

the onshore industry in Western Canada, or within the offshore industry in

Norway. In order to enhance the cluster attractiveness of this industry, there needs

to be a comprehensive value chain, and a venture fund will enable companies to

fill in the gaps within the value chain.

3) Interest free loans for fabrication industry in Western Canada, in order to

upgrade their equipment

As per interviews conducted, the fabrication industry in Western Canada is using

older methods and equipment. Interest free loans in order to upgrade their

equipment will entice these suppliers to do so, while improving the quality of the

final product, which will positively impact the oil & gas industry

12.2 Ownership Attractiveness

1) Enhance access to capital via more government funding, and establish a

venture capital fund for Canadian oil & gas companies


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As stated earlier, the lack of access to capital is significantly affecting companies

from growing. As per interviews conducted, the impact of the lack of capital is:

acquisition of Canadian firms by foreign firms, lack of ability to grow and be

internationally competitive, and becoming uncompetitive as compared to rivals.

According to Arnt Inge Enoksen, of EY, the venture capital industry in Norway

has significantly assisted the Norwegian oil & gas industry in being competitive

as access to capital has been very simple. In addition, the government has also

been very generous with providing firms with capital. Therefore, it is

recommended that the Canadian government follow a similar approach, while also

establishing a venture capital fund for oil & gas firms.

2) Abolish investment restrictions within the Investment Canada Act

Canada does not have adequate capital markets. Its venture capital market is

mainly focused on software and mining. Therefore, foreign investment is needed

in order to develop the industry cluster.

3) Reduce transaction costs by adopting a simple regulatory regime and one

provincial body to regulate the industry

It is unlikely that the provinces will agree to one Federal institution to oversee the

entire oil & gas industry in Canada. Therefore, it is recommended that there be

one regulatory body instead of multiple institutions that operators typically have

to go through. In addition, Atlantic Canada has a more ad-hoc system, which can

be unattractive for operators as they have to negotiate with the provincial

institution on a project by project basis. This leads to uncertainty and an increase

in transaction costs. A consistent regulatory regime and one provincial body will

reduce transaction costs and provide greater transparency.

4) Maintain attractive fiscal environment

Alberta has a very attractive fiscal environment in terms of corporate taxes, while

the fiscal regime in the other provinces also appears to be more attractive, as

compared to Norway. However, it is important for the government to maintain its

fiscal regime if it is to retain foreign headquartered companies within Canada,

especially Calgary. Headquarters of companies within the country are very

beneficial, as it can leads to significant knowledge accumulation for the workforce

since most knowledge intensive activities take place at the headquarters.


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5) Access to Asian markets for oil from Western Canada

Providing access to Asian markets from Western Canada is an integral driver in

enhancing investment into the oil sands. Access to market issues have led to the

WCS trading at a 21% differential to the WTI. This ultimately impacts firm

profitability, which ultimately reduces the royalties received by the government.

In addition, US production is increasing, while US demand is decreasing, and it is

the only consumer of the WTI. Therefore, it is essential that Canada diversify its

markets for risk management purposes.

6) Project containing geoscience data of exploration activities

The Nova Scotia government has partaken in a project titled Play Fairway. This

project has mapped out geological risk and potential hydrocarbon reserves. The

province of Alberta has its Geology reasonably well mapped out. However, as per

some interviewees, there are still small fields which can be developed by smaller

operators, and in order to determine the feasibility of these fields, more

exploration work needs to be conducted.

7)) Abolish local content requirement

One of the reasons Norway has done very well within the OFS industry, is the

lack of protectionist measures undertaken by the government. This has allowed its

companies to compete for local projects, and considering the strong competitive

environment within the home market, these companies have had to innovate in

order to stay competitive. This has enabled Norwegian companies to establish

competitive advantages both locally and internationally. It is consistent with

Porter’s views on competition as well, and it is recommended that Canada adopt a

similar policy.

7) Enhance provincial collaboration

As per the Atlantic Accord, local content is preferred. This has reduced synergies

across industries, such as maritime and offshore oil & gas. In addition, the local

content requirement in regards to preferred tax rates for organizations with offices

in the province is another requirement which forces companies to choose within

provinces, or not conduct business within a province. Therefore, it is

recommended that the provinces collaborate to create a strong national industry,

as opposed to a strong provincial industry.


