Rahman Khanani Jie Lie Master Thesis Oil Clusters

ID number: 0959043
: 0960504
BI Norwegian Business School Master Thesis

Supervisor: Torger Reve
The Canadian and Norwegian Oil

Clusters:
A Comparative Study
Date of submission:
01.09.2014
Campus:
BI Oslo
Examination code and name:

GRA 1900 Master Thesis
Programme:
Master of Science in Strategy and Innovation
This thesis is a part of the MSc Programme at BI Norwegian Business School. The school takes no
responsibility for the methods used, results found and conclusion drawn.
Master Thesis in GRA 1900
01.09.2014
Acknowledgement
We would like to thank our supervisor, Dr Torger Reve, whose advice and
feedback has been instrumental in driving our thesis forward. Having one of the
worlds leading oil & gas experts as our thesis supervisor was not only beneficial
in terms of being a source of knowledge, but also in terms of ensuring that our
final thesis was both practical and relevant, while our recommendations were
realistic.
Jarand Rystad of Rystad Energy provided us with access to data, which has been
an important component within our analysis, and we are very grateful for his
support. In addition, we would like to particularly thank the Canadian Association
of Petroleum Producers (CAPP), and the Alberta Department of Energy where
multiple officials were kind enough to speak with us. Last but not least, we would
like to thank all our interviewees, who were very generous with their time, and
provided us with in-depth insight which enabled us to move forward.
Rahman Khanani
Jie Li
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Executive Summary
This thesis includes an analysis of the Canadian onshore, offshore and oil field
service (OFS) industries, and the Norwegian oil industry via Porters Diamond,
which was used to evaluate these industries.
Canada has a strong business environment. However, a low number of PhD
students, and lower than average patents and innovation related spending and
financing illustrates that the innovation environment in the country is poor as
compared to other developed countries. In addition, its economy is significantly
dependent on the U.S. economy, while several provinces within the country
appear to prefer local content as opposed to national or international content. It is
important to note that the fiscal environment is variable all across Canada, with
Alberta having the lowest corporate income tax in Canada.
Canada has one of the worlds largest oil reserves, with 98% of its reserves
accounting for unconventional oil within the oil sands, and offshore reserves in
Atlantic Canada accounting for approximately 1% of Canadian reserves.
However, there is a strong possibility of finding significant reserves offshore,
considering almost $2 billion has been invested in into exploration.
The onshore oil industry in Canada is located in Western Canada and the
operating conditions are very complex. This has led to suppliers innovating within
the technologies of hydraulic fracturing and horizontal drilling. The U.S. receives
99% of Canadas total exports, and 88% of total oil production. It is important to
note that total production in the U.S. is expected to increase significantly over the
next decade, while demand is expected to decrease, which is a concern for the
Canadian oil & gas industry. However, the oil is transported via pipeline, and
pipeline capacity to the Gulf Coast the location of refiners for heavy oil is
lacking significantly. In addition, proposals for constructing new pipelines have
faced many hurdles from environmentalists to First Nations groups. Rail is an
alternative for pipeline but there is limited capacity for rail transportation. It
should also be noted that the cost of rail transportation is higher than the cost of
pipeline transportation. Lack of access to other U.S. markets (i.e. the U.S. Gulf
Coast, the U.S. East Coast, Rockies and the U.S. West Coast) has led to a Western
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Canada Select (WCS) to West Texas Intermediate (WTI) differential of 21% due
to oversupply in the U.S. Midwest. It is also important to note that production
costs of the oil sands are very high, which implies high operational risks and
substantial investment. There have been several environmental concerns which
have led to a poor perception of the oil sands not only provincially or nationally,
but internationally.
The offshore oil industry in Canada has one of the harshest, if not the harshest
environment in the world. In addition, costs of drilling and operations are also
significant. Total demand is low while the industry is cyclical, which leads to
significant knowledge being lost as many individuals within the industry move to
other regions. There is a lack of critical mass, and this can be attributed to the lack
of production. There are significant local (provincial) content requirements via the
Atlantic Accords, which have minimized collaboration between the oil & gas
industry in Newfoundland and Labrador, and the shipping industry in Nova
Scotia. It is important to note that the offshore industry is expecting significant
finds; BP and Shell have invested approximately $1 billion each in exploration.
Canada does not have a market leading oil field service industry, while Norway is
leading the industry in this market. This could be attributed to it having
competencies in onshore oil field services, for which there is a significant market
in North America. However, 77% of total sales of Canadian oil field service
companies are within this region, which is a concern, as it demonstrates lack of
global competitiveness. Significant drawbacks are that Canadian firms are
conservative, and are suffering from a significant labour shortage, which is a
concern for the entire oil & gas industry. Significant concerns within this industry
are in terms of access to capital, especially as most capital in Canada is within the
sectors of mining and software. The value chain in onshore Canada is fairly
comprehensive, and appears to have competencies in hydraulic fracturing and
horizontal drilling. The value chain in offshore Canada has strengths within
engineering and operations, and lacks subsea design companies, while most
capital equipment is brought in for projects from overseas
The Norwegian industry has a very different licensing system than the Canadian
industry, as it allows licenses to be awarded based on expertise as opposed to a
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bid, as it is done in Canada. In addition, government funding and tax incentives,

and harsh operating conditions in Norway have led to Norwegian companies
innovating significantly within offshore technology. Norway has understood the
importance of the oil & gas industry, as it has significantly influenced the
prosperity of the country. This has led to it being viewed favourably amongst the
population. Norwegian oil field service companies are market leaders, and the big
four earn the majority of their revenues internationally. Many scholars have
attributed this to collaboration between the largest companies within Norway.
Based on the analysis of the industrial clusters, it is recommended that Canada
enhance its focus on innovation, improve infrastructure and access to markets,
enhance immigrations and encourage collaboration within the industry.
Furthermore, it is recommended that the industry partake in a PR campaign to
improve the perception of the population about the Canadian oil & gas industry. In
addition, access to capital for oil & gas technology companies has been a
significant drawback, and it is recommended that the government provide capital
to starts up and create a venture fund, which would ultimately allow the Canadian
oil field service sector to become as competitive as that of Norway. Last but not
least, it is essential that Canada diversify its export markets for oil as soon as
possible, as its production is expected to increase significantly, while currently it
is strongly dependent on the U.S. markets for purchasing its oil. However, the
U.S. production is expected to increase and demand is expected to decrease,
which could lead to Canadian oil resources becoming obsolete.
Keeping in mind the significant oil reserves and the possibility of reaching
international markets, the oil industry in Canada has a bright future. However,
access to markets, innovation and access to capital are significant concerns which
need to be resolved. Unless Canada can resolve these concerns, its oil will
command a lower price, and it will essentially take advantage of natural resources
instead of creating value added industry.
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Thesis Structure
Part One: Introduction and Cluster Theory
1. Introduction
2. Literature Review
Part Two: Canadian Oil Industry
3. Canada Overview
4. Canadian National Diamond
5. Oil Overview
Part Three: Canadian Onshore Diamond
6. Canada Onshore Oil Diamond
Part Four: Canadian Offshore Diamond
7. Canada Offshore Oil Diamond
Part Five: Canadian OFS
8. Canada OFS Diamond
Part Six: Norwegian Oil Industry
9. Norwegian National Diamond
Part Seven: Comparative Analysis
10. Oil Costs Canada vs. Norway
11. Comparing the Canadian and Norwegian Oil Clusters
Part Eight: Recommendation
12. Recommendations to upgrade the Canadian Oil Clusters
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Table of Contents
1.0 Introduction and Custer Theory ......................................................................... 1

1.1 Research Topic .............................................................................................. 1
1.2 Thesis Aims & Objectives ............................................................................. 1
1.3 Research Question ......................................................................................... 2
1.4 Research Methodology .................................................................................. 2
1.4.1 Secondary Research ................................................................................ 2
1.4.2 Primary Research .................................................................................... 3
1.5 Research Limitations ..................................................................................... 7
1.5.1 Limitations of Qualitative Case Studies ................................................. 7
1.5.2 Limitations of Interviews and Efforts Made ........................................... 7
1.5.3 Research Reliability and Validity ........................................................... 8
2.0 Literature Review .............................................................................................. 9
2.1 Introduction.................................................................................................... 9
2.1.1 Why Do We Study Cluster Theory? ....................................................... 9
2.2 Porters Cluster Study .................................................................................... 9
2.2.1 Porters Cluster Definition...................................................................... 9
2.2.2 Porters Cluster Diamond ..................................................................... 10
2.3 The Development of National Competitiveness Study ............................... 11
2.3.1 Early National Competitiveness Study Prior to 1990s ...................... 11
2.3.2 National Competitiveness in 1990s and Thereafter ........................... 12
2. 4 Cluster Theory and Main Considerations ................................................... 14
2.4.1 Other Authors Clusters Definitions ..................................................... 14
2.4.2 Cluster Mapping ................................................................................... 15
2.4.3 Cluster Upgrading................................................................................. 16
2.4.4 Cluster Life Cycles ............................................................................... 18
2.4.5 Critiques of Cluster Theory .................................................................. 19
2.5 The Next Development Stage of Industry Clusters ..................................... 20
2.5.1 The Global Knowledge Hubs ............................................................... 20
2.5.2 The Emerald Model .............................................................................. 20
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3.0 Canada Overview.......................................................................................... 22

3.1 National Context .......................................................................................... 22
3.1.1 History .................................................................................................. 22
3.1.2 Economy ............................................................................................... 22
3.1.3 Social .................................................................................................... 25
3.1.4 Political ................................................................................................. 26
4.0 Canadian National Diamond............................................................................ 27
4.1 Government ................................................................................................. 27
4.2 Factor Conditions ........................................................................................ 29
4.3 Firm Strategy, Structure and Rivalry ........................................................... 35
4.4 Related Industry ........................................................................................... 36
4.5 Demand Conditions ..................................................................................... 37
4.6 Diamond Summary ...................................................................................... 38
5.0 Oil Overview ................................................................................................ 39
5.1 Proven Conventional Reserves in Canada ................................................... 39
5.2 Proven Conventional Oil and Oil Sands in Alberta ..................................... 39
5.3 Crude Oil Production ................................................................................... 40
5.3.1 Onshore ................................................................................................. 44
5.3.2 Offshore ................................................................................................ 45
5.3.3 Oil Production....................................................................................... 46
6.0 Canada Onshore Oil Diamond ...................................................................... 47
6.1 Government ................................................................................................. 47
6.2.1 Oil Sands............................................................................................... 50
6.2.2 Feasibility ............................................................................................. 50
6.2.3 Pipeline Infrastructure Oil ................................................................. 51
6.2.5 Labour ................................................................................................... 54
6.2.6 Calgary.................................................................................................. 55
6.3 Firm Strategy, Structure and Rivalry ........................................................... 57
6.3.1 Industry Structure ................................................................................. 57
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6.3.2 Investment............................................................................................. 58
6.3.3 High Breakeven Costs .......................................................................... 60
6.3.4 Competition .......................................................................................... 61
6.3.5 Rivalry .................................................................................................. 61
6.3.6 Local Content and Ownership .............................................................. 63
6.4 Related and Supporting Industry ................................................................. 65
6.4.1 Oil Field Services ................................................................................. 65
6.5.1 Markets ................................................................................................. 65
6.5.2 U.S. Oil Imports .................................................................................... 66
6.5.3 Sluggish U.S. Demand.......................................................................... 67
6.5.4 U.S. Shale Revolution .......................................................................... 67
6.5.5 Pricing ................................................................................................... 68
6.5.6 Refining Capacity ................................................................................. 69
6.5.7 Environmental Concerns ...................................................................... 70
6.5.8 Exploration ........................................................................................... 70
6.6 Diamond Summary & Cluster Map ............................................................. 71
7.0 Canada Offshore Oil Diamond ..................................................................... 74
7.1 Government ................................................................................................. 74
7.1.1 Regulators ............................................................................................. 74
7.1.3 Royalty.................................................................................................. 75
7.1.4 Government Initiatives ......................................................................... 76
7.1.5 Play Fairway Analysis (PFA) ............................................................... 78
7.1.6 Industry Sexiness .................................................................................. 79
7.2.1 Natural Resources ................................................................................. 80
7.2.2 Operating Environment ........................................................................ 80
7.2.3 Labour ................................................................................................... 81
7.2.4 Transportation ....................................................................................... 81
7.2.5 Capital Markets ..................................................................................... 82
7.3 Firm Strategy and Rivalry ........................................................................... 82
7.3.1 Local Rivalry and Capital Spending ..................................................... 82
7.3.2 Local Content and Ownership .............................................................. 83
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7.3.3 Cyclical Offshore Oil Industry ............................................................. 84

7.3.4 Global Rivalry ...................................................................................... 85
7.4 Related and Supporting Industries ............................................................... 86
7.4.1 Deep Ocean Technology Cluster .......................................................... 86
7.4.2 Secondary Petroleum Industries ........................................................... 87
7.5.1 Exports/Imports .................................................................................... 89
8.0 Canada OFS Diamond .................................................................................. 94
8.1 Cluster Location........................................................................................... 95
8.2 Government ................................................................................................. 95
8.2.1 Fiscal Environment ............................................................................... 95
8.3.1 Access to Capital .................................................................................. 96
8.3.2 Investment............................................................................................. 97
8.3.3 Human Capital ...................................................................................... 98
8.3.4 Education ............................................................................................ 100
8.3.5 Innovation ........................................................................................... 101
8.3.6 Research Programs ............................................................................. 102
8.3.7 Patents ................................................................................................. 103
8.4 Firm Strategy, Structure & Rivalry ........................................................... 103
8.4.1 Structure.............................................................................................. 103
8.4.2 Rivalry Onshore ............................................................................... 104
8.4.3 Rivalry Offshore .............................................................................. 107
8.4.4 Competitive Advantage Onshore ..................................................... 107
8.4.5 Competitive Advantage Offshore .................................................... 108
8.4.6 Lack of Global Canadian OFS Firms ................................................. 109
8.5 Demand Conditions ................................................................................... 111
8.5.1 Domestic Demand .............................................................................. 111
8.5.2 International Demand ......................................................................... 113
8.5.3 Sophisticated Customers ..................................................................... 114
8.6 Related and Supporting Industries ............................................................. 115
8.6.1 Onshore Cluster Value Chain .......................................................... 115
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8.6.2 Onshore Cluster Related industries ................................................. 116

8.6.3 Offshore Cluster Value Chain ......................................................... 116
8.6.4 Offshore Cluster Related Industries................................................. 116
9.0 Norwegian National Diamond ....................................................................... 118
9.1 Government ............................................................................................... 118
9.1.1 Governance Structure ......................................................................... 118
9.1.2 Industry Specialization ....................................................................... 120
9.1.3 Industry Sexiness ................................................................................ 120
9.1.4 Political Consensus ............................................................................. 120
9.1.5 Licensing System ................................................................................ 123
9.1.6 Stepwise Opening ............................................................................... 125
9.1.7 Consistent Policies .............................................................................. 126
9.1.8 Industry Promotion INSTOK .......................................................... 127
9.2 Factor Conditions ...................................................................................... 128
9.2.1 Reserves and Production..................................................................... 128
9.2.2 Historical Production .......................................................................... 129
9.2.3 Operating Conditions .......................................................................... 131
9.2.4 Labour and Human Capital ................................................................. 131
9.2.5 Efficiency of Human Capital .............................................................. 132
9.2.6 Access to Capital ................................................................................ 132
9.2.7 Infrastructure....................................................................................... 134
9.2.8 Innovation ........................................................................................... 134
9.2.9 Laboratory for Technologies Development ........................................ 135
9.3 Firm Strategy and Rivalry ......................................................................... 136
9.3.1 Structure.............................................................................................. 136
9.3.2 Competition ........................................................................................ 136
9.3.3 Effective Private and Public Collaboration ........................................ 137
9.3.4 Technology ......................................................................................... 139
9.4 Related and Supporting Industries ............................................................. 140
9.4.1 Oil Field Services ............................................................................... 140
9.4.2 International Operations of OFS ......................................................... 141
9.4.3 Shipping .............................................................................................. 144
9.5 Demand Conditions ................................................................................... 145
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9.5.1 Local Consumption............................................................................. 145

