Make an impression at your next holiday party
Peter Tertzakian is a Calgary-based economist, investment strategist, author and public speaker. He is chief energy economist and managing director at ARC Financial Corporation, an energy-focused private equity firm.
CALGARY - The holiday season is rapidly approaching and all the ingredients for festivity in Calgary are coming into order: snow, the early appearance of Christmas lights and welcoming invitations to parties. Before the first rum and eggnog goes down, it’s wise to have some handy chitchat material lest you get caught in the usual idle nattering about the cold weather. However, if you are cornered into complaining about -20C temperatures, you could use it as an opportunity to segue into, “Yes, I’m glad the furnace is on and my car started, but hey, speaking of energy, [pour eggnog here] do you really know the size of Canada’s oil and gas industry?”
Instead of using the dry language of barrels and cubic feet, it’s more appropriate to banter in the universal language of dollars, especially if you don’t know who you’re talking to, so you could say, “The Canadian oil and gas industry generates about $100 billion a year in revenue from the sale of hydrocarbons.”
Unless you’re talking to a billionaire that impressive-sounding statistic is difficult to comprehend. Even a trite description such as, “Did you know that a hundred billion dollars of stacked pennies would extend to the moon 40 times over,” is unlikely to impress and apt to attract a response like, “Excuse me, I’m going to mingle for a bit.”
If you’re interested in sparking a heated discussion about who contributes most to the prosperity of our country, you could offer up a comparison of the oil and gas industry to other segments of the Canadian economy that produce goods. A handy quick-reference chart is provided below that you can laminate and stick in your wallet if your forget the numbers.
We don’t need a long list of comparables to get a quick sense of how important the oil and gas industry is to our nation’s business. From a top line perspective, the sale of automobiles manufactured in Canada adds up to $65 billion a year. That’s finished product sales and doesn’t include auto parts – and shouldn’t – because the $100 billion in oil and gas sales doesn’t include the dollar contribution of the oilfield service industry either. Sales of wood (Forestry and Logging in Figure 1) totals only $10 billion or represents one-tenth the size of the oil and gas business. In the agriculture space, sales of wheat and barley adds up to $8 billion. As a side comparable, offshore oil and gas production just from the east coast, mostly oil from Newfoundland and some gas from Nova Scotia, generates just as much revenue as Canada’s entire wheat and barley output.
In the primary energy realm, a good barrels-to-atoms comparable is uranium. Despite being the world’s largest uranium producer, Canada generates only $1 billion from selling the nuke material – one-one-hundredth the size of oil and gas.
Sales is one metric that gives a sense of relative size, but capital flow and reinvestment is where the importance of the oil and gas industry really starts to show. After-tax cash flow in 2010 is looking to come in around $44 billion of which $41 billion is expected to be reinvested ($28 billion into oil and natural gas + $13 billion into oilsands). Augmenting cash flow, this capital-hungry industry typically raises $15 billion to $18 billion in debt and equity in a year, a large fraction of which is sourced from foreign investors. Admittedly, not all of that new debt and equity is invested into the domestic oilfield. Things such as takeovers, debt repayments, and investment into foreign domains are all part of the complex money dynamics, but the additional capital still flows through head offices in Calgary and contributes to local employment and prosperity, including to those employed by banking, legal and accounting firms.
Not to be ignored, over the past 15 months the Canadian oil and gas industry has also attracted an incremental $9.5 billion of Asian joint-venture capital – an amount that is on par with the total sales of either forestry or wheat plus barley. This new inflow of capital from across the Pacific is just the start and more pennies to the moon from Asia are likely in the future.
It’s difficult to make a comparison of reinvestment between different industries in Canada. Trying to match up the capital needs of those producing barrels versus those harvesting bushels can quickly lead to debate. Unless you’re cornered by an accountant you should just agree that recurring reinvestment by the oil and gas business is of similar magnitude to total sales of all cars produced by our auto industry. Importantly, I can’t think of any other business in Canada that reinvests 90% or more of its cash flow and then tops it up with almost $30 billion of other people’s money.
No doubt you will hear all sorts of opinion about the oil and gas industry on the party circuit this year. Armchair analysts, environmentalists, politicians, axe-grinding consumers and oilpatch veterans all have something to say about this big business that is a magnet for extreme and divergent opinions. Fair enough, but whomever you talk with and whatever you debate at least you should be able to agree that oil and gas is by far the largest product-selling business in Canada, the biggest spender, and a vital contributor to our prosperity (and our comfort from the cold). Cheers!
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Peter Tertzakian is a Calgary-based economist, investment strategist, author and public speaker. He is chief energy economist and managing director at ARC Financial Corporation, an energy-focused private equity firm.
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