Page 174

8) Regulatory federal board for oil & gas activities

As per interviews, many companies struggle with going through multiple

organizations for approval, especially in Alberta. In addition, they have to go

through significant bureaucratic red tape if they are to expand their operations to

another province. Therefore, it is recommended that one federal organization,

essentially a one stop shop be set up to ensure timely response to companies.

12.3 Talent Attractiveness

1) Ensure individuals stay employed within the oil & gas industry by providing

suitable living conditions in oil & gas towns and cities

As per our interviews, it was determined that many individuals are not interested

in living in Fort McMurray because of its lack of infrastructure. This has led to

individuals adopting a fly-in and fly-out life style, which has ultimately made a

career within the oil & gas industry unattractive. Other areas with oil & gas have

had similar problems. Therefore, it is recommended that the government improve

infrastructure within such areas.

2) Invest in developing and marketing an immigration programme tailored to the

Canadian oil & gas industry

Most immigrants in Canada in absolute terms move to the provinces of Ontario

and Quebec. This has led to a high unemployment rate in those provinces. As

most of the population lives in those provinces, which is also where the national

capital is located, there is significant pressure upon the government to adopt a

strict immigration policy. However, the provinces of Alberta and Newfoundland

have a shortage of labour, and a significantly higher GDP per Capita. Many oil &

gas companies have stated that they have had to turn down projects, or not had the

ability to grow due to a lack of labour. Therefore, an immigration programme

tailored to the oil & gas industry for both skilled and unskilled labour would be

beneficial

3) Government & industry collaboration to recruit from Central Canada

Recruiting from parts of Canada that have higher unemployment rates will be

beneficial for both the industry and the government. Therefore, it is recommended


Page 175

that the government create funding programs for the oil & gas industry to recruit

from Central Canada, or provide relocation assistance for individuals from Central

Canada who are interested in moving to Alberta, or Newfoundland.

4) Organize a federal and provincial level public relations campaign to enhance

industry sexiness

Industry sexiness within the Canadian oil & gas industry is very low as stated

above. It is particularly low in Western Canada as compared to Eastern Canada

due to the perceived environmental impact of the oil sands. This has led to

significant leakage of talent from the industry into other industries. Therefore, it is

recommended that both federal and provincial governments coordinate a

campaign to boost the image of the industry not just provincially or nationally but

also globally. This will enable Canada to attract the best global talent within the

oil & gas industry.

12.4 Educational Attractiveness

1) Increased government and industry funding for students within the sciences

and engineering

Engineering education in Canada is very expensive. Therefore, more funding for

such education will reduce the cost and make it more accessible for students. In

addition, scholarships and loans are more likely to make these fields of interest for

students. A greater number of students within these fields will mean a larger

number of students

2) Attract international students within the sciences and engineering

Foreign students within post-secondary institutions in Canada are highly likely to

stay after graduation, especially within the province of their education. Therefore,

collaboration with the Ministry of Education, Provincial governments, and

industry to provide scholarships to foreign students with the highest grades will

make them consider studying in the provinces of Alberta, Saskatchewan, and

Newfoundland. This may provide the industry with a chance to retain these

students after they graduate.


Page 176

3) Develop specific programs in collaboration with industry

There are programs specific to the petroleum industry, including an MBA in

Energy Finance at the University of Calgary – such a programme is offered by

less than five schools globally. However, specific programmes at universities

should collaborate with industry, as such tailored programmes will ensure

individuals entering the industry have the required knowledge.

4) Provide universities with a focus on petroleum, and petroleum engineering

programmes with added funding

A high ranking university is likely to attract high calibre students to study at the

institution and this will benefit the knowledge dynamics within that region.

Providing greater resources for universities with a focus on petroleum will

enhance their ability to attract faculty of the highest calibre, and invest greater

amounts in marketing and research.

5) Enhance government funding at the University of Calgary & Memorial

University

These two universities have the highest number of programs tailored to the oil &

gas industry. Memorial University is based in Atlantic Canada and has a strong

focus within the offshore aspect of the industry, while the University of Calgary

has a strong focus on the onshore industry. As per the authors of the Emerald

Model, Torger Reve and Amir Sasson, universities can be the foundation of

educational attractiveness, and examples of this are the universities in clusters in

San Francisco and Boston. Therefore, enhancing the ranking and quality of

universities within this cluster is likely to enhance total educational attractiveness.

12.5 Environmental Attractiveness

1) Strengthen environmental regulations

According to several interviewees, Canada has very strong environmental and

safety regulations. In addition there have been significant developments within

technology such as the creation of Steam Affected Gravity Drainage (SAGD).