9.5.2 Export Markets ................................................................................... 145
9.6 Diamond Summary .................................................................................... 147
10.0 Oil Costs Canada vs. Norway ................................................................... 147
10.1 Cost Analysis ........................................................................................... 148
10.1.1 Operating cost ................................................................................... 148
10.1.2 Transportation Costs ......................................................................... 150
10.1.3 Royalties and Taxes .......................................................................... 150
10.1.4 Breakeven Costs ............................................................................... 150
10.1.5 Increasing Costs ................................................................................ 151
10.2 Cost Discussion Canada vs. Norway .................................................... 152
11.0 Comparing the Canadian and Norwegian Oil Clusters................................ 155
11.1 Cluster Attractiveness .............................................................................. 155
11.1.1 Reserves ............................................................................................ 155
11.1.2 Location ............................................................................................ 156
11.1.3 Infrastructure..................................................................................... 156
11.1.4 Demand ............................................................................................. 157
11.1.5 Competition ...................................................................................... 158
11.1.6 OFS Value Chain .............................................................................. 158
11.1.7 International OFS Firms ................................................................... 159
11.1.8 Supporting Industry .......................................................................... 159
11.2 Education Attractiveness ......................................................................... 160
11.3 Talent Attractiveness ............................................................................... 161
11.3.1 Human Capital .................................................................................. 161
11.4 R&D and Innovation Attractiveness ........................................................ 162
11.4.1 R&D Requirement ............................................................................ 162
11.4.2 Innovation ......................................................................................... 162
11.4.3 Collaboration .................................................................................... 163
11.4.4 Sophisticated Customers ................................................................... 164
11.5 Ownership Attractiveness ........................................................................ 164
11.5.1 Fiscal environment ........................................................................... 164
11.5.2 Licensing........................................................................................... 165
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11.5.3 Protectionist Policy ........................................................................... 165

11.5.4 Capital Markets ................................................................................. 166
11.6 Environmental Attractiveness .................................................................. 167
11.6.1 Industry Sexiness .............................................................................. 167
11.6.2 Environmental Awareness ................................................................ 167
11.7 Comparative Analysis Summary ............................................................. 169
12.0 Recommendations to Upgrade the Canadian Oil Clusters .......................... 171
12.1 Cluster Attractiveness .............................................................................. 171
12.2 Ownership Attractiveness ........................................................................ 171
12.3 Talent Attractiveness ............................................................................... 174
12.4 Educational Attractiveness ...................................................................... 175
12.5 Environmental Attractiveness .................................................................. 176
12.6 R&D & Innovation Attractiveness .......................................................... 177
Conclusion ........................................................................................................... 179
References............................................................................................................ 180
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1.0 Introduction and Custer Theory
1.1 Research Topic
The Norwegian and Canadian offshore oil industries have adopted very different
approaches, and these approaches have been influenced by government regulation.
The Canadians have adopted a free market approach, which is considered a more
North American approach to industry (Hsieh 2013). The Norwegians on the other
hand have had significant government involvement (Hsieh 2013). According to
the Norwegian Oil & Gas Association (2010) the history of the oil & gas industry
in Norway is a saga of wise political decisions, world-class industrial
development and huge value creation. This has led to a very strong and
prominent cluster within the oil & gas industry in Norway and has led to the
successful creation and operations of various companies which are involved
within the service aspect of the industry. These companies have been very
competitive in the global market, despite the fact that costs in Norway are some of
the highest in the world. Therefore, we can conclude by stating that the
Norwegian collaborative approach has been more effective in terms of industrial
development, than the individualistic approach adopted by the Canadians.
1.2 Thesis Aims & Objectives
Canada has two industries within oil & gas, onshore and offshore, while Norway
has purely an offshore industry. This thesis will examine all three industries, and
compare and contrast the differences. This will ultimately lead to this study being
a comparative cluster development analysis of the Canadian and Norwegian oil &
gas industries. There will be an additional focus on determining the reasons
behind Norways success within oil & gas. Utilizing comparative analysis, a
number of recommendations for the Canadian industry will be stated, while
accounting for the differences in geography, history, industry specialization, and
natural resources.
This thesis is essentially a way for Canada to learn from Norway in terms of
developing industries. Excellent industrial development policies within the oil &
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gas industry have been significant drivers in making Norway one of the worlds
most prosperous countries. This thesis will enable Canada to learn from these
best practices, and see if they can use similar policies to enhance industrial
development and overall prosperity.
Several individuals within both the provincial and federal government have
recognized that the prior strategy employed by Canada was to take advantage of
its natural resources. According to Larry Ziegenhagel, from the Department of
Energy at the Government of Alberta, there has been a recent focus on enhancing
value creation, and this thesis will act as a blue print for this.
A comparative study of the Canadian and Norwegian oil & gas industries has
never been undertaken. Therefore, the learnings from this study could potentially
provide significant insight for industry, academia and government.
1.3 Research Question
What can Canada learn from Norway in terms of developing its oil & gas cluster?
1.4 Research Methodology
This qualitative thesis consists of both secondary and primary research, for which
more details are listed below:
1.4.1 Secondary Research
The secondary data collection phase was divided into multiple segments.
1) Background information
The first aspect for both authors was enhancing their knowledge of both the
Canadian and Norwegian oil & gas industries. They did so by subscribing to
publications about the oil & gas industry in Canada, and globally. In addition, the
authors read background data about the industries in both Canada and Norway in
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order to develop a more thorough understanding.

2) Theoretical Grounding
Both authors conducted research with regards to determining the most applicable
theoretical framework for this thesis. This was the second stage of the study and
stated in the preliminary thesis report.
3) Data collection
This thesis is qualitative, and in order to collect relevant data, the authors had to
browse through various industry publications, governmental regulations,
provincial petroleum ministry websites, industry trade association reports,
external reports and company presentations. In addition, the authors obtained
some valuable quantitative data from Rystad Energy a market intelligence and
consultancy based in Oslo.
4) Confidential Government of Canada Reports
Due to contacts with the Canadian government, the authors were able to obtain
several confidential Government of Canada reports about the Canadian oil & gas
industry. These reports proved to be beneficial for the purpose of the study.
5) Seminars
We attended two seminars at the Canadian Embassy of Norway in order to
enhance our understanding of the industries in both countries, while establishing
prospective contacts to interview.
1.4.2 Primary Research
Primary research was essential in order to have a thesis which consisted of all the
required data. Therefore, we had to identify viable interview subjects.
1) Selection of Interview Subjects
After mapping out the oil & gas clusters, we determined the organizations we
would like to get in touch with, and after researching the organization, we
determined the position of the ideal person we would like to interview. LinkedIn
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was an excellent tool in determining the name of the individual of interest. Alumni
of Queens School of Business and Trent University were given preference as the
authors had attended those institutions and it was likely that we had a chance of
obtaining a better response from alumni as this built an immediate connection
with them.
The goal in terms of determining the individuals we wanted to interview was to
ensure that the subjects had depth of knowledge, which we determined was based
on their prior experience, organization, and position. In addition, we ensured that
individuals from across the industry were interviewed; this included government,
trade associations, capital markets, oil field companies, industry experts and
operators. The reason we did so was to ensure that biases were prevented, and that
the opinions of stakeholders across the board were considered.
Individuals of interest were based both in Norway and in Canada. However, as the
research had a greater focus on Canada, most of the individuals interviewed were
from the Canadian oil & gas industry.
2) Obtaining Interviews
After determining the individual we would like to interview, we tried to use our
personal and professional network in order to get introduced. If we did not have
an individual in our networks who could introduce us to the individual of interest,
we would email them or send them a brief request to connect via LinkedIn. If this
failed, we would call them directly to express our interest in interviewing them.
3) Conducting Interviews
The interview varied as per the individual interviewed. However, all interviews
were limited to 75 minutes and consisted of a maximum of ten scripted questions.
The interview guide for the interview was tailored to the individual interviewed,
his/her position, educational and professional background along with their current
position within the industry.
Rahman Khanani interviewed all the interviewees within the thesis. This was
because of his prior experience in conducting research, and strong interpersonal
and communication skills.
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In order to ensure that the perspectives of both authors were recorded during the
interview, it was deemed necessary for both individuals to take notes. As most
interviews were conducted virtually, it was practical for both authors to take notes
on their computers.
The interview typically started with explaining to the interviewee the nature of the
study and the focus of the interview. The interviewee was also told to feel free to
divulge into any information that they might think would be relevant for the
purpose of this report, but was not specific to a question asked.
The following is a list of all interviewees:
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Name
Organization
Position
Arnt Inge Enoksen
EY Norway
Senior Associate
Anthony Patterson
Virtual Marine
CEO
Bettina Pierre-Gilles
Phasis Consulting
President & CEO
Brian Pyra
Deloitte Canada
Director of Operations
Bruce Edgelow
ATB Financial
VP Energy
Christian Hansen
Embassy of Canada in Norway
Senior Trade Commissioner
Christopher Theal
Kootenay Capital
President & CEO
Cooper H. Langford
University of Calgary
Professor
Craig Watt
Premier's Office Southern Alberta
Executive Director
10
David Arthur
Boston Consulting Group
Project Leader
11
Geoff Hill
Deloitte Canada
Partner
12
Hkon Skretting
INTSOK
Regional Director
13
James Logan Forbes
Welaptega Marine
Engineering Manager
14
Jarand Rystad
Rystad Energy
Managing Partner
15
John Winterbourne
Embassy of Canada in Norway
Trade Commissioner
16
Josh Hutchings
Imperial Oil
Project Manager
17
Jon Marsh Duesund
Rystad Energy
Project Manager
18
Jon Myran
BW Offshore
Head of Improvement Initiatives
19
Kelly Morrison
Canadian Petroleum Services Association
Vice President Communication and

Stakeholder Relations
20
Kinnon Kendziora
Talon Energy Services
Project Manager
21
Larry Ziegehagel
Department of Energy at the Government of

Alberta
Senior Advisor
22
Mark OByrne
Schlumberger Canada Limited
President
23
Mark Salkeld
Petroleum Services Association of Canada
President & CEO
24
Matthew Foss
Department of Energy Government of Alberta
Executive Director Economics and

Markets
25
Max Ruelokke
Aker Solutions
Senior Manager
26
Mette Kloster
EY Norway
Senior Consultant
27
Michael Eklund
Deputy Minister, Government of Alberta
Advisor on Strategic Initiatives
28
Paul Barnes
Canadian Association of Petroleum Producers
Atlantic Canada Manager
29
Paul Paynter
Saskatchewan Research Council
30
Peter Tertzakian
ARC Financial Corporation
31
Richard Grant
Gowlings Law Firm
Partner
32
Richard Wayken
Alberta Innovates Technology Futures
Vice President - Pipelines
33
Shannon Chmelyk
Alberta Energy Regulator
Manager, Planning and Analysis
34
Steven I. Paget
FirstEnergy Capital
Director, Institutional Research
35
Susan Hunt
Petroleum Research Newfound & Labrador
Program Manager
36
Svein Inge Eide
Statoil Canada
Research Lead
37
Tore Sorheim
Trican Norway
General Manager
38
Wade Locke
Memorial University
Professor
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Business Development Director

Energy
Chief
Energy
Economist
&
Managing Director
01.09.2014
1.5 Research Limitations
1.5.1 Limitations of Qualitative Case Studies
The chosen research methodology is qualitative approach, because cluster

development and dynamics is a complex phenomenon that cannot be fully
explained using variables and assessing their relevant magnitudes. Qualitative
studies also facilitate cross-case comparisons and analysis (Johnson and
Christensen 2004), which is in line with this study. However, several limitations
are embedded in the interview-based qualitative approach (Johnson and
Christensen 2004):
1) Qualitative findings produced might not be easily generalized to other settings
2) Data collection and analysis generally takes more time, and it is more difficult
to draw conclusion due to tangled causal relationships
3) Results and implications are more easily influenced by the authors personal
biases
1.5.2 Limitations of Interviews and Efforts Made
Due to lack of industry expertise, both authors relied on available industry

publications to understand the current situation of clusters in Norway and Canada.
Therefore, their understanding and perception about the industry developed was
more likely to be easily influenced by biases in the industry reports and
misinterpretation of available industry publications. We overcame this limitation
by looking into publications from different stakeholders, such as regulators,
industry associations, and consulting firms within both clusters. We also cross
compared the information received from various sources in order to be as close to
industry reality as possible.
Interview questions developed are heavily dependent on the understanding of
authors in regards to the important elements that influence cluster development.
Therefore, important elements could have been missed. All interview questions
were prepared via discussion and collaboration of both authors in order to reduce
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the likelihood of interviewer bias. We encouraged interviewees to communicate

important factors that they thought would be beneficial to the thesis which were
not mentioned in the interview. The open-ended interview method has been
proven beneficial in guiding our research direction, as it gave us significant
additional information. Over time, significant aspects that needed to be researched
and discussed in order to understand cluster development are mentioned and then
confirmed by many interviewees. Their contribution and confirmation have
increased our confidence in covering important aspects in this clustering study.
1.5.3 Research Reliability and Validity
Both the limitations of quantitative approach and interview-based information

collection are sources of errors. These errors could affect the relevance and
validity of our thesis.
Validity concerns the objectivity and credibility in data collection (Anderson
2010). In order to increase the validity of our thesis, we use respondent validation
and constant comparison techniques. Respondent validation allows an interviewer
to read the analysis and provide feedback to confirm the authors interpretation
(Anderson 2010). Constant comparison refers to interpreting new interview
findings based on previous information collected from industry publications and
interviews (Anderson 2010). We based our analysis on all interviews jointly,
rather than treating each interview as a fragmented piece of information.
However, due to the nature of the quantitative approach, we consider the validity
of our data collection moderate.
Reliability addresses reproducibility and stability of the data (Anderson 2010).
Firstly, the reliability is hard to attain in the sense that cluster development is a
dynamic process, and recommendations made in our thesis are situational to
external environments. Secondly, when asked the same questions again at a later
point in time, the interviewees might provide different answers as the industry
environment changes over time. Thirdly, suggestions that are relevant based on
initially observed market problems might lose their value as time elapses.
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2.0 Literature Review
2.1 Introduction
This section outlines the literature used within this study. The key concepts,
theories and frameworks are Cluster Theory, National Competitiveness, Porters
Diamond, Amir Sasson and Torger Reves Emerald Model, and the Global
Knowledge Hub concept authored by Torger Reve.
2.1.1 Why Do We Study Cluster Theory?
Cluster theory was chosen as the primary theory within our study because it is
most relevant to national competitiveness. Industrial clusters contribute to
industrial competitiveness, and national competitiveness is the accumulated and
synergetic effect of competitive industries. Supported by related industries, a
strong industrial cluster requires a critical mass of industrial and knowledge actors
at every stage of the value chain or value network (Reve 2009). The industrial
clusters produce positive knowledge externalities, because there are knowledge
spillovers and rapid learning processes that stimulate both innovation and
commercialization of innovation (Reve 2009). Like public goods, knowledge
externalities are undersupplied and hence government policies are essential to
bring the supply of knowledge externalities to the optimal level (Reve 2009). The
aim of our thesis is to provide recommendations that strengthen the Canadian
onshore and offshore oil clusters, after evaluating these clusters via Porters
Diamond
2.2 Porters Cluster Study
2.2.1 Porters Cluster Definition
Cluster refers to geographic concentrations of interconnected companies,

specialized suppliers, service providers, firms in related industries, and associated
institutions (e.g., universities, standards agencies, trade associations) in a
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particular field that compete but also cooperate ( Porter 2000, 16).
According to Porter (2008), a cluster is a series of industries that are horizontally
(i.e. pharmaceutical and skin care industry) or vertically (i.e. supplier and services
providers, buyers) related to the central industry. A cluster is a set of firms that are
co-located and co-dependent (external economics: i.e. skin care industry
benefits from breakthroughs in pharmaceutical R&D), and they tend to have
strong commonalities and complementarities in terms of resources, skills, and
knowledge. Clusters also include institutions (i.e. specialized training entities,
standard-setting agencies, and industrial associations) which provide the
interconnection between different elements within the cluster.
2.2.2 Porters Cluster Diamond
Porter (1990) uses the Diamond Model to refer to the effect of the microeconomic
environment on industry competitiveness. The characteristics of the Diamond
Model are as follows:
1) Context for Firm Strategy and Rivalry
This determinant refers to how companies are created, organized and managed in
the nation, as well as how they compete (Porter 1998a). A healthy local
environment for firm strategy and rivalry encourages innovation, investment,
competition, and thus sustained growth. Vigorous competition among local rivals
indicates strong incentives to follow sophisticated strategies such as investing in
R&D, collaborating with institutions in innovation, and accumulating human
capitals in order to attain or maintain competitive advantage.
2) Factor (Input) Conditions
Factor conditions are essential variables which are required to compete in the
industry. They include natural resources, human capital, financial resources, and
physical and knowledge-based infrastructures. However, it is important to note
that, the stock of factors that a nation enjoys is less important than the rate
and efficiency with which it creates, upgrades, and deploys them in particular
industries (Porter 1990, 172).
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3) Related and Supporting Industries

