Canada: Refocusing on Asia

Canada: Refocusing on Asia

In line with other producers, Canada - as the world’s fifth

largest oil producer - has been impacted by the decline in oil

prices. However, in Canada’s case the impact has been more

severe compared with lower cost producers, such as those in

MENA, due in part to the higher costs of the unconventional

drilling techniques used to tap the Canadian Oil Sands. The

average cost of Canadian oil production is USD41 per barrel,

above the current global oil price.

According to the National Energy Board of Canada in 2013,

71% of Canadian Crude production was exported to the US

and only 2% to overseas markets. With a flattening US import

demand due to increased local supply of oil coupled with

constraints on pipeline capacity, Canada has been looking for

new domestic as well as international markets for its oil.

Response

At a national level, the response has been to look East, with

last October’s trade missions to China being a case in point. At

a corporate level, the focus has been on cost cutting and the

deferral of capital projects. Inevitably, this has had implications

for Canadian corporate treasuries, who are being expected to

achieve more with less. An important part of achieving this is

for treasuries to gain a clear understanding of the current state

of the business. Armed with this understanding, it becomes

possible to identify areas that are time- and capital-intensive

and to remedy this situation through process and technology

efficiencies. As a result, more advanced treasuries are

reviewing and, where possible streamlining existing structures

to improve their agility in support of corporate operations in a

demanding environment.

If successful, Canada’s drive to develop Asian oil trading

relationships will also have an impact on Canadian corporate

treasuries’ banking requirements. Many Canadian oil

companies have become used to dealing almost exclusively

with customers in the US. In terms of banking capabilities,

these quasi-domestic relationships are not especially

Lance T. Kawaguchi

Managing Director

Global Sector Head - Resources

and Energy Group Payments and

Cash Management

demanding, but dealing with new Asian customers

will be very different. New international receivables

capabilities and their incorporation into existing treasury

systems will be required, as will the ability to integrate

new Asian revenues into existing liquidity management

processes efficiently. Apart from a banking partner

capable of the purely functional aspects of servicing this

Canada/Asia receivables channel, that partner should

also possess deep Asian expertise it can share.

Customer Diversification

Energy exports to the US currently account for the vast

majority of Canada’s total energy exports, but there is

a clear realisation in Canada - in part driven by current

energy price levels - that partner diversification is

essential. To some extent, this was already underway

before the decline in oil prices, with rapid participation

growth from international and national oil companies.

Other considerations aside, oil sand investment enables

foreign companies to obtain technological expertise

that can be reapplied to other unconventional resources

elsewhere.

Chinese companies have played an important role here,

with China National Petroleum Corporation (CNPC),

PetroChina, Sinopec and China National Offshore Oil

Corporation (CNOOC) all investing heavily in oil sands,

as well as other parts of Canada’s energy sector. This

has been mirrored by Canadian initiatives to grow the

country’s energy business with Asia more generally

and has already borne some fruit. For instance, a

consortium led by Malaysia’s Petronas has made a

USD36 billion investment in Canada’s Pacific Northwest

LNG (in British Columbia).

Nevertheless, although tapping the energy demands of

emerging markets in Asia makes considerable strategic

sense, bringing it to fruition is very much a long term

project. The considerable infrastructure and pipeline

projects necessary to support non-US oil exports

remain uncertain investments in view of current low oil

prices. Having said that, now could be the ideal time for

corporate treasuries to work with their banking partners

to evaluate, formulate, and implement industry best

practices. This will not only position their companies

for the highest probability of success in the current low

price environment, but will also allow them to maximise

the opportunity when the oil price eventually rebounds.

Published: March 2016

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