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IJ Interview: Dave Collyer, President, CAPP, Canada

Gaurav Sharma 20/07/2011 Canada‟s western provinces, Northwest Territories and Atlantic Canada have always been developed markets for energy projects, but something of a sea change took place in 2006 when oil sands production first surpassed conventional production. IJ‟s research on the ground suggests a mature Canadian energy project finance market is reshaping itself following the global financial crisis. The case could be a convincing one for a multitude of reasons and regions from the unconventional bituminous reserves to Bakken oil formation in Saskatchewan and the Cardium oil formation in Alberta. That is not forgetting that Atlantic Canada still provides 10 per cent of Canadian production. Earlier this year, IJ features writer Gaurav Sharma visited Calgary – Canada‟s oil capital – to gather the thoughts of Dave Collyer, President of the Canadian Association of Petroleum Producers (CAPP).

D.R. (Dave) Collyer was appointed President of CAPP in September 2008, after serving as President and Country Chair for Shell in Canada. In his current position, he is responsible for

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leading CAPP’s activities in education, communications and policy / regulatory advocacy on behalf of its members representing over 90 per cent of the upstream petroleum production in Canada. During his 30 year tenure with Shell, Collyer held a broad range of technical, business and senior leadership roles. These included positions in conventional oil and gas, oil sands, marketing and transportation and downstream commercial marketing, as well as crossbusiness roles such as strategy and planning, communications and sustainable development. He also participated in a two year Executive Exchange assignment with the federal government in Ottawa. He holds a petroleum engineering degree and an MBA from the University of Alberta, and belongs to a range of professional affiliations including the Association of Professional Engineers, Geologists, and Geophysicists of Alberta (APEGGA) as well as the Society of Petroleum Engineers (SPE). Collyer has also been a member of a number of not-for-profit boards.

Infrastructure Journal: Everyone in US political circles from President Obama downward understands that they need access to Canadian crude. USA is the key market for Canadian oil exports. Given this sentiment, are the delays surrounding the approval of the Keystone pipeline extension project (Keystone XL) a doubly frustrating experience? Furthermore, how would you summarise impact of the delay on the drive to increase Canadian access to the American market? Dave Collyer: As Canadian crude production grows we would like access to the wider crude oil markets. Historically those markets have almost entirely been in the US and we are optimistic that these would continue to grow. Market access is critically important. We have always viewed Keystone XL as an opportunity to link up Western Canada to US Gulf coast market, to replace imports by the US from foreign sources most notably Venezuela and Mexico – where production is declining according to available data. There are noticeable political impediments in case of the former. We do not see this pipeline extension as incremental supply into that orbit, rather a replacement of existing production through a relatively straightforward pipeline project, akin to many other pipeline projects and extensions that have been built into the US. So why has this become more complicated? The essence of that is Keystone XL project and others of its kind have been caught up in the broader dialogue about the oil sands. Hence, consideration of the project in the US has increasingly gone back upstream into what product is being shifted into the pipeline as opposed to whether the pipeline construction / extension plans themselves meet the environmental criteria. We are absolutely confident that Keystone XL project can be competitive in its target market and that the crude that is being produced and

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sold into that orbit has a carbon content which is not a whole lot different than the crude that is already being imported [which it seeks to replace]. However, the opponents of oil sands have gotten the narrative engrained in a wider debate on the environment, energy mix and so on. Going forward they view Keystone XL and other incremental pipeline projects in the US as perpetuating reliance on crude oil and are opposing the pipeline on that basis. Do we think that’s right? No. Do we think there is legitimacy in the argument that is being made against Keystone? No [for the most part]. However, the reality is that there has to be due consideration in the US. I would assume the US State Department is in a position where it has no alternative but to employ an abundance of caution to ensure that all due processes are met. When I heard news about their supplemental environmental assessment, I was (and am) pretty confident the issues and concerns they raised would be satisfactorily addressed, the pipeline would get the approval that it needs at the end of the day and oil sands would be a key source of crude oil for the US. There is a popular belief the process has become more difficult – but I think it should be! What frustrates Canadians and Americans alike is the length of time that it has taken. However, at the end of the day when we get that approval and it is a robust one which withstands a strict level of scrutiny then it’s a good thing. IJ: If there are barriers to pipeline projects taking off between US and Canada, are “fears” that Canadians may look to export crude elsewhere legitimate? DC: Unquestionably there is increasing interest in the oil sands from overseas and market diversification to Asia is neither lost on Canadians nor is it a taboo subject for us. As such market sentiment that we may look “elsewhere” exists for a number of reasons. First of all, a producer of any product is well served by market diversification – that is simple enough. Secondly, I think it makes sense for the US to rely on Canadian crude oil – particularly when you look at what’s going on in the Middle East and elsewhere. But we continue to see what we view as potential impediments to increasing access to the US markets whether we are taking about the Keystone extension or otherwise about oil sands in general. So it is both physical infrastructure and policy acting as potential impediments. Thirdly, and this is no exaggeration, that there is increasing interest from Chinese, Korean and other Asian players when it comes to buying in to both crude oil reserves and natural gas in Western Canada. Interest alone does not create a market – but backed up by infrastructure (at our end and theirs), it strengthens the relationship between markets we have traditionally not looked at. All of this shifts emphasis on West coast exports. Is it going to be straightforward to get a pipeline to the West coast – we’ll all acknowledge that it’s not. For instance, Enbridge has its challenges with the Gateway pipeline. There is an interest in having an alternative market. There are drivers in trying to pursue that and I would say collectively this raises the “fear”