Local presence of capable and competitive suppliers, as well as supporting
industries enhances innovation in the focus industry. The presence of local
suppliers and other related industries that are internationally competitive creates
advantages in downstream industries, because they deliver the most cost-effective
inputs in a timely fashion (Porter 1998a). Local suppliers and related industries
also enhance innovation in the focus industry, because it enables the focus
industry to take advantage of short communication lines and receive ongoing
exchange of ideas and innovations (Porter 1998a).
4) Demand Conditions
This determinant refers to sophisticated and demanding local customers or a
challenging environment which leads to the industry has to provide superior
solutions. According to Porter the size of home demand proves far less significant
than the character of home demand (1990, 174). The demand is considered of
good quality, if specific customer needs at a given location can provide companies
the opportunities to learn and develop targeted products and services, and even
predict the needs of customers in other markets (Ketels 2006). Consequently, local
demand conditions that lead the global market is an important factor that
determine whether a cluster location is likely to be at the cutting edge of
innovation (Ketels 2006).
2.3 The Development of National Competitiveness Study
2.3.1 Early National Competitiveness Study Prior to 1990s
The study of national competitiveness originated in the study of international trade

which states that international trade and specialization create a win-win situation
due to comparative advantages. In the book the wealth of nations, first published
in late 18th century, Adam Smith (1868) used a pin factory example to explain the
efficiency improvement as a result of labour specialization. He observed that
division of labour improved the productivity. Later studies in the first half of 19 th
century scale up productivity improvement to the national level. According to
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David Ricardo (1971), at the national level, if opportunity cost is taken into
consideration, the productivity improvement due to specialization and
international trade is called the law of comparative advantage.
One country is said to have a comparative advantage over another in the
production of a particular good relative to other goods if it produces that good
less inefficiently than it products other goods, as compared with the other
country (Baumol and Blinder 2012, 49).
The comparative advantage is shared between countries engaged in international
trade. Consequently, international trade is referred to as a win-win situation due to
the law of comparative advantage. However, in the 1980s and 1990s, the classical
concept of free trade was challenged by protectionist forces due to market failures
(Bhagwati 1994). In 1992, Lester Thurow authored a book titled Head to Head:
The Coming Economic Battle among Japan, Europe, and America. He wrote
about advanced nations being in a win-lose competition for world markets
because they all compete against each others to become the worlds most powerful
economy (Thurow 1992). This win-lose perception directly challenged the
fundamental propositions of the classical international trade model, because it
promoted local protectionism and government intervention instead of free
international trade, which the law of competitive advantage advocates (Krugman
1994, Krugman 1996).
2.3.2 National Competitiveness in 1990s and Thereafter
Despite the ongoing debates between classical (win-win situation) and the
Mercantilist-based concept (win-lose competition) of national competitiveness,
the focus has shifted towards achieving national competitiveness (Krugman
1996). Porters cluster study in 1990s lays the foundation for creating and
sustaining national competitiveness in a knowledge-based economy and is the
dominant theory in national competitiveness studies.
Improvements in distance-free Information Communication Technologies (ICT)
alter the economics of location, because companies are no longer bound to source
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inputs (i.e. labour, capital and supplies) and do business locally (Cairncross 2001).
However, Porter observes the formation of clusters in every advanced economy,
and states that with globalization, geographical location is becoming more rather
than less important (Porter 1998b, Porter 2000, Ketels 2006). It is pointed out that
localization appears to be the feature of most business activities (i.e. computers,
software, biotechnology, fashion, design, media, and music) (Martin 2007).
Indeed, while globalization and the new information and communication
technologies are rendering the national economy increasingly borderless and
problematic as a concept, it seems that economic production and organization are
becoming increasingly localized (Martin 2007, 35).
Classical economic theory underlined the importance of labour costs, interest
rates, exchange rates and economies of scale as determinants of national economic
competitiveness, and thus the studies of national competitiveness focused on
utilizing macroeconomic factors of comparative advantage in international trade
(Porter 1998b). Porters insights in relation to national competitiveness are
essentially threefold:
1) National prosperity is dependent upon the competitiveness of its local industry
which is influenced by both macroeconomic factors and the microeconomic
business environment (Porter 1998c). Porters cluster theory focuses on
microeconomic factors.
2) Industry competitiveness is created and sustained through a highly localized
process (Porter 1998b, 155). Cluster effects are the main advantages of the
localized process of upgrading (Porter 2008).
3) In the process of industry upgrading, demanding local customers, competitive
home-based suppliers, and intensive rivalry all benefit the innovation and
upgrading process (Porter 1998a).
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2. 4 Cluster Theory and Main Considerations
2.4.1 Other Authors Clusters Definitions
Alfred Marshall (2009) uses the term localized industry to describe geographic
concentration of an industry.
According to Marshall, when an industry has thus chosen a locality for itself, it is
likely to stay there long: so great are the advantages which people following the
same skilled trade get from near neighborhood to one another (2009, 255).
Physical conditions, such as climate, soil, natural resources and ease of
transportation, were identified as the most important reasons for the emergence of
localized industry. Localized industry has advantages due to the hereditary
skill, the growth of subsidiary trades, the use of highly specialized machinery and
a constant market for special skill (Marshall 2009). However, sometimes a
localized industry makes too expensive demands for one kind of labour (Marshall
2009, 226). According to Marshall (2009), multiple localized industries
contribute to regional prosperity through avoiding depression, because different
industries in the same neighborhood mitigate each others depression (227).
Porters concept of clusters shares some similarities with Marshalls localized
industry definition (Martin and Sunley 2003), because it also describes geographic
concentration of industries.
Porter (1998a) refers to the location externalities defined by Marshall as cluster
externalities, which essentially provide better access to specialized inputs,
employees, information, institution, local complementary activities and other
public goods. In addition, firms in clusters have stronger incentives for innovation
because firms can better involve local suppliers and customers in the innovation
journey, and utilize innovation in related industries that are co-located. This
enables them to remain competitive in the long run (Porter 1998a, Porter 1998c,
Porter 2000).
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Other than stronger incentives and richer capabilities for innovation, close
proximity allows them to transact business more cheaply and easily, resolve their
problems more quickly and efficiently, and learn earlier and more directly about
new and innovative technologies and practices (Rosenfeld 1997, 3).
Nevertheless, different authors tend to have a different emphasis (i.e. proximity,
collaboration, network effects, synergy, and innovation), which leads to confusion
of clusters definitions (Martin and Sunley 2003). Crouch and Farrell suggest a
more general concept of cluster which is a tendency for firms in similar types of
business to locate close together, through without having a particularly important
presence in an area (2001, 163). Similarly, Enright emphasis on proximity and a
cluster is defined as an industrial cluster in which member firms are in close
proximity to each other (1996, 191).
Roelandt and Hertag use the network concept to describe cluster and a cluster is
defined as networks of producers of strongly interdependent firms (including
specialized suppliers) linked to each other in a value-adding production chain. In
some cases, clusters also encompass strategic alliances with universities, research
institutes, knowledge-intensive business services, bridging institutions (brokers,
consultants) and customers (1999, 9).
Rosenfeld (1996, 1997) highlights that active channels for collaboration (i.e.
business transaction, information sharing, communication, feedback) and cluster
synergy in addition to geographic proximity and concentration. According to
Rosenfeld (1997), good cluster dynamics achieved through active channels for
collaboration are the key to synergy and competitiveness. Consequently, a critical
mass without collaboration, which has no cluster synergy, should not be classified
as cluster (Rosenfeld 1997).
2.4.2 Cluster Mapping
Porter (1998a) outlines five steps to identify clusters:

1) Find concentrations of similar firms and then look upstream and downstream
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in the vertical chain of firms and institutions (1998a, 200).

2) Look horizontally (i.e. complementary products and related industry) to find
industries that utilize similar downstream channels or produce complementary
products;
3) Find additional horizontal chains of industry that have input similarity and
linkages;
4) Find local institutions or collective bodies which provide specialized skills,
technology, information, capital, or infrastructures to cluster;
5) Seek out regulatory bodies that significantly influence cluster participants.
The scope of a cluster is defined as the distance over which informational,
transactional, incentive, and other efficiencies occur (Porter 2000, 16).
According to Porter (2000) a cluster encompasses the focus industry and several
related industries, and extends across the value chain of the focus and related
industries. Governmental and other institutions (i.e. university, industry
association, R&D entity) support the development of clusters, providing both
tangible (i.e. capital and infrastructures) and intangible resources (i.e. education,
regulations and policy). The boundaries of a cluster could be drawn by weighting
the importance of the linkages and complementary across industries and
institutions that enhance the competitiveness of the focus industry. The scope of a
cluster should aim to outline critical cluster attributes instead of comprising all
private and public participants (Porter 1998a).
2.4.3 Cluster Upgrading
National competitiveness is sustained through constant cluster upgrading (Porter

1998a). Quality of the National Business Environment, State of Cluster
Development, and Sophistication of Company Operations and Strategy are three
key indicators of microeconomic competitiveness (Delgado et al. 2012). Social
Infrastructure, Political Institutions, and Monetary and Fiscal Policies are key
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macroeconomic competitiveness variables that have a positive impact on country

output per potential worker (Delgado et al. 2012). Porters cluster theory focuses
on the microeconomic business environment (Ketels 2006).
Although sound macroeconomic context paves the way for economic
development, the microeconomic business environment rests on the sophistication
of the organizations operations and strategy. Therefore, the quality of the
microeconomic business environment must be addressed in the discussion of
upgrading national productivity and hence prosperity (Porter 1998b, Porter
1998c). Porters empirical study of the World Economic Forum (1998c) finds a
strong (positive) statistical relationship between the microeconomic business
environment and economic development amongst 52 countries. Consequently,
Porter (1998c) states that national productivity is essentially a function of three
interrelated determinants: Macroeconomic Policies which provide contexts,
Microeconomic Conditions that determine business environment and Company
Operations and Strategies that create competitiveness.
In the process of economic development, competition shifts from being cost-based
to knowledge-based. The formation and upgrading of clusters is essential to reach
a high-level of economic prosperity in knowledge-based competition. This is
because clusters at the microeconomic level contribute to economic development
by facilitating specialization and innovation (Porter 1998a, Porter 1998b, Porter
1998c). Clustering per se is a result of specialization, and clusters reinforce
specialization. Specialized R&D institutions are often the knowledge bridge
builders that form knowledge networks (Reve 2009). As a cluster develops, more
public and private investments are made to support specialized R&D institutions
and upgrade human resources. Knowledge spillovers in the knowledge network
contribute to faster innovation and commercialization of new technologies. As this
process continues, clusters become more competitive and knowledge-based. As
per Porters Cluster Diamond, this is essentially the self-reinforcing dynamic of
the competitive diamond (Martin and Sunley 2003).
1) Advantages of Locating in Clusters Innovative Pressure & Knowledge
Spillover
Porter (1990) argues that the sources of competitiveness for a firm that is located
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in a cluster stem from both improved operations (internal) and conditions of the
cluster diamond (external). Several empirical studies demonstrated that companies
within a cluster experience stronger growth and faster innovation than companies
which are not part of a cluster. Audretsch and Feldman (1996) examine the spatial
distribution of innovative activity and geographic concentration of production,
and find that innovative activities tend to cluster according to geographic
concentration of production, especially in industries that are characterized by
knowledge spillovers. In an empirical study based on firm activities statistics
gathered in the UK, Baptista and Swann (1998) find that firms located in strong
industrial clusters or regions are more likely to be innovative.
2) Self-Reinforcing Dynamic of the Competitive Diamond
As per Porters Diamond, each aspect within the diamond affects industry
competitiveness which ultimately affects national prosperity (1998c). The
intensity of interaction within the competitive diamond is enhanced if the firms
are clustered (Martin and Sunley 2003). Firms and institutions are likely to have
stronger linkages if they are clustered, than if they are far away from each other.
Therefore the self-reinforcing dynamic of the competitive diamond as a group
of interlinked industries and associated activities is the driving force making for
cluster development (Martin and Sunley 2003).
Although clustering takes place spontaneously, governmental policies influence
the formation and upgrading of the cluster through affecting the macroeconomic
context and microeconomic business environment. Therefore, the government
should aim to enhance the self-reinforcing dynamic of a cluster through the
variables within the Diamond (Porter 1998c).
2.4.4 Cluster Life Cycles
The evolutionary development of clusters shares similarities to the industry life

cycle. Oliver Williamson (1975) depicts the industry life cycle as an early
exploratory stage, an intermediate development stage, and a mature stage. Maskell
and Malmberg (2007) define cluster life cycles as rise, growth, decline and
possible rejuvenation of special clusters of similar and complementary economic
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activities.
However, cluster life cycles differ from the local representation of the industry life
cycle in three aspects (Menzel and Fornahl 2010). Firstly, during the growth stage,
with increasing numbers of co-located companies, cluster dynamics start to show
strong externalities which are rapid innovation and strong collaboration. Secondly,
clusters start to have a negative effect on companies within the cluster in the late
maturity stage (Menzel and Fornahl 2010). These negative effects, according to
Grabher (1993) and Maskell and Malmberg (2007) include lock-in traditional
trajectory and falling into the deep specialization trap. Thirdly, if the knowledge
heterogeneity is recreated in clusters, despite of entering into mature stage of
industry life cycle, clusters can be renewed (Menzel and Fornahl 2010).
2.4.5 Critiques of Cluster Theory
Porters Cluster mapping has been criticized for lacking clear industrial and
geographical boundaries (Martin and Sunley 2003).
Martin and Sunley argue that in practice, there are probably very few firms that
do not have horizontal or vertical links (co-operative or competitive) of some sort
with other loosely-defined geographical proximate firms. Does this mean that
virtually every firm could be considered part of a potential cluster (2003, 13)?
Porter (2004) defines a regions prosperity as productivity which is the value of
output produced per unit of labour and capital, and other resources employed.
Porters productivity-based definition standardizes the unit of analysis in the study
of national competitiveness. Although economic, social and environmental goals
are not mutually exclusive, productivity-based definition is narrowly economic
and fails to consider social and environmental aspects (Ketels 2006).
Research illustrates that the effect of a cluster approach on small enterprises
competitiveness has not been extensively researched in developing (transition)
countries, especially from the point of view of companies, as a result it is unclear
whether their performances have improved due to cluster effects (Karaev, Koh ,
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and Szamosi 2007).

