Conoco’s sale of oil sands, natural gas assets to Cenovus motivated by business concerns, not policy

A few weeks ago I wrote a column about how the purchase of $32 billion in oil sands assets by Cenovus and CNRL was a “great news” story for the Alberta energy sector, a real coming of age for homegrown companies. Another story late this week sheds more light on why ConocoPhillips, one of the sellers to Cenovus, reduced its Alberta presence – and it has nothing to do with provincial policies.

To some extent, I feel like I’m beating this poor story to death.

But opposition energy critics Drew Barnes (Wildrose) and Rick Fraser (PCs) have flogged the line – repeated ad nauseam by Postmedia and Wildrose media lapdogs (e.g. BOE Report, JWN Energy, Energy Now) – that the sales were an example of “capital flight” caused by the Rachel Notley government, until their political spin became an accepted truth in Alberta.

Here’s what Conoco is really up.

The American super-major announced Thursday it was selling oil and gas assets in the San Juan Basin of New Mexico for $3 billion.

“This transaction significantly accelerates value from our San Juan Basin assets. Including our recently announced Canadian asset sales, we have line of sight to more than $16 billion of total considerations in 2017,” said Conoco CEO Ryan Lance.

“These transactions will materially reduce our exposure to North American gas and achieve an immediate step change improvement in our balance sheet and cash margins, while accelerating our return of cash to shareholders.

Ed Hirs is an energy economist from the University of Houston and a regular source for North American Energy News stories. He said Conoco is under fire from Wall St. and has been for some time.

“The company has faced some criticism from the financial community over its costly move into the Niobrara formation (bombing range acquisition) and large debt load,” Hirs said in an email.

“Conoco abandoned its plans to move fully into its newly constructed campus in Houston because it is also not cost-effective with its smaller workforce.”

Hir says that Conoco is realigning its portfolio, continuing a process it began some time ago with the spinoff of Phillips66.

“Conoco has exited its offshore developments already. The announced sale of the Canadian properties is not a complete exit from Canada but rather just a business as usual rationalization of capital within the corporation,” he said.

Lance’s comments about exiting North American gas production were also instructive. Maria Sanchez is the energy analysis manager for Drillinginfo, based in Denver. She expects that Canadian exports to the US will drop from the existing 4 billion cubic feet (Bcf) per day to 1.5 Bcf within the next five years.

“Because of existing long-term contracts and because Canada keeps pricing gas lower to compete with US gas, we’re not expecting the displacement to be 100 per cent,” Sanchez said in an interview.

But she and her team of analysts do expect Canada’s share of the American natural gas market, currently around 11 per cent, to decline by half to three-quarters. Companies in the prolific Marcellus and Utica shale basins produce gas more cheaply than their Canadian competitors and they’re closer to domestic markets, meaning less transportation costs.

The Canadian gas market has its own challenges.

Oil sands producers are preparing to cut their consumption of the natural gas used to create steam for in-situ and mining operations.

And the long hoped for LNG expansion in British Columbia is likely delayed because of rapid growth in capacity in the US, Australia, Africa, and the Middle East, according to University of Calgary economist Jennifer Winter.

“Right now it doesn’t look like there’ll be a need for new investment for five to 10 years, but eventually we’re going to get to a situation where current suppliers for whatever reason – perhaps they run out of natural gas reserves or they decide to restrict natural gas for domestic use or demand increases – then we need new suppliers,” she said in an interview.

Only the most efficient and low-cost Canadian gas producers – e.g. Calgary-based Seven Generations, you can read my Canadian Business story here – are likely to do well in the short-term.

No wonder a super-major like Conoco, with its relatively high cost structure, wants out of Alberta oil sands and natural gas production. The challenging price environment of the next few years favours nimble operators – like Cenovus and Canadian Natural Resources Ltd. – able to minimize costs and maximize returns.

So, the real story behind Conoco’s significant downsizing in Alberta is about business prospects, not public policy.

Will Barnes and Fraser abandon their “capital flight” talking points? Not likely. Politicians rarely let the truth get in the way of a good story.

But that doesn’t mean Albertans have to fall for the Wildrose and PC fake news.