Another ‘Saudi Arabia” of Oil Next Door

Along the lines of the energy comments I have made recently, I bring you this from the Vancouver Sun:

Oil Sands Being Claimed by Cash-Rich & Resource-Hungry Asia

A Calgary-based economist discusses the implications of foreign investment in Canadian resources. Typically, Canada has been rather open to resource investing from companies overseas. The rejection of the bid for Potash by Australian-UK behemoth BHP was an exception. The amount of oil and other resources in Canada is huge and coupled with the country in most parts being generally mining-friendly, makes them not only a great source of needed natural resources, but a likely target for resource company acquisitions.

The article includes some interesting charts showing that since 2006, the activity in securing land permits has dropped and most of the action is buying of companies – he mentions recent purchases by Thai and South Korean companies (I like how we always say “South Korean” as if North Korea would buy anything). He also shows the average weekly earnings of oil workers in Canada up nearly 70%  in the last 8 years. Wanna make 100k? Go work oil sands in Canada!

From Vancouver Sun

Canada will continue to add jobs, increase wages and prosper due to global demand for the “stuff” they have. Of course housing prices rose huge in the Calgary area and in outlying oil towns.  Also rising sharply, interestingly, was the cost of nannies! Some of the wage levels for nannies being tossed around made the oil worker pay look like minimum wage.

Bottom line

Canada is ground zero for free world supply of oil. The tar sands require tremendous energy and processing to turn the tar into lighter crude which means this oil is profitable at higher prices only. Some people say as low as $50/barrel which I doubt, to around $80 minimum (which seems more likely with rising input costs) to produce.  Either way, there are ENORMOUS resources of oil – and thankfully for the US, located close by in friendly Canada. I expect the tar sands to become fully developed as oil demand continues to rise and I expect many more takeover bids for Canadian companies.

Investment Takes

Part of the process of refining tar sands into lighter oil requires using lots of natural gas to heat up the raw material. Natural gas is super cheap due on the world markets due to new technologies of drilling for it. This could last a while but as more electricity plants switch to ‘cleaner’ natural gas, and more cars/buses etc use natural gas (see Clean Energy Fuels, Inc website for a company focusing on this), demand will continue to rise, driving up prices. 2 other ideas on this – as oil becomes more expensive, more natural gas (called “nasty gas” by some energy traders) will be used to get oil (seems weird/wasteful doesn’t it? But running the numbers it can work). Also, natural gas is a local market because it’s not easy to transport overseas. If better methods of shipping natural gas from the US where is fetches <$5/mcf to Asia where it fetches >$10 mcf can be found, it can make a long term decent investment.

In the meantime, considering oil companies with Canadian exposure might be a decent long term growth & income investment for certain people. Suncor is the big daddy up in Canada with extensive exposure to tar sands.

Thanks for reading!

Chris Grande

note: neither I nor any clients own or control shares in any company mentioned here in this article as of the date of the article. This may change in the future.

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About Chris Grande