Porters Cluster Diamond framework and definition of clusters have a deep root in
business strategy, industrial organization and economic interaction, and are highly
generic, vague and indeterminate (Martin and Sunley 2003). As a result, the
elasticity of Porters Cluster Diamond becomes a chaotic concept, in the sense
of equating different economic localization under one umbrella (Martin and
Sunley 2003).
2.5 The Next Development Stage of Industry Clusters
2.5.1 The Global Knowledge Hubs

According to Reve (2009), the global knowledge hubs are not simply geographic
concentration of firms, but they are characterized with dense inter-firm linkages
and strong knowledge networks. Research & Innovation is placed at the core.
Investors and Venture Capital surround the Research & Innovation. From the core
of knowledge base and competent capital, various industrial sectors of the focus
industry emerge.
Taking the example of Norwegian maritime industry, in the industry cluster
analysis, the shipping firms are placed at the core and surrounded by a large
network of customers and suppliers. Maritime R&D, institutions, and other related
service providers are at the periphery of the cluster. However, according to the
global knowledge hub framework, R&D is at the core and surrounded by
competent capital.
2.5.2 The Emerald Model
Reve and Sasson (2012) developed the Emerald Model to study the
competitiveness of a cluster. The six-dimensions of this model are Cluster
Attractiveness, Education Attractiveness, Talent Attractiveness, R&D and
Innovation
Attractiveness,
Ownership
Attractiveness,
Attractiveness.
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and
Environmental
01.09.2014
1) Cluster Attractiveness assesses the degree to which the cluster encompasses

all relevant activities (Sasson and Blomgren 2011). To study the completeness
of a cluster, Reve and Sasson (2012) suggest to examine the existence of a
critical mass of firms, study the distribution of larger and smaller companies
along the important parts of the value chain, and look into the diversity of the
cluster as a whole.
2) Education Attractiveness assesses the degree to which the advanced and
subject-specific education system channels human capital to support the
development and upgrading of clusters (Sasson and Blomgren 2011). Initially,
investments in general education are most likely institutional efforts, while as
clusters mature over time, the demand for human capital increases, and firms
in clusters often develop targeted programs to increase the pool of human
capital.
3) Talent Attractiveness assesses the degree to which the industries and firms
compete to attract the knowledge workers (Sasson and Blomgren 2011). To
stay competitive, firms need to attract talented individuals before making
investments in physical capital.
4) R&D and Innovation Attractiveness focuses on the innovation collaboration
among firms in clusters (Sasson and Blomgren 2011). A competitive cluster
has the support of a sound innovation system that involves institutions,
associations, and key industry players. Competitive clusters act as a laboratory
for the development of new technologies that could be spread out to similar
markets globally.
5) Ownership Attractiveness measures the extent to which firms in clusters are
able to attract competent capital, both domestic and foreign, to support their
development (Sasson and Blomgren 2011).
6) Environmental Attractiveness assesses the extent to which firms and
institutions in clusters are climate-sensitive and hence take actions to
implement environmental friendly production (Sasson and Blomgren 2011).
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3.0 Canada Overview
3.1 National Context
3.1.1 History
Canada was initially colonized by England in the mid-1700s. The European
explorers arrived in Canada and tried to establish claims to property of the
Aboriginal people, also referred to as the First Nations people. These people were
enrolled in industrial and residential schools run by Christian churches in order to
civilize them and convert them to Christianity. In addition, residential reserves
were created for First Nations people to live on in order to isolate them, while
they were forced to renounce their language, cultural practices and beliefs. Canada
gained independence in 1857, but it still remains loyal to the British
Commonwealth.
3.1.2 Economy
1) GDP per Capita
According to the United Nations Statistics (2014), Canada had a GDP per capita
slightly above $U.S. 42,000 in 2011, making it the 2ed highest in the G7 countries.
For the purpose of comparision, Norway has the worlds highest GDP per capita
in 2011, about $ U.S. 65,000.
2) Strong Service Sector
As demonstrated in the figure below, GDP is dominated by the service sector
(69.9%), while the industrial sector contributes 28 % and the agricultural sector
contributes 1.7% of GDP, based on a 2013 estimation.
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Canadian GDP by Sector

Canadian GDP by Industry
(April 2013)
(April 2013)
Goodsproducing
industries
Serviceproducing
industries
30%
70%
Source: Statistics Canada, gross domestic product at basic prices, by industry

According to Statistic Canada, the labour force consists of 19.08 million
individuals, 76 % of which are employed in the service industry. The high number
of employees in the service industry is typical for an innovation driven economy
(Porter 1998b).
3) Industries
Canada has the 8th largest commercial fishing and seafood industry, which
contributes $2 billion to the GDP (herein and after all $ values refers to Canadian
dollars unless otherwise noted). Canada has developed leading industries in the
sectors of petroleum, forest products, aerospace vehicles and defense, and
furniture (Harvard Business School 2014). The table below illustrates the largest
industries in Canada and this demonstrates that the economy does not have strong
industry specialization.
Canadian GDP by Industry (April 2013)
Agriculture,
forestry,
fishing and
hunting
6%
Mining,
quarrying, and
oil and gas
extraction
27%
Manufacturing
35%
Construction
24%
Utilities
8%
Source: Statistics Canada, Gross domestic product at basic prices, by industry
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4) Export-Driven Economy
According to Trading Economics (2014), exports account for more than 45% of
Canadas GDP, and the main exports are oil & gas, mineral products, chemicals,
primary metals and food products. In addition, Canada also has increasing exports
in professional and financial services (Burt 2013).
5) Major Trading Partners
Canada has close ties with other developed countries, especially the U.S. The
North American Free Trade Agreement (NAFTA), between the U.S., Canada and
Mexico has led to substantial trade between these countries as per the figures
below.
Canada's Major Trading Partners

(% of Exports, 2011)
Canada's Major Trading Partners

(% of Imports, 2011)
74%
50%
11%
4%
United States United Kingdom
4%
China
United States
China
6%
Mexico
Source: United Nations Statistics, Canada

6) Strong Correlation to the U.S. Economy
Canadas economic and technological development is parallel with that of the
U.S., as per the figures below. This can be attributed to its reliance on the U.S.
economy, especially in terms of exports. The graphs below also illustrate the
similar growth trajectory between the Canadian and U.S. economies. GDP of
Norway is added for the purpose of comparison.
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Real GDP per Capita, by Country,

19602011 ( 2011 USD)
Canada
United States
Average Annual Rates of Change

19602011
Norway
United States
Canada
Norway
$70,000
$60,000
$50,000
$40,000
$30,000
$20,000
$10,000
$0
Source: US Bureau of Labour Statistics, International Labour Comparisons
3.1.3 Social
1) Language
Canada has two official languages, French and English. French is considered the
primary language in the province of Quebec.
2) First Nations
Over the past few decades, positive steps have been taken to address the grave
injustices suffered by the First Nations people. Currently, the First Nations people
receive extra government assistance in terms of tax breaks, funding for higher
education and monthly remunerative assistance. Some First Nations people have a
share of the money distributed from oil & gas royalties on their land, or land
settlements. It is important to note that some First Nations people feel aggrieved
about the injustices they faced from the European settlers. The First Nations
communities own significant pieces of land all over Canada, and the government
is required to negotiate with them prior to using their land for any activities. The
injustices committed to First Nations communities, along with the fact that these
communities own significant pieces of land has greatly affected the oil & gas
industry in Canada, and will be discussed in further detail below.
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3) Diverse Population due to Immigration Policy

The population is diverse and this can be attributed to its immigration policies.
However, it is important to note that most immigrants entering Canada move to
the provinces of Quebec (Montreal) and Ontario (Toronto). According to Statistics
Canada, out of the 257,887 immigrants in 2012, 99,154 moved to Ontario and
55,062 moved to Quebec. The high immigrant intake, higher population density,
and less natural resources in the provinces of Central Canada, as compared to
Alberta, Saskatchewan (Western Canada) and Newfoundland and Labrador
(Atlantic Canada), has meant that the GDP per Capita is lower and unemployment
rate is higher in Central Canada. This has had several implications for the
Canadian oil & gas industry, and will be stated in this report.
4) Significant Land Mass and Lack of Population Density
Canada is located in North America with the North Pacific Ocean to the west, the
Arctic Ocean to the North and the North Atlantic Ocean to the east. Canada has
ten provinces and three territories. The ten provinces are Alberta, British
Columbia, Manitoba, New Brunswick, Newfoundland and Labrador, Nova Scotia,
Ontario, Prince Edward Island, Quebec, and Saskatchewan. The three territories
are Northwest Territories, Nunavut, and Yukon. Canada shares an 8,893 km long
border with the U.S., and has a coastline of 202,080 km. Canadas landmass
area of 9,984,670 square kilometers makes it the worlds 2ed largest country,
although its population is only 35 million.
3.1.4 Political
Canada is a parliamentary democracy, a federation, and a constitutional monarchy.

The head of state is Queen Elisabeth II, and the Prime Minister is Stephen Harper,
who represents the conservative party.
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01.09.2014
4.0 Canadian National Diamond
4.1 Government
1) Fiscal Policies
The fiscal policy in Canada varies by province, although it is coordinated with the
federal government.
2) Monetary Policies
The Bank of Canada and the federal financial authorities promote the stability and
efficiency of Canadas financial systems. According to the Bank of Canada
(2013), the Central Bank has aimed for an inflation rate of 2% since 1991. The
monetary framework enjoys a high degree of credibility as inflation has remained
close to the 2% target since 1995 (OECD 2012). In order to support economic
recovery, the Bank of Canada has maintained its policy rate at 1 % since 2010
(OECD 2012). Canadian banks have little direct exposure to the vulnerable euro
area, although a major crash could have damaging indirect effects due to lower
equity prices and higher funding costs (OECD 2012). The World Economic
Forum (WEF) ranked Canadas banking sector as the most sound in the world for
six years in a row from 2008 2013 and has praised the sector for adequate
capitalization and efficient regulation (Schwab 2013). The stability within
financial services in Canada is beneficial for the oil industry as a whole.
3) Royalty and Tax
Canadian oil & gas producers pay tax and royalty to federal and provincial
governments. The table below illustrates the fiscal burden and differences within
tax.
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01.09.2014
Federal Royalty and Tax on Oil Production
Corporate
Income Tax
Energy
Production
Royalties
The oil sector is taxed at the same rate as other sectors

15% federal corporate tax in addition to provincial tax
Provincial or territory tax ranges from 10% to 16%: 10% in Alberta
and British Columbia, 14% in Newfoundland and Labrador, and
16% in Nova Scotia.
Royalties for energy production on crown lands (in which mineral

rights that are owned by federal, provincial, and territorial
governments) pay crown royalties which range from 10% to 45%
Royalties for energy production on First Nations reserves are
negotiated on a case by case basis
Oil sands and offshore productions have special regimes
Royalties for energy production on privately owned mineral rights
are negotiated on a case by case basis
Tax Credits
20% federal tax credit on Scientific Research and Experimental

Development expenditures was eliminated in 2013
Royalty is tax deductible
Exploration cost (which is 100% expensed as costs) and
development costs (which is written off at a 30% declining balance
rate) are tax deductible
Federal Atlantic Investment tax credit (10%), will be completely
eliminated by 2015
Source: Global Oil & Gas Tax Guide 2013

As illustrated via the table below, royalty regimes vary dramatically across
provinces. Therefore, significant efforts are required to understand and negotiate
royalty rates and tax credits, which increase the transaction costs for companies.
In addition, well-by-well and location-by-location negotiation delays investment.
Furthermore, the negotiation-based royalty regime in Atlantic Canada is less
transparent and more time-consuming. Therefore, the Canadian royalty and tax
regimes make Canada a less attractive place to invest. However, the negotiationbased royalty policies can also a have positive impact on international oil & gas
companies. According to Bott & Carson (2007), the flexibilities in determining
offshore energy royalty allows investors to recover a significant amount of the
initial investment before paying a high percentage of revenues as royalties.
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01.09.2014
Federal and Provincial Royalty and Tax on Oil Production
Alberta
Conventional
Oil
Alberta
Oil Sands
Newfoundland
and Labrador
Conventional
Oil
Nova Scotia
Conventional
Oil
15% Federal income tax

10% Alberta provincial income tax
Royalty on gross revenue: royalty rate varies with the price of
oil
o $50 per barrel 29%
Royalty is not based on net profit

10% Alberta Provincial income tax
Royalty on gross revenue: 1% when development costs are not
recovered or when profits are negative
Royalty on net profit: ranges from 25% if price below $55 per
barrel to 40% at $ 120 per barrel

14% Newfoundland and Labrador provincial income tax
Royalty on gross revenue: 1% to 7.5% as cumulative
production rises
Royalty on net profit: ranges from 20% to 30% and above, rises
as project profitability rises
16% Nova Scotia provincial income tax
Royalty on gross revenue: initially 2%, increased to 5% once
project breakeven
Royalty on net profit: 20% once unused operating and capital
costs (carried forward on long-term government bond rate plus
20%, or eventually 45%) are exhausted
Source: Taxing Canadas Cash Cow: Tax and Royalty
4.2 Factor Conditions

1) Natural Resources
Canada's natural resources are widespread, with a large amount of minerals, fish,
timber, wildlife and petroleum. Its natural resources include 25% of the worlds
fresh water, 10% of its forests and 13% of its oil reserves
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01.09.2014
2) Domestic and International Transportation

According to the Global Competitiveness Reports from the World Economic
Forum, Canadas infrastructure is ranked 12th, quality of port infrastructure is
ranked 20th and quality of air infrastructure is ranked 19th out of 144 countries
(Schwab 2013). However, the low ranking can be attributed to its large size and
low population density, which makes it difficult to develop infrastructure. The
lack of population density and significant land mass have made transportation
very expensive across Canada, which has led to transportation or travel to some
U.S. destinations being more economical as compared to within Canada. It is
interesting to note that the flight time from St. Johns, Newfoundland and
Labrador, Canada to London, United Kingdom is 5.5 hours, while the flight time
from St. Johns to Vancouver, British Columbia, Canada is approximately 6.5
hours. This illustrates that transatlantic travel can be more efficient than national
travel. This also signifies the massive distances which need to be covered in
Canada.
3) Educational System
Canada is ranked 16th in higher education and training, and 10th in terms of quality
of educational system, but 34th on staff training (Schwab 2013). This illustrates
that Canada needs to improve its educational system in order to enhance its
competitiveness.
4) Low Number of PhD Graduates
Canada has one of the worlds highest education levels, and is considered one of
the global leaders in post-secondary education. However, Canada has a low
number of PhD graduates (The Conference Board of Canada 2014). The low
number of PhD graduates could mean a lack of focus on research in Canada, and a
lack of individuals capable of performing high intensity R&D.
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01.09.2014
PhD Graduates, Number of Graduates per 1000,000 Population Aged 25-39

132
127
Norway
Canada
Alta.
124
N.L.
112
101
86
76
70
55
69
58
65
55
74
55
1998
29
2000
70
2001
2002
88
74
65
53
50
37
35
31
85
73
55
27
81
64
42
25
1999
82
77
62
55
41
24
72
91
24
2003
2004
2005
2006
2007
2008
2009
2010
2011
Source: The Conference Board of Canada, PhD Graduates

5) Labour Shortage
The labour supply shortage is an ongoing challenge in Canada. It is anticipated
that from 2012 to 2015, approximately 15,000 jobs will be created in Canadas oil
& gas industry due to an aging workforce and leakage to non-energy industries,
but the current labour supply can only fill 64% of the forecasted labour demand
(Canadian Association of Petroleum Producers 2013a). Over the next decade,
labour shortage will intensify, as Alberta anticipates a shortage of 77,000 workers
(McKibbon, Mortlock, and Robinson 2011). As per the 2020 employment outlook,
the Canadian industry anticipates a demand of at least 170,000 workers
(McKibbon, Mortlock, and Robinson 2011).
Labour shortage leads to continued wage increase in mining, quarrying, and oil &
gas extraction. According to Statistics Canada, from 2002 to 2010, the weekly
wage earning for the energy sectors, increased from approximately $1,250 to
$1,800, an average of 5.5% increase every year (McKibbon, Mortlock, and
Robinson 2011). As a result, since 2006, Alberta has maintained the highest
average hourly wage in Canada. An aging population further intensifies the labour
shortage issue. Based on 2006 Census of Canada, about 60% of the pipelines
workforce and 52% of energy production workforce are in the 35 54 age groups
(McKibbon, Mortlock, and Robinson 2011). Besides the aging demographic and
labour supply shortage, high mobility is an ongoing challenge as Alberta has a
high concentration of energy-related business. This makes jobs switching within
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01.09.2014
the energy sector easy (McKibbon, Mortlock, and Robinson 2011).

