As Baron Rothschild once noted, “the time to buy is when there’s blood in the streets”. Could the recent decline of crude oil prices to six-year lows represent just such an opportunity for Indian companies to consider investing in the North American (and particularly Canadian) oil sector?
With Brent and WTI crude in the US$45-50 range in mid-January, valuations of oil companies in Canada are falling and restructurings of Canadian oil companies may soon follow. That could be an opportune time for India to consider investing in the Canadian oil sector (including oil sands).
Time to diversify
India imports more than 70% of its crude oil requirements, with the vast majority of that supply coming from the Gulf region. As announced by India’s oil minister Dharmendra Pradhan in July 2014, India is diversifying its sources of oil imports to reduce dependence on any one region.
Canada is the world’s sixth largest producer of oil and gas with the third-largest proven oil reserves (including oil sands) in the world and offers a stable source of supply. While Canadian oil often sells at a (sometimes steep) discount to world crude prices, traditional barriers to export of Canadian oil to India have included shipping costs and issues as to whether Canadian grades of crude could be refined in India.
Late in 2013, Husky Energy broke that barrier by selling 1 million barrels of crude to Indian Oil Corporation, to be shipped from Canada’s east coast to Indian Oil’s refineries in India. India’s refineries include some of the most advanced in the world and the Husky Oil-Indian Oil deal shows that at least lighter grades of Canadian crude can be successfully processed and refined in India.
In addition, as noted by Pradhan in a written reply in the Lok Sabha on 8 December 2014, India’s refining capacity has more than tripled over the past 15 years and India’s present refining capacity exceeds the demand for petroleum products in the country. Accordingly, India could become a consistent net exporter of petroleum products if it can obtain reliable and economic sources of crude, and the Canadian oil sands may present such a source.
India and Canada have already done the groundwork for investments and partnerships in the oil and gas sector. A five-year memorandum of understanding (MOU) to “establish a framework for discussions on petroleum and natural gas issues with the view to advance the trade and investment ties between Canada and India, enhance energy security and increase cooperation” was negotiated in October 2013. This MOU gives high-level officers in each government the responsibility of heading a working group to develop and implement activities to foster trade and investment in oil and natural gas.
While Canada currently ships the bulk of its oil to the US, Canada has realized the need to diversify its oil markets. One of the primary challenges in relation to the export of oil to Asia has been development of the infrastructure needed to move crude from Canada’s oil sands projects in Alberta, which is a central-western province, to either the Pacific or Atlantic coast for shipping.
Pipeline in the works
Canada is moving forward in answering this challenge. In June 2014, the Canadian government approved the construction of the C$7 billion (US$5.8 billion) Northern Gateway pipeline, which is a 1,177-kilometre twin pipeline system running westward from the oil sands in Alberta to a new marine terminal in Canada’s western-most province, British Columbia. From there, the oil will be loaded on tankers and shipped to international markets, including Asia. The project still faces a number of conditions, including environmental approvals and consultation with First Nations communities affected by the pipeline, but approval by the Canadian government was viewed as a major step towards completion of the project.
Many economists are predicting that the dramatic fall in crude prices will have a positive impact on India’s economy and foster growth of India’s manufacturing sector, particularly with the push by the Narendra Modi-led central government to turn India into a global manufacturing powerhouse. A source of reliable and economical crude for use as fuel and in the manufacture of petroleum-based products and components will be critical in ensuring India’s growth in that regard.
Canada is one of the most politically, socially and economically stable countries in the world, and arguably the most stable among major oil producing nations. And, while the cost of shipping oil between India and Canada is significant, Canada’s commitment to develop the necessary infrastructure to export Canadian crude overseas and the relative discount still afforded to Canadian crude may make it an increasingly economical alternative as well.
Raj Sahni is a partner and chair of the India Business Group at Bennett Jones LLP, a law firm with offices in Calgary, Toronto, Edmonton, Ottawa, Vancouver, Washington DC, Doha, Bermuda, and a representative office in Beijing.
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