This report analyzes the economics of the five largest bitumen-extractive corporations in Canada. The “Big Five” are Suncor Energy, Canadian Natural Resources Limited (CNRL), Cenovus Energy, Imperial Oil, and Husky Energy. We examine the key features of the five firms and analyze their accumulation dynamics in the context of the latest commodity cycle: boom (2004–2014), bust (2014–2016), and restructuring and consolidation (2015 onward).
The Big Five’s Key Features and Accumulation Strategies
Key economic variables, oil and natural gas reserves, organizational characteristics, and financial metrics are provided for each of the Big Five in this section of the report.
In terms of industrial structure, all of the Big Five are vertically and/or horizontally integrated, publicly traded corporations. Three of the Big Five are vertically integrated (Suncor, Imperial, and Husky), meaning they are active from pit to pump. All five firms are horizontally integrated, meaning their activities are spread across the full spectrum of the fossil fuel sector. All five firms are multinationals, but, most importantly, all five have significant mid-stream assets in the US, including refineries and storage facilities, which enables them to attune their internal costing to mitigate exposure to currency spreads and to commodity price spreads (the so-called price discount for Canadian crude).
As of 2017, the Big Five control 79.3% of Canada’s productive capacity of bitumen (2.86 million barrels per day (bb/d) out of a total of 3.6 million bb/d of bitumen production). The Big Five also collectively control 90% of existing bitumen upgrading capacity, a total of 1.2 million bb/d. The Big Five are positioned to dominate Canada’s future oil sands development. In a sense they are the oil sands.
The Big Five directly employed 35,788 workers in 2017. Their aggregate revenue was $115.23 billion, their aggregate net income was $13.74 billion, and the assets they own and control are worth a total of $278.82 billion. For perspective, Alberta’s annual gross domestic product is about $300 billion. The aggregate gross profits of the Big Five in 2017 were $46.6 billion, which was close to the government of Alberta’s 2017 income of $47.3 billion.
In 2016, the average profit margin for all industries in Canada was 7.8%. Three of the Big Five—Suncor, Cenovus, and CNRL—had net profit rates above 13.5% in 2017, and Cenovus’s profit margin was an impressive 19.4%. Simply put, these three firms are extraordinarily profitable compared to the vast majority of businesses in Canada. By contrast, the 2017 net profit rates for Imperial (1.7%) and Husky (4%) were well below the 2016 economy-wide profit margin average of 7.8%.
In 2017, the Big Five returned $4.16 billion to their shareholders in the form of dividends, or 30.3% of their net profits, which is considerable. The Big Five spent another $2.04 billion of their income buying back shares from the market, meaning that the total transfer of value to shareholders in 2017 was $6.2 billion. In comparison, the Big Five paid $1.6 billion in income taxes and $3.12 billion in royalties to various levels of government (chiefly Alberta), meaning the total transfer of value to various governments in 2017 was $4.72 billion. The residual once all these payments and transfers are made are retained as savings—uncommitted capital that can be eventually invested. The Big Five’s 2017 residual savings were $7.3 billion.
The Big Five and the Latest Commodity Cycle
The report provides an in-depth analysis of accumulation dynamics over the last commodity cycle of boom (2004–2014), bust (2014–2016), and restructuring and consolidation (2015 onward).
The aggregate productive capacity of the Big Five surged throughout the boom. In 2005, the firms’ cumulative productive capacity of bitumen was 1 million bb/d, by 2009 it was about 1.5 million bb/d, and by 2015 it was up to 2.5 million bb/d. The Big Five’s expansion of extractive capacity was spurred by substantial capital expenditures (CapEx). In total, the Big Five’s CapEx was a whopping $196 billion over nine years (2009–2017). The aggregate CapEx of the five firms plummeted 40% in 2015 compared to 2014 because of the oil price downturn. Total CapEx decreased a further 25% in 2016 before recovering slightly in 2017, but still only representing 50.8% of the spending peak in 2014. In aggregate, the Big Five paid $31.76 billion in dividends to their shareholders over these nine years (2009–2017).
The price of oil lost nearly half of its value in the second half of 2014, and 2015 was the worst year for Alberta job losses since 1982. The oil price downturn resulted in the (perhaps permanent) elimination of over 20,000 jobs across the Canadian oil and gas sector. Overall employment dropped in Alberta’s mining and oil and gas extraction and support industries. Salaried employees and salaried support employees were cut dramatically in 2014 and 2015. There was a slight uptick of employees paid by the hour in these two years. Wages were reduced across the sector. Overall spending on support activities for oil and gas extraction across Canada decreased by 38.4% for 2014–2016, and the bulk of these cuts were in Alberta. By contrast, overall Canadian oil and gas extraction spending increased 7% for 2014–2016.