6) Canadian Stock Exchange
The TSX (headquartered in Toronto, targets senior companies) and TSX Venture
Exchange (TSXV, headquartered in Calgary, targets emerging companies) have
the largest oil & gas public market in the world by number of listed oil & gas
companies (TMX Group 2014).
Worlds Largest Oil & Gas Public Market
Worlds Largest Oil & Gas Public Market Worlds Largest Oil & Gas Public Market
Number of Listed Oil & Gas Companies
Number of Listed OFS Companies
80
369
59
46
167
147
136
21
49
17
14
19
13
Source: Global Leaders in Oil & Gas

As per the figures above, 369 oil & gas companies were listed on the TSX and
TSXV stock exchanges as of December 2013 (259 on TSXV and 110 on TSX).
They had a total market capitalization of $376 billion (TMX Group 2014).
According to the TMX Group (2014), during 2013, oil & gas companies listed on
these two stock exchanges raised $5.2 billion, accounting for 15% of oil & gas
equity capital raised globally. Within the 369 listed companies, 234 companies (or
64%) have global operations. 80 energy service companies are listed on TSX and
TSXV, representing more than 20% of the worlds public energy services
companies.
7) Canadian Energy Sector Debt and Equity Financing
Canada is ranked 1st in soundness of banks, although there is room for
improvement in ease of access to loans (26th) and availability of venture capital
(23rd). Access to financing is an issue when doing business in Canada (Schwab
2013).
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01.09.2014
Despite the 2008 financial crisis, there has been significant access to capital in the
Canadian energy sector (Canadian Energy Research Institute 2013c). Based on the
2011 estimates, a total of $15 $20 billion in capital was invested via equity and
debt.
Equity and Debt Capital Raised
Annual Financings Including Trusts
Source: ARC Financial

According to Christ Theal, President and CEO of Kootenay Capital Management,
energy financing activities are cyclical because the capital market is correlated to
the performance of the energy sector as a whole. He also stated that access to
capital varies across upstream operators due to company-specific factors, such as
cash flows, commodity choices, reserves, and operations. In his opinion,
integrated upstream operators and oil field services companies are usually selfsufficient in capital, while small and medium sized companies in the energy sector
frequently raise capital.
Chris Theal stated that there has been an increase in capital within oil field
services, and this can be attributed to Canada enhancing its expertise in
developing the oil sands, with those projects being capital intensive. Despite
technological enhancement in developing unconventional resources, equity
financing for unconventional oil projects has remained weak due to significant
operational risks in the sense that oil sands projects in general have higher breakeven costs than light oil.
8) Foreign Direct Investment (FDI)
In 2012 the FDI from the U.S. into Canada was $319 billion, which is more than
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01.09.2014
50% of Canadas total FDI (Market Line 2013). Over the past four decades,
Canadas inward FDI has steadily dropped (The Conference Board of Canada
2012). Canada receives a grade D and 6th place out of the 16 peer countries on
inward FDI. Looking at FDI outflow, Canada receives a C and is ranked in 10th
place (The Conference Board of Canada 2013).
Stock of Foreign Direct Investment in Canada
by Region 2007
Africa
1%
Asia/Oceania
6%
Europe
31%
North America
and Caribbean
59%
South and
Central America
3%
Source: Statistics Canada, Canada's State of Trade and Investment Update 2008
9) Recent Decline in SOEs Investment in Canadian Energy Sector
In 2012, the capital committed by State Owned Enterprises (SOEs) to the
Canadian oil & gas sector totaled $28 billion (Canadian Energy Research Institute
2013c). This is about 15.38% of Canadian GDP in 2012. The increased level of
investment from foreign SOEs has raised serious concern with the Canadian
federal government, because foreign SOEs are inherently susceptible to foreign
government influence, which might undermine Canadian economic objectives
(Business Monitor International 2013). In December 2012, the federal government
announced changes in reviewing SOEs investment in Canadian oil sands. These
changes made it harder for SOEs to become controlling shareholders in the
Canadian oil sands projects. This development took place because the government
wanted to ensure that the oil sands were owned primarily by private sector
companies (Tertzakian and Baynton 2011).
The new practice to review SOEs investment under the Investment Canada Act
(ICA) places significant limitations on acquisitions of control by SOEs in
Canadian oil sands development. The view held among commentators was that
changes in policy would lead to more joint ventures with Canadian partners as an
alternative to the takeover of Canadian oil companies (Tertzakian and Baynton
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01.09.2014
2011). As a result of changes in ICA, as of Q3 2013, the amount of SOEs

committed to Canadian energy sector was down to $320 million (Turner and
Glossop 2014), and total foreign direct investment in the oil patch declined 92%
to $2 billion from $27 billion in 2012. The oil & gas M&A activities had averaged
around $50 billion a year over the last decade, however, in 2013 the activity has
dropped to $8 billion from $66 billion in 2012 (Government of Canada 2012).
Compared to 2012, M&A activity in the Canadian energy sector decreased over
80% in 2013 (Government of Canada 2012).
Recent policy changes have reduced foreign capital available to oil sands business
and hence delayed oil sands development. The economic consequences of
decreased SOEs capital and transactional activity in the Canadian oil sands are
negative, because SOEs investment is a critical catalyst to growth in Canadian
unconventional energy sector. According to the Alberta government, the capital
investment in the oil sands is estimated to add up to $207 billion over the 2013 to
2022 periods, and every dollar invested in the oil sands creates about $8.00 worth
of economic activity (Turner and Glossop 2014). Oil sands investment also
indirectly affect professional services, oilfield services, manufacturing, wholesale
trade, financial services, and transportation (Ivsion 2013). This policy is
questionable because Canada does not have adequate access to capital, and
foreign capital is required for the industry to grow.
4.3 Firm Strategy, Structure and Rivalry
1) Good Business Environment

Canada is ranked 17th in goods, 7th in labour and 12th in financial markets
(Schwab 2013). This illustrates that Canada has a sound business environment,
efficient markets, educated workforce, and a sound financial system, which are
important factors in making Canada an attractive country to conduct business in.
Canada is ranked 19th in availability of the latest technology (Schwab 2013),
which is moderate but leaves room for improvement, as availability of the latest
technologies is likely to enhance competitiveness.
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01.09.2014
Canada is ranked 65th in prevalence of trade barriers (Schwab 2013), which

illustrates an improvement is required in reducing trade barriers, which will
ultimately enhance competition for local industry, providing it with access to
larger markets.
2) Lack of Specialized R&D and Innovation
The biggest concern is that Canada is ranked 27th in capacity for innovation, 29th
in company spending on R&D and 18th in university and industry collaboration on
R&D (Schwab 2013). The lack of innovation and R&D is likely to significantly
affect Canadian industry.
Canada spent 1.8 % of its GDP on research and Development in 2011, compared
to the US which spent 2.8 %, while the EU average is 2.0 %. R&D spending has
not increased despite generous tax incentives for business innovation (Market
Line 2013). Canada ranked 14th overall in competitiveness for the second year in a
row, down from 9th place in 2009 (Schwab 2013). Michael Bloom, Vice-President
of the Conference Board of Canada stated: When it comes to business
innovation, Canada is seriously underperforming" (Canadian Press 2013). In
innovation and business sophistication Canada dropped 4 places to 25th place in
2013. Innovation related access to financing, and insufficient capacity to innovate
have been defined as significant factors preventing the development of industries.
Canada also has performed poorly in terms of total patents. It has developed 165.6
patents per million people compared to 385.5 in the US, and 397.5 in Japan.
Therefore, innovation performance in Canada received a D grade, and 13th place
out of 16 peer countries (The Conference Board of Canada 2013). The lack of
patents, spending on R&D, and PhD graduates appears to be significantly
impacting ability of Canadian innovation.
4.4 Related Industry

It is interesting to note that Canada is ranked 57th in value chain breadth, which is
a cause of concern and can impact the competitiveness of the industry (Schwab
2013). Canada is ranked 12th in quality of local suppliers, but much lower at 36th
place in the local supplier quantity.
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01.09.2014
4.5 Demand Conditions
Geographic proximity, the North American Free Trade Agreement (NAFTA), and
the large market size of the US have made it Canadas most important trading
partner. As discussed earlier, Canada has a strong dependence on the US economy.
The Canadian market is large and is ranked 13th in market size (Schwab 2013)
which illustrates that it has strong demand conditions.
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4.6 Diamond Summary
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01.09.2014
5.0 Oil Overview
5.1 Proven Conventional Reserves in Canada

As per the Geological Survey of Canada, Canadas conventional petroleum
reserves are divided into seven petroleum regions (Bott 2004). These seven
hydrocarbon regions are: Western Canada Sedimentary Basin (which accounts for
57% of Canadas estimated conventional petroleum reserves), Atlantic Margin
(18%), Arctic Cratonic (10%), Arctic Margin (6%), Pacific Margin (4%),
Intermountain (3%), and Eastern Cratonic (2%) (Bott 2004). Western Canada
(British Columbia, Alberta, Saskatchewan and Manitoba) and the Atlantic Margin
(New Brunswick, Newfoundland and Labrador, Nova Scotia, and Prince Edward
Island) account for roughly 75% of Canadian conventional petroleum reserves.
These percentage estimations highlight the geological potential of the abovementioned regions but do not take into consideration the vast bitumen resources in
the Alberta oil sands which are considered unconventional hydrocarbon resources.
According to the Canadian Association of Petroleum Producers (2014),
conventional petroleum reserves are characterized by small volumes that are easy
to develop, whereas unconventional reserves are featured with large volumes that
are difficult to develop. Conventional reserves include easy-to-access natural gas,
condensates and natural gas liquids (NGL) and crude oil. Unconventional reserves
include oil sands and shale gas.
5.2 Proven Conventional Oil and Oil Sands in Alberta

According to Canadian Centre for Energy Information (2014a), Alberta has an
estimated 1.49 billion of the total 4.14 billion barrels of conventional crude oil
reserves in Canada. Therefore, Alberta has 36% of Canadas total conventional
crude oil reserves.
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01.09.2014
Dirstibution of Conventional Crude Oil

Alberta's Total Oil Reserves
(2010, in billion barrels)
Condensate and
NGL
Alberta
36%
1.61
Oil Sands
169.3
Conventional Oil
The Rest
of Canada
64%
1.49
0
50
100
150
Source: The Canadian Centre for Energy Information

In 2010, Albertas oil sands reserves totalled 169.3 billion barrels (Canadian
Centre for Energy 2014). Taking into account conventional and unconventional oil
reserves, condensate, and natural gas liquids (NGL), Alberta has 172.4 billion
barrels of oil reserves, or 98% of Canadas total oil reserves, which are currently
176 billion barrels.
Dirstibution of Conventional and

Unconventional Crude Oil
The Rest
of Canada
3.6
billion
barrels
Canada's Oil Reserves

(2010, in billion barrels)
Alberta
Alberta
172.4
billion
barrels
180
160
140
120
100
80
60
40
20
0
The Rest of Canada

3.6
172.4
2.65
1.49
CoventionalOil
Conventional and Unconventional Oil
Source: The Canadian Centre for Energy Information

5.3 Crude Oil Production
According to U.S. Energy Information Administration (2014), as of 2012, Canada
is the worlds 5th largest oil producer, producing 3.9 millions of barrels per day.
According to the Canadian Centre for Energy Information (2014c), with the
expansion of oil sands projects, Canada will be the 4th largest oil producer by
2015, and Canadian oil production is forecasted to increase to 4.7 million barrels
Page 40
200
01.09.2014
per day by 2025, up from 2.8 million barrels per day in 2010.
According to the Canadian Centre for Energy Information (2014a), as of 2011,
Canada has the 3ed largest proven crude oil reserves in the world at 176 billion
barrels, and over 97% of the reserves are oil sands. According to the U.S. Energy
Information Administration, the Canadian proven oil reserve is 173.6 billion of
barrels in 2012, and still has the 3ed ranking. The figure below illustrates the
increase in total oil production in Canada by 2040, and it is clear that it is likely to
increase significantly.
Production (kbbl/d)
Source: Rystad Energy
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01.09.2014
The figure below illustrates the largest producers of unconventional energy

(herein and after refers to oil sands, shale gas and tight oil) globally in 2013, and
Canada is ranked 2ed after the US. Its total production of unconventional energy in
2013 was approximately 2250 kbbl/d.
Production (kbbl/d)
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01.09.2014
As per the figure below, Canada is still expected to be the second largest producer
of unconventional energy globally behind the US in 2025.
However, it is
important to note that total unconventional energy production in Canada is

expected to double, which translates into a higher demand for OFS within this
segment.
Production (kbbl/d)
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01.09.2014
5.3.1 Onshore
According to the Alberta Energy Resources Conservation board, Alberta is the
largest producer of conventional crude oil, synthetic crude, natural gas, and gas
products in Canada. In addition, there are three oil sands deposits Athabasca,
Pease River and Cold Lack in Alberta and Saskatchewan as illustrated below
(Canadian Association of Petroleum Producers 2013a). The oil sands are at the
surface near Fort McMurray. Therefore, mining is the technology used to recover
oil from the oil sands. Oil sands in the other two deposits are deeper in the ground
(more than 200 feet below the ground), and drilling (in situ) is the major method
used to extract the oil (Canadian Association of Petroleum Producers 2013a). The
figure below illustrates the location of the oil sands in Western Canada.
Source: Canadian Association of Petroleum Producers, About Canadas Oil Sands,

Page 5
There are other oil fields in South East, North West, Central and North East
Alberta as well. In addition to Alberta, there is onshore oil & gas in British
Columbia, Manitoba, Saskatchewan, Northern Canada (Yukon, Nunavut,
Northwest Territories) and Eastern and Atlantic Canada (Nova Scotia,
Newfoundland and Labrador, Ontario, and Prince Edward Island). There is
drilling in Southern Ontario, Western Newfoundland and Labrador, Northern
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01.09.2014
Nova Scotia, Cape Breton Island, and in Northern and Eastern Prince Edward
Island (National Energy Board of Canada 2013a).
5.3.2 Offshore
According to the Canadian Center for Energy Information, large amounts of crude
oil and natural gas are located beneath the ocean floors of Canadas shores (Bott
2004). Today, there is offshore production in the Beaufort Sea off the Mackenzie
Delta in Northern Canada. In addition, there is offshore drilling in the provinces of
Nova Scotia and Newfoundland and Labrador. The fields of Hibernia, Terra Nova
and White Rose are located off the coast of Newfoundland and Labrador. There
has also been offshore drilling and production in the field of Sable Island off the
coast of Nova Scotia. There is drilling across the continental shelf off Nova
Scotia, Laurentian Fan, and the Northumberland Strait (National Energy Board of
Canada 2013a). Canadas offshore industry has primarily focused on the East
Coast due to significant resources in Eastern/Atlantic Canada. Furthermore, these
resources are located close to energy-hungry markets in Europe, Asia, and Eastern
U.S. and Canada.
The reason there is a high level of activity in offshore is because Canadas major
petroleum basins are passing into maturity, and production is declining (Bott and
Carson 2007). Therefore, the offshore reserves will become a major source for
crude oil and natural gas. In addition, the average onshore well in Western Canada
produces less than 50 barrels of crude oil per day, while approximately 57,000
barrels of crude oil initially flowed from the Hibernia well (Bott and Carson
2007). Although the wells output will decline over time, their production is still
significantly greater than the typical onshore well. On the cost side, crude oil and
natural gas produced via offshore developments reduces Canadas use of imported
oil, which is shipped into Eastern Canada via an ocean tanker, mainly from South
America and the Middle East (Bott and Carson 2007). This is because it is cheaper
than transporting crude oil via pipeline from Western Canada. About half the
imports directly go to Eastern Canadian ports, while the remainder is delivered to
Portland, Maine for shipment via pipeline to Quebec and Ontario (Bott and
Carson 2007).
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01.09.2014
5.3.3 Oil Production
As stated above, most of Canadas reserves are unconventional onshore oil. The
figure below illustrates production forecasts in Canada specifically in regards to
offshore and onshore production. It is clear that offshore production is expected to
increase, and the increase might be significant relative to total offshore
production, but not significant compared to total Canadian oil production. In
addition, onshore production is expected to rise significantly as well.
Production (kbbl/d)
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01.09.2014
6.0 Canada Onshore Oil Diamond