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you mention and with some factual basis. However, the US has been a great market and should continue to be a great market while some caution is warranted. IJ: How open is the Canadian oil and gas project market to foreign direct investment? DC: Canada has well established foreign investment criteria and all foreign partnerships, stakes and acquisitions in the energy business are evaluated on the basis of a benefits test that has to be passed. Our view here is that it is a global industry – investment capital is mobile and we need investment in the energy business in Western Canada. Certainly the Provincial government and indeed the Federal government see foreign investment in a favourable light if the established criteria are met. Capital infusion is welcome; in some cases it may even assist in getting challenging projects off the ground. IJ: Earlier in February, Ed Stelmach, the outgoing premier of Alberta took a huge plunge into the upgrading world by announcing that the province would supply bitumen it collects from Alberta‟s oil producers as a royalty to support the construction of a CAD$5 billion (US$5.06 billion) bitumen refinery by partners North West Upgrading Inc and Canadian Natural Resources Ltd. The move was described as a BRIK – Bitumen Royalty in Kind. What do you make of the move? Will it have a tangible effect on investor sentiment? DC: There is already a fair bit of upgrading taking place in Alberta – about 60 per cent of the bitumen that’s produced in Alberta is upgraded within the province. The rest is exported as bitumen to the US. The NorthWest Upgrader is a bit unique in that it is somewhat of a standalone project and the Alberta government has committed itself to supporting it. So there is supply guarantee to that project. They essentially proposed to upgrade the project for a fee for services basis – which makes it unique in the respect that it is backed by the provincial government by taking the Bitumen molecules/barrels and committing themselves to this project. Whether we will see more of this, it is difficult to say at this point in time. The provincial administration also sees it as an encouragement to economic activity and job creation. It is clearly a step in the direction that Alberta has not taken before with respect to oil sands. So the project structure is quite unique and there are arguments in its favour. We see bulk of the investment being privately financed and supported by equity or debt markets and that is going to continue. This is a specific measure that the province adopted to address this particular challenge. I would not hold it to be indicative of a broad policy change certainly in terms of intervention by the province and what otherwise would be a market decision. IJ: Majority of the oil sands projects have been equity financed and the project finance market has perhaps not been tapped to the extent it could have been. The

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oil sands projects are becoming increasingly mainstream. In terms of the next half decade do you feel project sponsors will tap the PF debt markets as opposed to solely equity financing their efforts? DC: Indeed most of the financing to date has been equity financed. I think as we get a more diverse mix of companies involved in oil sands and that is increasingly happening – this will change. Around 80 per cent of the resource is amenable to in-situ and 20 per cent to mining and so at this point majority of the production is from mining projects but increasingly over time we will see that the produce would come via in-situ projects which are by definition smaller projects than some of the mining projects. In-situ investment as opposed to mining is of a smaller scale in relative terms, its compartmentalised and contains a series of project facets which link-up and follow on from one another. We see it as a type of investment which lends itself to smaller and intermediate companies – who by definition have a smaller capital structure or different capital structure to the large firms. So this mix is crucial to how projects will be financed over time. As the oil sands business becomes more mainstream and more accepted in terms of growth opportunities and the risk profile - then we will see a mix of financing going forward. IJ: The province had a tough 2007-08 with there being issues related to the taxation and royalty regime Alberta. This did stunt investment, but the provincial government then reacted to bring about clarity and address the concerns. As a result, has the investment climate in Alberta improved over the last three years. What is your assessment? DC: There is currently more clarity about the investment climate in Alberta than four years ago. Between fiscal year 2007-08 and as we speak now, Alberta has gone through some pretty significant royalty structure changes. Some components of the previous regime of royalties were controversial and may be likened to an increase in the royalty structure. There was a fair bit of consternation within the industry and in the end more importantly among investors when they were introduced to the market conditions. People forget that it’s not the companies who make the investment decisions – it’s the people behind the companies who make the investment decisions. The investment community was shaken by the rather abrupt changes to the royalty system in Alberta at the time. Subsequently, there was a significant dip in activity over the first quarter of 2010 – a very challenging time for the business [Not solely due to the royalty changes, but part of the overall economic mix]. So on the basis of the feedback, we and other stakeholders worked closely with the Provincial government to pinpoint towards the drop in activity and migration of activity to other jurisdictions – Saskatchewan and British Columbia most notably. It was a strong message that Alberta had taken measures that had significantly reduced its competitiveness and