All of the Big Five except Suncor dramatically cut their CapEx during the bust. Each of the Big Five cut between 5% and 25% of their workforce, and each of the companies scaled back or delayed the expansion of their extractive facilities. Some of the firms sold significant assets; Imperial, for example, sold upstream and downstream assets. Suncor and CNRL both saw the downturn as an opportunity. Suncor’s biggest move was becoming majority shareholder of Syncrude in 2016. Between 2014 and 2016, CNRL acquired about 12,000 natural gas wells, moving the company past Encana as Canada’s largest natural gas producer.
Restructuring and Consolidation (2015 onward)
The prolonged glut in global oil markets and the resulting lower oil prices drove oil industry restructuring. Restructuring in the Alberta oil sands industry has consisted of several global oil giants selling their oil sands assets and the acquisition of much of this productive capacity by the Big Five. In 2015–2017, the Big Five were all vocal on what this phase of consolidation means for the future of the industry, with all five downplaying the possibility of large-scale expansion of productive capacity in the near-term. There will be expansion of production, but largely through increased efficiency of current facilities and because of past investments.
Our research shows that over the latest commodity cycle the Big Five were able to maintain their gross profits, out of which they pay for past investments, maintain overhead expenditures, and generate financial capital in the form of share buybacks and dividends. The Big Five were able to do this through direct production cost compression. With the Big Five increasing production while squeezing costs and slowing down investment, a significant chunk of Alberta’s (and Canada’s) carbon budget is currently reserved for a slow-growing, cost-cutting sector with weak fiscal, investment, employment, and innovation benefits.
If the Big Five are able to continue to steer provincial and federal fiscal, energy, and climate policies, Canada will not be able to live up to its Paris Agreement obligations for the year 2050. What is more, humanity likely doesn’t have three decades to dramatically reduce fossil fuel use. The planet has already warmed 1C above pre-industrial levels (about 200 years ago), and in October 2018, the United Nations’ Intergovernmental Panel on Climate Change (IPCC) published a summary of research on meeting the Paris Agreement’s tougher target of limiting global warming to 1.5C. The IPCC estimates that based on current trends global warming will surpass 1.5C between 2030 and 2052.
In terms of climate change effects, limiting global warming to 1.5C, as opposed to 2C, would be significantly better for humanity and the planet. But, to be clear, limiting global warming to 1.5C does not ensure that we will avoid climate change risks altogether. Albertans, for example, have experienced at least two extreme weather events in recent years—a large flood in Calgary and the surrounding region in 2013 and a gargantuan wildfire in and around Fort McMurray in 2016.
There are no easy answers for how to limit global warming to 1.5C, but the IPCC’s research does clarify the options. In short, what is clear is that Canada and other countries need to implement much higher carbon taxes, and fossil-fuel-producing jurisdictions like Alberta need to develop and legislate plans for phasing out hydrocarbon production over the next number of years. In the case of the oil sands, this most certainly means phasing out production by 2050, and every year that timeline can be shortened gives humanity more of a chance to limit global warming to 1.5C.
Despite this reality, the Big Five all forecast an increase in total emissions in the future due to their plans to increase bitumen production. None of the Big Five have made science-based targets or implemented material actions that align with the amount of decarbonization required to keep the global average temperature increase below 2C, let alone 1.5C. The Big Five’s hopes for future emissions decreases rely primarily on claims that new technologies will enable substantial reductions. However, technological advancements to date have not produced absolute emissions reductions, and there is no reason to believe they will. The only realistic way for the Big Five to reduce their total emissions is to reduce their oil and gas production. The Paris Agreement means that business as usual for the Big Five and other fossil fuel producers is not an option.
The ongoing energy transition in Canada and around the world is a massive economic opportunity, even for oil-dependent jurisdictions like Alberta, should they choose to embrace the energy transition and legislate accordingly. Alberta and Canada can make a just transition by developing policies that recognize and respect Indigenous rights and title, put thousands of people to work cleaning up land that has been polluted by Alberta’s hydrocarbon industry and building wind and solar farms, and that minimize the impacts of such a transition on oil and gas workers by involving them in building our new economy.