6.1 Government
1) Federal Regulation
Jurisdiction over energy is divided between the federal, provincial and territorial
governments.
Provincial
governments
have
jurisdiction
on
exploration,
development, conservation and management of non-renewable resources. Federal

jurisdiction in energy is limited to regulation of inter-provincial and international
trade and commerce. The National Energy Board (NEB) regulates the Canadian
energy industry. It was created in 1959 and reports to the Federal Minister of
Natural Resources.
2) Provincial Regulation
Provinces impose royalties and taxes on oil and natural gas production. In
addition, they also provide drilling incentives and grant permits and licenses. The
provinces also regulate distribution systems and determine the retail price of oil &
gas. According to Shannon Chemlyk, Manager, Policy and Analysis at the Alberta
Energy Regulator, there are a large number of regulatory bodies in Alberta, which
makes the regulatory environment very complex, while increasing the transaction
cost. This is especially difficult for firms used to operating in the U.S., as the
regulatory environment in the U.S. is not as stringent.
3) Corporate Tax
The province of Alberta has no municipal sales tax, provincial sales tax or
provincial general capital tax. It also has the lowest provincial corporate tax rate
in Canada. Its current general provincial tax rate is 10%; while Canadas corporate
tax rate is 15%. The result of this is that Canada has the lowest corporate income
tax rate in the G7 (Calgary Economic Development 2014). In addition, businesses
in Alberta have no inventory tax, no machinery and equipment tax and no payroll
tax. Alberta has a flat personal income tax rate of 10%, and is the only Canadian
province to adopt such a tax scale. Alberta also has a Scientific Research and
Experimental Development (SR&ED) tax credit program which refunds tax credit
for SR&ED expenditures. This makes Alberta a fairly attractive place to do
business especially within the oil & gas sector.
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4) Royalty
According to National Energy Board (2000), prior to 2009, Alberta collected a
single rate of 25% royalty based on net profit of the project only when payout
began. Otherwise, there is a 1% royalty based on gross revenue if the net profit tax
is not paid, or if the development costs are not recovered. In Alberta, royalty for
conventional oil & gas production is based on production, but the oil sands royalty
regime is not (National Energy Board 2000). This difference is due to high cost,
long lead-time and the associated high-risk nature of oil sands investment. After
2009, the oil sands royalty varies by oil price. The new royalty rates on net profits
range from 25% if price below $55 per barrel to 40% at $120 per barrel (Mintz
and Chen 2010). Albertas oil sands have a lower fiscal burden than conventional
oil & gas production, because oil sands royalty regime provides an explicit
deduction of costs from the taxable income (Mintz and Chen 2010). This appears
to be an effective strategy to enhance investment into the oil sands, as the biggest
concerns appear to be price per barrel.
5) Value Add Strategy
According to Larry Ziegenhagel, Special Advisor in the Oil Sands Division at the
Department of Energy in Alberta, the government is looking to enhance the value
added activities being conducted in the province. This includes encouraging
refining activities, and increasing petroleum products and petrochemicals
productions. In addition, the government is looking to move up the oil sands value
chain to support integrated hydrocarbon processing. Therefore, the government is
encouraging
the
development
of
hydrocarbon-processing
cluster.
6) Innovative Energy Technologies Program (IETP)

As per the Government of Alberta (2014a), this program is a $200 million
commitment to provide royalty adjustments to pilot and demonstration projects
that use innovative technologies to enhance recoveries from the reserves, which
will ultimately increase production and royalties.
Successful applicants receive royalty benefits of up to 30% of the projects costs.
The total investment in the program is expected to be $1.15 billion industry
contributing $955 million, and the province contributing $195 million (Alberta
Energy 2014).
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01.09.2014
The IETP supported the first field wide polymer flood in Canada. It also funded
the first steam assisted gravity drainage project in Alberta this led to the
potential to tap another 300 billion barrels of bitumen (Alberta Energy 2014).
7) Industry Sexiness
Amir Sasson and Torger Reve used the sexiness barometer to determine talent
attractiveness as per the Emerald Model within specific industries. The sexiness
barometer was determined based on a quantitative study of positive as compared
to negative articles written about the industry in the media. As per the Emerald
Model, it impacts talent attractiveness. However, we believe that the sexiness
barometer also impacts the perception of the industry by other stakeholders.
This study has not included a quantitative study of the articles written by the
industry. However, based on our knowledge and conversations with interviewees,
we can confidently state that the onshore oil & gas industry is Canada is not sexy.
It has faced significant negative publicity, especially due to the perceived
environmental impact of the oil sands. This can be attributed to the Keystone XL
pipeline facing strong opposition not just within Canada but also the U.S. this is
discussed further below. In addition, the Northern Gateway pipeline has also faced
opposition. Last but not least, the industry appears to not be viewed favourably by
residents in Western Canada, despite the strong positive economic impact it has
had on the region.
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6.2.1 Oil Sands

According to CAPP, Canada possesses approximately 174 billion barrels of oil
that can be recovered with todays technology. Out of the 174 billion barrels, 169
billion are located in the oil sands, making Albertas oil sands the worlds 3rd
highest (behind Saudi Arabia and Venezuela) hydrocarbon deposit (Canadian
Energy Research Institute 2013a). The development of the oil sands is regulated
by the Alberta Energy Resources Conservation Board (ERCB).
According to Business Monitor International (2013), the oil sands had production
of 56% of total oil in 2012, and production is expected to rise to 59% in 2015.
However, the export potential is limited in the short run due to pipeline capacity
constraints, and Canadas exports of oil are expected to rise once there is an
increase of capacity in the pipeline.
6.2.2 Feasibility
It is important to note that oil sands are heavy and require substantial investment
in upgraders and refineries. In addition, diluents are required to reduce the
viscosity of the crude, ensuring that oil flows in the pipeline (Canadian Energy
Research Institute 2013b). This reduces the profit margin of the producers and can
at times reduce the feasibility of oil sands production.
In addition, it is not financially feasible to move forward with some oil sands
projects, as the WCS has been trading at a discount to the WTI due to
infrastructure bottlenecks. According to Craig Watt, Executive Director, Premiers
Office, Southern Alberta at the Government of Alberta, the differential between
the WTI and the WCS last year was 21%. In addition to it commanding lower
revenue, the WCS has higher costs at about $60 per barrel. Trading against the
Brent is considered the preferred situation for the oil sands, but it is only likely to
occur if Canada is able to end its singular dependence on the US or significantly
increase the oil shipped to other markets (Deloitte 2013).
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However, production forecasts are expected to rise exponentially due to several

reasons, as outlined by Bruce Edgelow, VP Energy, ATB Financial:
1) Use of radio micro-seismic technology which provides greater data, while
enhancing efficiency and certainty.
2) Enhancements in technology are allowing companies to go deeper into the
field, which will ultimately enhance total production.
3) New technology allows companies to go back into the reservoirs which
were determined as not feasible to drill anymore due to either economic or
technological reasons. Some of these wells were drilled as early as 1927,
and new technology is allowing firms to extract significant oil from these
fields.
As per Bruce Edgelow, these enhancements in technology might not enable
Canada to move ahead of Saudi Arabia and Venezuela in terms of total reserves,
but it will enable it to move significantly closer.
6.2.3 Pipeline Infrastructure Oil
Oil is transported from Western Canada to the U.S. via pipelines. However, the
limited capacity of the pipelines has reduced production. According to CAPP, the
lack of pipeline market access costs the economy $40 million per day.
According to many analysts, the current takeaway capacity of Western Canadian
oil is 3 million barrels per day (MBD), with 1.5 MBD allocated to heavy oil, such
as oil from the oil sands. In 2012, production from the oil sands in Western
Canada exceeded available takeaway capacity by 0.3 MBD. As per CAPP,
Canadas total export capacity will need to double by 2030, and this will equal 8
MBD. Therefore, even if all the pipelines including Keystone XL are built,
Canada will still need to add more export capacity (Carbon Tracker Initiative
2013).
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1) Keystone XL
The proposed Keystone XL (KXL) Pipeline project is a $7 billion project run by
TransCanada, which will connect Hardisty, Alberta with Steele City Nebraska.
This pipeline will transport crude oil from Canada and the U.S. to the large
refining markets in the American Midwest and Gulf Coast. However, President
Obama and the American government are concerned with the increase of CO2
emissions released via the pipeline. If built, this pipeline would have a capacity of
830,000 barrels per day (BPD). Taking into account that TransCanada has
allocated roughly 100,000 BPD of this amount to light oil from North Dakotas
Bakken formation, the KXL would move 730,000 BPD to the Gulf Coast
refineries, which is equal to almost half of Western Canadas takeaway capacity
for heavy oil (Carbon Tracker Initiative 2013).
2) Northern Gateway Pipeline

It is a $6.5 billion twin pipeline project run by Enbridge. It will run 1,177 km
from Northern Alberta to the deep water port of Kitimat, British Columbia. It has
a capacity of 525,000 BPD. This pipeline will provide access to new markets in
the Pacific Rim, which will ultimately reduce Canadas dependence on the US
market.
However
the
pipeline
has
faced
significant
opposition
from
environmentalists. In addition, several First Nations groups have opposed the

North Gateway pipeline proposal because they see it as an intrusion on their lands.
This project has recently been approved by the government. However, there is a
still a possibility that it could be cancelled due to further protests or lobbying from
First Nations groups.
Alternative pipeline routes face challenging prospects due to the rights and
demands of Canadas First Nations communities as they would need to agree to
any pipeline crossing their lands (Carbon Tracker Initiative 2013).
6.2.4 Rail Oil
Approximately 250,000 BPD of Canadian oil mainly light blends from

Saskatchewan are currently shipped via rail to the U.S. However, costs to move
oil via rail from Western Canada to the Gulf Coast range from $15 to $20 per
barrel, compared to $7 to $11 via pipeline. It is important to note that companies
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can cap costs to $10 per barrel if they have their own rail infrastructure. In
addition, deployment of unit trains where all rail cars are shipped from the same
origin and arrive at the same destination would help reduce costs (Carbon
Tracker Initiative 2013).
As per the Carbon Tracker Initiative (2013), report titled Keystone XL Pipeline: A
Potential Mirage for Oil Sands Investors, the question arises, as to how much of
the rail capacity will be built, and if so on what timeframe. This is because
manufacturers of heated and coiled rail cars will need to be able to deliver the
significant backlog of orders. In order to unload 20 30 thousand barrels per day
(KBD) of oil, one Gulf Coast refinery will need 1,600 heated and coiled tank cars.
Furthermore, rail cars have restrictions on maximum weight. Therefore, the higher
density of bitumen as opposed to the lighter oil reduces the number of barrels each
rail car can carry. Bitumen also needs to be heated before being unloaded and this
reduces the number of barrels each rail car can carry. These factors make it
expensive to transport heavy crude via rail. Another issue appears to be the fact
that the companies are unwilling to build loading terminals if the refineries in the
Gulf Coast do not have unloading terminals. The refiners in the Gulf Coast are not
willing to build unloading terminals, unless there are firm commitments from
producers in Western Canada.
It is important to note that currently there is limited capacity for rail, and demand
has exceeded supply for rail transportation. According to Richard Wayken, Vice
President, Pipelines at Alberta Innovates, this will lead to the oil industry paying a
higher price for rail transportation, which will take away capacity from other
industries. He stated that the limited capacity of rail has especially affected the
forestry industry. Therefore, it can be stated that the lack of pipeline capacity is
negatively impacting not only the direct and indirect oil & gas industry, but also
other industries.
Peter Tertzkakian, Chief Energy Economist and Managing Director of ARC
Financial Group has a very different opinion about rail transportation. He stated
that infrastructure (rail roads, and loading and unloading facilities) has been built
at record rates over the past 18 months. This was reiterated by Bruce Edgelow, VP
at ATB Financial, who stated that there is greater rail capacity than Keystone XL
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could provide. He also stated that rail transportation could give the WCS access to
over 40 to 50 refineries which possess the technology to refine heavy Canadian
oil, while pipeline only gives access to 4 or 5 refineries. In addition, rail can move
the oil a lot faster to the destination, which means that oil producers will be paid
for the oil quicker than if it were transported via pipeline. Furthermore, oil
companies can influence the feasibility of rail transport by examining back
hauling other products to the destination. For example, if oil is being transported
from Edmonton to Houston, another product could be transported back from
Houston, which would reduce the total cost of transportation via rail.
According to Bruce Edgelow, VP Energy at ATB Financial, the impact and
demand for rail can be demonstrated by earnings per share of Canadian rail firms
which transport crude oil. This is illustrated by the fact the incremental growth in
their earnings per share has been substantial.
6.2.5 Labour
In a report published by the Canadian Energy Research Institute, it was stated that
if all new oil sands projects were to move forward, it would lead to $2.1 trillion
investment, and would grow the labour force in North America from 75,000
employees to 900,000 which is equal to the current population of Edmonton,
Alberta, Canada. This does not take into account the growth in the work force for
existing projects (Deloitte 2012). This illustrates that there is a significant
requirement for more labour in Western Canada.
A study conducted by Deloitte (2012) illustrated that Alberta will remain an
employee-driven market until 2020. In addition, Baby Boomer retirements and the
few established plans to retain talent suggest that skill shortages will worsen in the
next few years. In addition, the higher turnover in Generations X and Y will
escalate replacement costs for talent in the oil & gas industry, leading to be 25%
200% of the annual compensation of the employee. The total cost of turnover is
$58 million for a company which has 5000 employees, and less than 10%
turnover .Temporary foreign worker allowances enable the Canadian industry to
fill gaps for skilled labour, but only on a short term basis. The program suffers a
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significant issue as the recent amendments require qualified workers to leave