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ultimately the royalty structure was changed back to something like it was before the changes were instituted. What we have seen since then is a fairly dramatic turnaround in drilling activity and a very significant amount of land sale activity which is always a leading indicator about where the industry is going. So I think we are in a much better place now than we were in 2007-08 in terms of the investment climate. I would say the consternation that both the industry and investment community felt at the time is yet to work its way out of the system – there is a hangover – but positive steps by the government on the fiscal and regulatory side to address competitiveness issues over the last couple of years have ensured that we are in a far better place now than we were 2-3 years ago. There is now the matter of convincing some in the industry and investment community that we are in a much more stable place. They can count on the infrastructure that is now in place and will be so for the foreseeable future. These things, especially taxation matters are never static, but of late Alberta has signalled its competitive intent and with some purpose. Our feedback is that investors and financiers are taking that on-board. IJ: What was the impact on investment during and after the financial crisis for both conventional and unconventional oil projects? DC: On the conventional side of the crude business, where there is more diversity in the nature of the participating companies, the fiscal situation, drop in oil prices and crude consumption patterns – all came together to create the perfect storm. This contributed to the decline in activity either side of the global credit crisis. The other side of it is the oil sands business where I would say that these are large cap projects and people do not make investments based on the immediate fiscal environment. The fiscal shock, which created uncertainty in markets, made people more reticent when it came to making investments. This combined with the impact that it had on the costs of inputs, services and supplies to oil sands projects gave a number of companies a cause to pause in their investment plans. However, the economic downturn both globally and locally caused input costs to go down by 20 to 25 per cent. Due to the economics, long term forecasts remained the same – but still companies paused to get a sense of the risk, macro environment and impact of the crisis over the medium term and felt that in a year or two they would be in a better position to move forward with the project. That is very much what we have seen – so projects on hold are now back on in terms of finance procurement, development or construction and the pressure we are now seeing is that when activity ramps up – some of the cost pressure is coming back into the system. Time will tell whether this pause in activity translated into a cost advantage. Both conventional energy and oil sands projects felt the impact.

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IJ: Finally, will a more stringent diligence process Post-Macondo inflate the costs of developing unconventional and offshore energy resources whether we are talking about the initial capital spent by the project sponsor or a longer „diligence timeload‟ as some in the legal community refer to it as? DC: There is no question that if you look at the issue in a broader context, the offshore industry in Canada has a very good safety and environmental record. This does not preclude the impact of any one incident, however unusual. The fallout as we have seen from Macondo can be pretty significant. So there is no question that it has caused all offshore operators, regardless of their scale of operations, to go back and examine their standards and accident preventions systems – most of which I would imagine would be pretty robust. Everyone learns from incidents like these – be they directly involved or not. This applies not only to companies but to regulators as well. Post-Macondo there was a pretty solid reexamination of offshore regulatory standards in Canada. I would say that in general our regulatory standard in Canada had more separation of responsibilities delegated to different monitors and is more robust than what we saw in the US Gulf Coast prior to the accident. This view is supported by a number of inquiries which have taken place in Canada since then. I am firmly of the view that more regulation is not necessarily better regulation – so you would have to look at risk assessment studies and regulations appropriate to the activity in question. Having said that, there is no question that we will get more regulatory oversight on offshore wells, on what are deemed to be higher risk activities in any jurisdiction and to be on honest that is also reflected in public opinion whether its offshore, shale gas or oil sands. When we look at the survey data, vast majority of Canadians want responsible development of oil and gas – so they are not opposed to oil and gas development. They acknowledge the economic benefits and are fairly pragmatic about what can be done by the industry on the environmental front and green commitments made by the industry players. But we also have the more extreme factions who are opposed to any form of hydrocarbon development. They are effective, often well funded and they take it upon themselves to oppose most types of oil and gas activities these days. The increased regulatory and public scrutiny post-Macondo has created an environment where there is more latitude for opponents of hydrocarbon development to intervene in regulatory processes. Delays translate into costs – this is a tension the industry, project sponsors and financiers have to collectively manage.

To read IJ’s comprehensive report on the Canadian Oil & Gas market and the outlook for 2011 please click here. To read about the delays associated with Keystone XL project please click here This interview was first published by Infrastructure Journal on July 20th, 2011. An online copy may be seen here (Subscription protected pay-wall link).

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