Furthermore, the largest operators within the oil sands are collaborating under the

Canadian Oil Sands Innovation Alliance (COSIA) in order to develop


Page 177

environmentally friendly technology.

Strengthening environmental regulations will benefit the cluster in becoming more

environmentally competitive, which will enable the firms to have a competitive

advantage within this niche globally. Although this report has not focused on

exploration and production in Arctic Canada, it is important to note that

production within the arctic is expected to be economically viable within the next

decade. It is also important to note that significant concerns about exploration and

production in the arctic are safety and environmental sustainability. Therefore,

stronger regulations could lead to the Canadian offshore cluster being a market

leader within safety and environmental sustainability.

12.6 R&D & Innovation Attractiveness

1) Establish a cluster organization

Norway has assigned multiple industries within the country National Centers of

Expertise (NCE) and Global Centers of Expertise (GCE) status. This has led to

not only funding for these industries, but also an organized initiative to assist

these industries in moving forward via an association headed by a prominent

executive known within the industry. It is recommended that the both the offshore

and onshore clusters within Canada are awarded a similar status by the federal

government. This will not only lead to greater collaboration between members,

but also collaboration between organizations across provinces.

2) Create an organization similar to Alberta Innovates in Atlantic Canada

Alberta innovates is an organization which allows industry, government and

academia to share resources, expertise and ideas across sectors. In addition, it

allows university researchers to work together, unrestricted by academic barriers.

An organization similar to this is needed in Canada, as it would enhance

collaboration between the maritime and oil & gas industry, which is currently

lacking.

3) Establish organization for commercialization of technology

According to Svein Inge Eida, Research Lead at Statoil, Canada has a very well


Page 178

developed system of financing through the public system. It has rigorous

processes of attracting and defining projects. In addition, it has clear criteria,

which requires significant bureaucratic effort for the application to be processed,

which leads this process to being very rigid and lacking in agility. In addition, this

process is extremely academic in Canada, while it is more practical in Norway.

This has led to the Canadians struggling with commercialization of technology.

Therefore, an organization which could assist start-ups in commercializing

technology while acting as a liaison with academic institutions in order to ensure

that projects remain practical and the funding process quick and agile, would be

beneficial for the industry as it would enable greater technology development.

4) Fund for PHD students within oil & gas

As stated above, Canada has a very low number of PhD students, and a higher

number of PHD students leads to more research. Greater education is expected to

enhance the quality of research. Therefore, it is recommended that the government

fund programs for students interested in pursuing a PhD and conducting research

with oil & gas.

5) Award tax credits and grants for R&D

As per several interviews, the provinces have a very complex system of awarding

grants for research. In addition, this system is not very transparent. It is also

important to note that the tax incentives for R&D have decreased significantly.

Norway on the other hand has significant tax credits and it is recommended that

both provincial and federal government award more tax credits and grants in order

to enhance innovation

6) R&D collaboration between public institutions and industry

Production costs in Canada are significantly higher than in Norway, especially

when taking into account the GDP per capita differences between both countries,

which mean that labour is more expensive in Norway. Therefore, the Canadian or

provincial governments should fund collaborative projects between operators,

OFS providers, universities and R&D institutions in order to lower production

costs.


Page 179

Conclusion

This study has demonstrated that Canada needs to enhance provincial

coordination, increase collaboration between players, and increase the focus on

R&D and innovation. In addition, providing access to markets for oil in Western

Canada is essential, as oil production in the U.S. is expected to increase, while

demand is expected to decrease.

Canada will become a larger player within oil in the next decade as per production

estimates. In addition, the offshore industry is expected to grow rapidly

considering the significant exploration amounts committed to offshore Nova

Scotia. Last but not least, several industry experts have stated that drilling in the

arctic will be feasible in the next decade. Keeping these factors in mind, the

government needs to enhance its focus on developing the oil field service industry

in Atlantic Canada, as this would significantly enhance the prosperity of this

region.

In conclusion, it is imperative that the stakeholders within the industry prevent

protectionist policies, and learn from the Norwegian industry, which has

succeeded due to the intense local rivalry and collaboration between the largest

players. The future is bright for the industry, but if Canada wants to move beyond

merely taking advantage of its natural resources and focus on value creation, then

it needs to ensure the industry environment is conducive for firms to become

globally competitive


Page 180

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