Canada after four years, and then wait another four years before being eligible to
work in Canada again (Deloitte 2012). As mentioned above, according to
Statistics Canada, Ontario and Quebec are densely populated. Combined they
have a population of over 21 million, while Canadas total population is about 35
million. As per Statistics Canada, from 2009 to 2013, the Canadian population
increased by about 1%, the rate of increase was the same in Ontario and Quebec.
However, the rate of increase in Alberta was 2.3%. Despite Alberta having the
highest percentage increase in population, mainly due to international and
domestic immigration, its population increase in absolute numbers is not the same
as Ontario or Quebec. In addition, it is important to note that Ontario and Quebec
have the highest unemployment rates in Canada, and the population in these
provinces has pressured the government to reduce immigration from foreign
countries, and this has ultimately impacted the number of immigrants coming into
Alberta.
As per conversations with several of the individuals interviewed, individuals
working minimum wage jobs in Alberta were earning over $16 per hour, as
opposed to Ontario and Quebec where they were earning $10 per hour. Several
stores, restaurants and businesses were being closed earlier than preferred due to a
lack of labour. This further illustrates the significant labour shortage in Western
Canada.
6.2.6 Calgary
Calgary is the capital of Alberta and is the location of the oil & gas cluster in
Canada. According to Calgary Economic Development (2008), Calgary is now the
location of 87% of Canadas oil and natural gas producers, although there are
relatively few well sites near Calgary. However, Calgary is where the expertise in
management, finance and technology is located, and provides knowledge for oil &
gas exploration and extraction. This has enabled Calgarys economy to become a
knowledge economy (Langford, Li and Ryan 2010).
As per British Petroleums World Energy Review in 2011, Calgary is home to the
head office of almost every major oil & gas company in the country. Most of the
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industrys major trade associations, major pipeline operators, manufacturers,

oilfield service companies, drilling companies, energy related engineering firms
and consulting firms, Canadas national energy regulator and various industry
bodies are located in Calgary (Paynter and Yin 2012).
1) Education
Calgary has five post-secondary institutions within the city and two postsecondary institutions in the suburbs. In addition, there are thirty independent
research institutions in Calgary, and many of them have been recognized
internationally for their work (City of Calgary 2008). According to a report
published by the City of Calgary, there is a significant labour force shortage in the
city. In order to counter this issue, the city has taken a number of initiatives to
attract and retain labour from other parts of the country and the world. A concern
for the city is the fact that Calgarys post-secondary transition rates of 63.5% of
high school graduates proceeding towards post-secondary education within six
years of graduation are not suitable to be competitive in the global economy (City
of Calgary 2008). In addition, a low unemployment rate has contributed to higher
wage levels, which has led to many companies moving to other parts of the
country in order to be cost competitive.
2) Human Capital
As per the Civic Census of 1981, there were 591,857 residents in Calgary. The
Civic Censure of 2006 reported a population of 1,079,310 which illustrates that
the population doubled as of 1981. It is important to note that Calgary attracted
the highest number of Science and Engineering professionals, and Business and
Finance professionals across Canada. As per Calgary Economic Development
(2008), Calgary offers the highest concentration of engineering, business and
finance talent in Canada. Furthermore, Calgarys scientists and engineers have
played a significant role in developing techniques of horizontal drilling, shale
fracking, Steam Assisted Gravity Drainage (SAGD), Toe to Heel Air Injection
(THAI) and other technologies for extracting hydrocarbons (Paynter and Yin
2012).
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3) Calgary Logistics
Calgarys location in Western Canada and its integrated multi-modal
transportation infrastructure has helped it in becoming a centre for transportation
and warehousing operations (City of Calgary 2008). It has logistics, supply chain
management and transportation management services, accessible terminals,
warehousing and distribution centers, and linked road, rail and air networks. There
are rail and intermodal auto and trainload facilities available from both the
Canadian Pacific Railway and Canadian National, and they serve every major city
in North America. Furthermore, it provides access to the Canamex smart
corridor which runs between Alaska and Mexico City, and has enhanced the
development of the manufacturing base in the province (City of Calgary 2008).
4) Capital Market
Most major financial institutions and lenders are present in Calgary. 17 of the top
20 investment banks are present in Calgary. As Canadas M&A hub, it accounted
for more than 26% of the total M&A deal volume in the country, which was
higher than any other Canadian city. The finance and business industry is growing
rapidly in Calgary, and has added 13,300 new jobs over the past ten years, which
amounts to an increase of 39%. In September 2012, Calgary ranked 23rd on the
Global Finance Centre Index (GFCI), which measures 77 global financial centres
in terms of competitiveness (Paynter and Yin 2012). Calgarys financial services
sectors advantage is in its knowledgeable experience and sophistication of its
workforce, especially in the selling side of the transaction, as the energy sector in
Calgary is an attractive market for firms in financial services due to its high
concentration of capital intensive companies, high deal velocity and large deal
size (Paynter and Yin 2012). According to Paynter & Yin, while only 3% of the
worlds energy M&A deals took place in Calgary, it still represented 12% of the
total deal volume.
6.3 Firm Strategy, Structure and Rivalry
6.3.1 Industry Structure
There are five main segments in the Canadian oil & gas industry (Natural
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Resource Canada 2013):
1) Upstream oil & gas companies (exploration, drilling, production, and field
processing)
2) Oilfield services providers to the upstream oil & gas extraction operation
(perform drilling and well maintenance services based on contracts)
3) Petroleum refineries that process crude oil into refined products
4) Oil pipelines that transport crude oil and refined produced between production
sites, refineries, export or import border points, and end-users
5) Distributors of refined products at wholesale and retail levels
According to Natural Resource Canada (2013), each segment is composed of a
large number of private sector firms, including multinational companies, regional
firms, and small businesses. Several upstream players (e.g., Imperial
Oil/ExxonMobil, Shell Canada, Chevron, and Suncor) are vertically integrated oil
companies, having activities such as in-house oil field services, oil field
productions, refineries, and retail distribution networks. The figure below shows
the largest producers within Alberta.
60,000
50,000
Top Oil Producers in Alberta

(Production bbls/d)
40,000
As of June 2013
30,000
2012
20,000
10,000
-
Source: Alberta Energy Regulator
6.3.2 Investment
The oil sands have received the most FDI in Canadas energy sector since 2007.
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Foreign entities can gain access to the oil sands via farm-ins, where new entrants
can negotiate deals with established lease holders (Canada Research Institute
2013). Leases are initially available through a land tenure system which is
administered by the Alberta Department of Energy. Most of these rights are
offered through public offerings via auctions, which are held throughout the year.
Rights are sold to the higher bidder at these auctions for a minimum price of $1.25
per hectare. Canadian and foreign companies both have equal rights to participate.
This process has led to a busy market place, along with frequent rights transfers
and trades, mergers and acquisitions. Chinese and U.S. Investment represents 60%
of the total FDI going into the oil sands since 2007 (Canada Research Institute
2013).
The figure below illustrates total investment in the Canadian upstream energy
sector. We did not have the data for separate onshore and offshore investments.
However, due to the substantial production in onshore Canada, we can state that
most of these investments were made within that sector. It is clear that investment
is expected to increase over the next decade within both the onshore and offshore
clusters.

The figure below illustrates the distribution of investment, and it is interesting to
note that although total exploration expenditure might be increasing, the total
exploration expenditure relative to total expenditure is decreasing, while operating
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expenditure in terms of an absolute amount and relative to total expenditure is

increasing.
6.3.3 High Breakeven Costs

Analysts typically estimate the breakeven costs of an oil project in terms of the
price per barrel required to cover costs while achieving the required rate of return.
The main cost components are capital costs, operating costs and royalties paid to
governments. Therefore when evaluating the economics of the oil sands projects
in Canada, the important questions which need to be answered are the oil price
required to cover total production costs, the comparison of this price with other
prospective projects in the world, and the availability of cost effective access to
markets (Carbon Tracker Initiative 2013).
As per Carbon Trackers report (2013), fossil fuel projects with greater than
average costs of production are at a risk of being cancelled. This was reiterated by
Citibanks analysis of the largest 300 oil & gas projects, which indicated that
many unconventional assets, including Canadas oil sands were more expensive
than the average project and risked becoming a stranded asset. Therefore, they
could be written down or completely written off.
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6.3.4 Competition
Competition for the pipeline growth is from shale oil production in the U.S.,
which has led to an increase in crude by rail deliveries, which is more expensive.
In addition, there has been an increase in liquids produced, mainly from the
Bakken formation in North Dakota. The product found is a lighter and sweeter
version, which can be sold for a higher price to refineries as compared to the
heavier crude from the oil sands. This has reduced the U.S. demand for Canadian
crude.
In Canada, there are about 200 upstream producers, while the top 40 upstream
operators dominate the upstream market. As shown in the following chart, the top
20 upstream producers produce about 60% of total national production, and the
top 40 upstream producers produce about 80% of total national production.
Top Canadian Producters

90%
Top 20 (%)
Top 30 (%)
Top 40 (%)
79%
80%
70%
60%
50%
40%
30%
20%
10%
0%
6.3.5 Rivalry
The figure below illustrates the largest players within the global onshore industry
in 2013, along with total Canadian production. Canada was ranked in 5th place
within total onshore production in 2013, and the biggest players were Russia,
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Saudi Arabia, U.S., China, and Iraq.

The figure below illustrates forecasted global onshore oil production in 2025. It is
interesting to note that the U.S. is expected to be the largest player, and total
production in North America is expected to be very high. This might be a cause of
concern for Canada as the U.S. is its largest customer. The figure also illustrates
that total onshore Canadian production is expected to rise significantly.
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6.3.6 Local Content and Ownership
The Investment Canada Act governs the foreign ownership in Canada. To acquire
Canadian firms, foreign investors have to complete a net benefit to Canada test
to see if the investment amount exceeds $330 million, and this review process
takes at least 30 days (Deyholos and Cuschieri 2013). If the foreign investor is a
stated-owned enterprise, the investment plan has to demonstrate no threats to
Canadas national security. As discussed previously, in December 2012, changes
were made to the Investment Canada Act and these changes place significant
limitations on acquisitions of control by SOEs specifically within the oil sands.
According to Jarand Rystad, Managing Partner, Rystad Energy, international firms
are taxed 1% more than Canadian firms. Canada has a 25% branch tax imposed on
unincorporated branches of non-resident corporations in addition to the normal
corporate income tax (PwC 2012). According to Income Tax Act bulletin, the 25%
branch tax is imposed on the branchs after-tax Canadian source income, as
adjusted by deducting an allowance for investment property in Canada. If the
branch is incorporated in Canada as a subsidiary of a foreign company, it would
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be considered as Canadian resident for income tax purposes (Goodmans 2007).

The Canadian subsidiary is therefore subject to withholding tax (5%, 10%, or
15%) that applies to dividends, interest, and other passive investment income paid
to the non-resident corporation (PwC 2012). This demonstrates that the Canadian
industry has several protectionist tendencies.
In addition to the Investment Canada Act, the federal Canada Business
Corporations Act and the Business Corporations Act (Alberta) require 25% of the
directors to be Canadian residents (Deyholos and Cuschieri 2013). According to
Hkon Skretting, Regional Director, INSTOK, this lead to several Norwegian
firms having to acquire Canadian firms in order to do business in Canada.
The federal governments policy and the Immigration and Refugee Protection Act
indicate that employment opportunities in Canada belong first to Canadian
citizens and permanent residents (Deyholos and Cuschieri 2013). Production on
Aboriginal land also needs to satisfy the employment and benefit obligations
owed to Aboriginals.
Signed in 1995, the Agreement on Internal Trade is a formal agreement among the
federal, provincial and territorial governments to promote free trade within
Canada (Government of Alberta 2014b). This agreement provides two dispute
resolution mechanisms: consultation and independent panels. However, none of
the dispute resolution mechanisms are legally binding. We would argue that the
non-binding nature of the Agreement on Internal Trade might fail to bring the
desired free trade across Canadian provinces. For instance, according to Vicki
Huntington, the Legislative Assembly of British Columbia, Albertas residency
requirements for oil & gas companies is a protectionist requirement that unfairly
favoured Alberta as the location of headquarters (Huntington 2012). According to
Vicki Huntington, Albertas residency requirement states that companies must
have local offices in Alberta in order to conduct oil & gas related business in
Alberta. This local office in Alberta must also be complete with the management
team which makes full operating decisions. Albertas Energy Resources
Conservation Board Liability Management Group, which was succeeded by the
Alberta Energy Regulator in 2013, undertakes residency audit to ensure
companies locate their main office in Alberta. Vicki Huntington argued that B.C.
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has no similar residence requirement, and as a result, companies in the oil & gas
business tend to locate their main office in Calgary and not in B.C. (Huntington
2012).
According to Michael Ekelund Deputy Minister, Government of Alberta, the
government requires a registered office, which is not necessarily a head office, in
order to ensure that the government can provide the companies a notice on
environmental issues if the need arises. This residence requirement ensures that
operators are liable under Alberta law for paying royalties, cleanup, and
reclamation. This residency requirement governs only operators not OFS
companies. According to Michael Ekelund, the Government of Alberta recognizes
offices in some other Canadian provinces, but the operators have to convince the
Government of Alberta that sufficient supervision and enforcement are in place.
6.4 Related and Supporting Industry
6.4.1 Oil Field Services
Based on our interviews with industry experts from both public and private
sectors, oil field services firms in Alberta have developed excellent local expertise
in horizontal drilling and hydraulic fracturing. An entire section within this report
has been dedicated to relating and supporting industry within the oil & gas sector.
6.5.1 Markets
Only 12% of the oil produced in Canada was used within the country, and the
remaining 88% was exported. 97% of total Canadian heavy crude oil exports were
to the U.S. The most important U.S. markets were the Midwest (72% of total
exports), Rockies (12% of total exports), Gulf Coast (6% of total exports), West
Coast (4% of total exports) and the East Coast (2% of total exports). The five subregions within these areas were Chicago, Wood River, Twin Cities, Billings and
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Toledo (Canadian Energy Research Institute 2013b).

As the Midwest is where most of the Canadian heavy crude oil is supplied, the
price of the oil sands crude is determined by the refiners value of the crude in the
Midwest. According to the Canadian Energy Research Institute (2013b), the value
to the refiner is influenced by a number of factors such as the crudes gross
product worth (GPW), the value of the refined petroleum products (RPPs), yield
from the crude, processing cost, transportation cost, refinery margins and
availability, and price of competing crude. Taking into account that the majority of
the heavy crude in this region is Canadian, its price is determined by the
availability of the required refining capacity. Currently the Canadian crude is
oversupplied which is why there is a significant price differential to the WTI
(Canadian Energy Research Institute 2013a).
6.5.2 U.S. Oil Imports
The U.S. import requirements averaged 17.5 million barrels per day in 2010. 9.5
million barrels were imports, with Canada being the largest exporter of oil to the
U.S., exporting 2 million barrels per day (21% of imported oil). Saudi Arabia was
second with 1.1 million barrels per day (11.6% of imported oil) (Angevine and
Oviedo 2012). 99% of oil sold from Canadian oil sands to the U.S. is sold at
discounted rates due to oversupply to the Mid-West, which can be attributed to the
lack of market access to the Gulf Coast (Canadian Energy Research Institute
2013b). In addition, the total demand for oil is declining in the U.S., while it is
increasing for the BRIC nations. The figure below illustrates the differences in
demand between the U.S. and BRIC nations.
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U.S. and BRIC Oil Consumption, Share of Total Oil Consumption
Source: BP Statistical; Review of World Energy
6.5.3 Sluggish U.S. Demand
A concern for the Canadian producers is where the production could go after
reaching the U.S. Gulf Coast, as domestic U.S. production has been increasing
and there has been increasing efficiency of use. Regardless of Canada gaining
efficiency in production, processing and transportation, the question about who
will purchase the oil is valid. There have been predictions by some that the U.S.
could be an energy exporter by 2020 2025 (Carbon Tracker Initiative 2013).
This will ultimately reduce demand for Canadian oil sands imports.
The options to export are either via pipeline or rail. The benefits of providing
access to refineries provides the oil with access to global markets which will
ultimately lead to higher prices, and this is essential to further expanding the oil
sands production. The Keystone XL pipeline debate linking Alberta to the Gulf
Coast is key for the industry to grow (Carbon Tracker Initiative 2013). The
industrys preference is for pipelines due it being more cost effective than rail
transport. In addition, rail has substantial infrastructure development issues, and
use of rail negatively affects other industry, as stated above.
6.5.4 U.S. Shale Revolution

According to Arnt Inge Enoksen, Senior Associate at EY, the U.S. Shale
Revolutions is likely to make the U.S. oil & gas producer in the world. Taking into
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account the declining U.S. demand, it is likely that U.S. dependence on Canadian
oil will decrease significantly. Keeping in mind that Canada does not have other
markets for its oil means that oil resources in Canada could be obsolete, unless
Canada can acquire access to the Asian markets.
6.5.5 Pricing
A major challenge for the producers is the lack of access to refining capacity. The
heavy oil from the oil sands has higher sulphur content than conventional oil in
Canada and the U.S. Therefore, it can be refined by a limited number of refineries
which have invested in such technology and are located close to Western Canada.
Oil sands production is much higher than the refining capacity available to
process it in the Canadian and U.S. mid-continent markets (areas accessible via
existing infrastructure). Therefore, due to increased supply, the price for WCS has
traded at a steep discount to the WTI. Over the past 12 months, the WCS has been
priced over 24% lower than the WTI, which has reduced profit margins for the
producers (Carbon Tracker Initiative 2013).
As per the Carbon Tracker Initiative report (2013), the WCS is similar to the
Mexican heavy crude, which sets the price for the Maya. Therefore, once the
WCS is accessible to the Gulf Coast refineries, its price will be similar to Maya.
Canada exports 1.1 MBD of heavy oil to the U.S. Midwest and the amount is
expected to rise to 1.6 MBD by 2016. This increase in heavy oil exports and
infrastructure bottlenecks are constraining the oil being transported to the U.S.
Gulf Coast. This has created a glut which is depressing price for Western
Canadian Select (WCS) (Carbon Tracker Initiative 2013). This costs producers in
Canada millions of dollars per day, and is driving the push to build more
infrastructure which is required to deliver the heavy crude to refineries in the U.S.
Gulf Coast which are likely to pay a higher price. The other options appear to be
building pipelines to send the crude to the U.S. West Coast, Asia and the Canadian
East Coast. However, the short term solution appears to be pipeline expansion to
the U.S. Gulf Coast (Carbon Tracker Initiative 2013).
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6.5.6 Refining Capacity

According to the CAPP, oil sands producers are looking to increase production by
200% by 2030. However, limited export capacity is a major constraint for the
producers looking to increase production. The time required to add this capacity
and the method of transport will influence the economics of production. Oil sands
oil can only be processed in refineries with specialized equipment to handle heavy
oil, meaning that the crude from the oil sands has a restricted market, as opposed
to lighter Canadian or U.S. oil (Carbon Tracker Initiative 2013). Western Canada
has 260 KBD of refining capacity for heavy oil, which is equal to 15% of
Canadas heavy oil production. Therefore, the majority of the crude oil production
goes to refineries capable of processing this crude, and these refineries are located
in the U.S. Midwest and Gulf Coast (Carbon Tracker Initiative 2013).
As per the Consumer Council of Canada, the Canadian Petroleum Products
Institute (CPPI) stated that Canadian refineries are facing significant competition
from imports and super refiners in China and India, as these large refineries are
able to use their scale to reduce unit costs. In addition, the local demand within
Canada, the U.S. and other OECD countries is likely to go down in the future,
which would lead to the Canadian refineries facing difficult times (Canadian
Energy Research Institute 2013b).
According to Business Monitor International (2013), refineries in Eastern Canada
are reliant on expensive crude oil imports for refining feedstock. In addition,
gasoline prices are regulated in the Eastern provinces of Newfoundland and
Labrador, Nova Scotia, New Brunswick, Quebec and Prince Edward Island. This
has led Shell to convert its Quebec refinery into an oil products terminal. Poor
infrastructure in regards to connecting Western Canadian crude oil to the
refineries in Eastern Canada is another reason that has contributed to Imperial Oil
and Suncor not enhancing their production (Canadian Energy Research Institute
2013b).
The Western Canadian refineries have an advantage due to the low prices of
Canadian crude. According to Business Monitor International (2013), this can be
attributed to excess supply in the U.S. Midwest and Cushing, Oklahoma, which is
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01.09.2014
Canadas largest crude oil market. In addition, an increase in oil production from
the oil sands in Western Canada is also enhancing supply. Due to the discounted
crude oil, the refineries are able to purchase cheaper feedstock, which ultimately
leads to enhancing profits for the refiners. However, the lack of capacity in
Canadas pipeline network is still likely to be a huge issue, and this will reduce the
gains (Canadian Energy Research Institute 2013a).
6.5.7 Environmental Concerns

The concerns about the environmental impact have reduced the number of
markets open to Canada. The EU is planning to label exports from the oil sands as
dirty and will be enforcing a tax on refiners who use it (Canadian Energy
Research Institute 2013b). However, this is not likely to impact the industry as oil
sands oil is not transported to the EU, but this could be a cause of concern if
Canada obtains market access to other continents.
6.5.8 Exploration
According to Matthew Foss, Executive Director from the Department of Energy
of the Government of Alberta, there is not a lot of exploration taking place in
Alberta as the geology is reasonably mapped out, and over 300,000 wells have
been drilled. However, it is important to note that the success rate of drilling in
Alberta is significantly higher at 70% 80% compared with the success rate of
drilling in the rest of the world which is 10% 20%. More discoveries are likely
to take place even though the geology is well mapped out, but the size of projects
is likely to be small. Exploration and production are feasible for smaller
companies that have the cost structure to operate smaller scale projects. In
addition, it is important to note that the incremental cost of drilling a well in
Western Canada is reasonably less compared to other places in the world, while
the time frame required between deciding to drill and having production on the
market can be as short at 6 8 weeks, which makes small production fields more
attractive to smaller companies which have the flexibility to operate on such time
frames.
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6.6 Diamond Summary & Cluster Map
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Canadian Onshore (Alberta) Oil Cluster Map Oil Production Value Chain
Transportation
Pipelines
Oil Exploration
Oil Completion
&
&
&
Rails
Development
Production
Oil Distributors
& End
Oil
Customers
Refining
Focused Operators:
Enbridge,
Ten refineries in
Imperial Oils,
Penn West, Canada Natural Resources,
TransCanada,
Western and
Petro-Canada,
Talisman Energy, Pengrowth Energy,
ShawCor, Mullen
Central Canada;
Devon Canada,
ARC Resources, EnCana, Crescent
Group, Superior
72% of total
Gibson Energy,
Point Energy, and Pacific Rubiales
Plus, Canadian
export goes to the
Nexen, Shell
Energy
Pacific, Canadian
U.S. Midwest via
Energy, Sunwest
National rail
pipelines
Integrated Operators:
Imperial Oil/ExxonMobil, Shell Canada, Chevron, Suncor, Husky Energy, Cenovus Energy, Harvest
Operations
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Canadian Onshore (Alberta) Oil Cluster Map
Exploration
Completion
Transportati
Distribution
&
&
on
Development
Production
Pipelines &
End
Rails
Customers
&
Refining
Oil Field Services / Contractors

Related Industries
Petrochemical, Financing,
Drilling & Drilling
Trican Well Service,
Mental Fabrication,
Calfrac Well Services,
Equipment
Renewable Energy
Precision Drilling,
AMEC, WorleyParsons
Project
Development
Business Services
Engineering,
Fabrication,
Kiewit Energy Canada Corp.,
Construction &
Energy Financing & Capital Market:
Bantrel, Fluor Canada, Jacobs
Canadian Banks, State-Owned Enterprises,
Installation
Engineering Group, Secure
Private Equity
Energy Services, Tervita
Accounting & Auditing / Law Compliance

Business Consulting
Waste
Management
Specialized Institutions
Regulators:
Associations:
Research
Training Centers:
The Federal &
CAPP, GAGC, PSAC,
Institutions:
NAIT,
Provincial
JCPT, APEGBC,
Alberta Innovates,
Governments
OSLI, CEPA,
CERI, COSIA,
University of Regina
NEB, NRC, AE, AER,
CAODC, PTAC,
University of Alberta,
Enform
ESRD
CSUR
University of Calgary,
SRC, SDTC
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01.09.2014
7.0 Canada Offshore Oil Diamond
7.1 Government
7.1.1 Regulators
According to the Canada Petroleum Resource Act, federal law governs offshore
acreage, and companies have to obtain rights from the federal government through
a public-call-for-bids process. They have to pay royalty to the federal government
(Business Monitor International 2013). Accord Implementation Acts govern how
offshore energy management and revenues are shared between the federal
government and the provincial government. As a result two offshore regulatory
boards, the Canada Newfoundland and Labrador Offshore Petroleum Board
(CNLOPB) and the Canada Nova Scotia Offshore Petroleum Board (CNSOPB),
were established (Business Monitor International 2013). The roles of the
governments and regulatory bodies are listed below.
1) The Federal Government
Grants rights through a public-call-for-bids process
Collects royalty
2) Provincial Governments
Share offshore energy management and revenues with the federal

government
Govern onshore energy exploration
3) Offshore Regulatory Boards
Represent federal and provincial government Issue exploration, significant

discovery and production licensees for offshore energy production
Source: INTSOK, East Coast Canada Annual Report 2011

7.1.2 Atlantic Accord
As per the Atlantic Accord, there are legislative requirements for expenditures
related to R&D in Newfoundland and Labrador: Expenditures shall be made for
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01.09.2014
research and development to be carried out in the province and for education and
training to be provided in the province (Canada Newfoundland and Labrador
Offshore Petroleum Board 2011). According to Canada Newfoundland and
Labrador Offshore Petroleum Board (2011), the R&D expenditure that operators
have to commit is not a fixed percentage of revenue. During the exploration
phase, the R&D expenditure could up to a maximum of 5%. Production phase
R&D expenditure is the residual of total R&D expenditure (which is the product
of Statistics Canada benchmark for oil & gas extraction companies, total
recoverable oil, and long-term oil price) minus the R&D expenditure during the
exploration phase.
Newfoundland and Labrador and Nova Scotia both have Atlantic Accords with the
Government of Canada. According to Svein Inge Eida of Statoil, this leads to
preference of regional content in terms of both employees and companies.
Therefore, companies within the province(s) have an advantage as compared to
Canadian companies, which have an advantage as compared to international
companies. Such protectionist measures negatively impact companies and prevent
them from being globally competitive as per Porters diamond model.
As noted above, provincial trade can be difficult as provinces have different
agreements between them and with the federal government. According to Svein
Inge Eide, one of the reasons Norway has developed a strong offshore oil field
services industry is because it carried over its knowledge from the shipping and
maritime industries. The province of Nova Scotia has several companies within
these industries, while companies within offshore are based in Newfoundland and
Labrador. Due to the Atlantic Accord and provincial trade restrictions, the
knowledge of the shipyards and maritime industries in Nova Scotia have been
underutilized in Newfoundland and Labrador, which has prevented the offshore
oil field services cluster from being a market leader.
7.1.3 Royalty
Newfoundland and Labrador Offshore Royalty Regime and Nova Scotias Generic
Offshore Petroleum Royalty Regime provide guidelines for offshore energy
royalty collection (Business Monitor International 2013). In Newfoundland and
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01.09.2014
Labrador, oil royalties include basic royalty (calculated based on gross revenue,
and ranges from 1% to 7.5% as cumulative production rises), which are to be paid
at all stages of the project and are linked to realized prices, and net royalty
(calculated based on net revenue), which varies according to the projects
profitability (Mintz and Chen 2010). According to Bott & Carson (2007), due to
accords between the provincial and federal governments, the provinces are able to
create royalty policies based on the wellhead value of the petroleum and the
profitability of the individual projects.
There are three tiers of oil royalty rates in Newfoundland and Labrador, while four
tiers in Nova Scotia. Royalty regimes are similar in Nova Scotia and
Newfoundland and Labrador, because in both provinces royalties are determined
based on the profitability of the project (Mintz and Chen 2010). The previous
table in the Canadian National Diamond Government section illustrates the
differences in royalty rates between Newfoundland and Nova Scotia.
A recent study illustrated that oil & gas producers in Newfoundland and Labrador
and Nova Scotia have a low tax and royalty burden due to both a royalty structure
that provides excessive deductibility for investment costs and the Federal Atlantic
Investment tax credit (Mintz and Chen 2010). However, Paul Barnes, CAPP
Atlantic Region manager, stated that the complexity of the royalty regime had
made energy investment in Atlantic Canada less attractive for international oil
companies. In his opinion, despite the fact that the Newfoundland and Labrador
government have royalty regime established, royalties rates were not clear and oil
companies had to devote significant efforts in negotiating royalty payments and
seeking tax credits. This illustrates that the transaction cost involved for oil & gas
firms to negotiate royalty rates can be significant, and it should be taken into
account when determining the total cost of the project.
7.1.4 Government Initiatives
1) Ensuring Predictable Provincial Energy Strategy

According to CAPP, from 1997 to 2005, the oil & gas sector generated
approximately 48% of economic growth in Newfoundland and Labrador, and
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cumulated over $18 billion in investment (Newfoundland and Labrador 2006). In

2005, the oil & gas sector accounted for close to 25% of total provincial GDP
(Newfoundland and Labrador 2006). In order to sustain the oil & gas industry in
Newfoundland and Labrador, the CAPP recommended that the provincial
government encourage exploration through ensuring a stable business climate and
predictable regulatory system. This is because existing fields are approaching
production peaks, and stable business climate and predictable government regimes
are essential in order to attract more exploration investment (Newfoundland and
Labrador 2006).
In order to meet industry expectations, the provincial government has outlined its
long-term energy development strategy in an Energy Plan published in 2007. As
presented in the Energy Plan, the provincial government aims to achieve
economic self-reliance and environmental sustainability in the long run
(Newfoundland and Labrador Department of Natural Resource 2007). These goals
will be achieved through the conversion of non-renewable resources into
renewable, environmentally-friendly sources of energy (Newfoundland and
Labrador Department of Natural Resource 2007). Renewable sources of energy,
energy efficiency and conservation programs will be encouraged and funded by
the government through royalty revenues collected from the oil & gas sector
(Newfoundland and Labrador Department of Natural Resource 2007). Sustainable
value will be created through exporting electricity generated from renewable
sources, including but not limited to hydroelectric and wind generation.
Newfoundland and Labrador aims to become an energy warehouse for global
markets through exporting crude oil & gas, as well as electricity from renewable
sources (Newfoundland and Labrador Department of Natural Resource 2007). It
is evident that the goal of becoming an energy warehouse for global markets is
mainly dependent on oil & gas royalties (which will fund renewable energy
projects). In order to enhance royalties, the government needs to enhance oil
production in Newfoundland & Labrador, which only has three offshore wells.
Therefore, enhancing exploration is essential if the government wants to achieve
its goal of being an energy warehouse.
2) Encouraging Exploration in Existing and Nearby Satellite Fields

The provincial government has made an initial $20 million investment in 2007
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through the Energy Corporation to purchase proprietary seismic data for reevaluation and acquire new data to fill in the gaps in existing offshore geological
data (Newfoundland and Labrador Department of Natural Resource 2007). This is
because new exploration opportunities are often discovered through the process of
geological data consolidation. This demonstrates that the government understands
the importance of having more discoveries.
7.1.5 Play Fairway Analysis (PFA)

As per the Nova Scotia government website, petroleum exploration in Nova
Scotia spans over 50 years. During this period, over 200 exploration, delineation
and production wells have been drilled with discovered reserves amounting to
2.21 billion barrels of oil. However, recent exploration has not been successful,
and is shown by the fact that since 1998 over 29 wells have been drilled, costing
over $1 billion, but there has been only one commercial gas discovery Deep
Panuke. Poor success in regards to exploration has led to a decline in exploration
licenses from 59 in 2002 to only 10 being awarded in 2008. Therefore, the Nova
Scotia Department of Energy commissioned a study which determined that the
region has a perception of being a high cost environment, and high geological
risk. In order to enhance exploration activity, the government funded Play Fairway
Analysis (PFA), in order to enhance offshore petroleum activity. The goal of this
project was to demonstrate to the industry that there is opportunity in offshore
Nova Scotia. The project recognized that there was a large amount of knowledge
about the offshore geology in Halifax, and incorporated this knowledge into a
thorough geoscience analysis. This analysis addresses both the geological risk,
and the potential volumes of hydrocarbon resources (Province of Nova Scotia
2014).
According to Province of Nova Scotia (2014), there is a substantial opportunity in
shallow water, small-scale traps with potential for both oil & gas. The PFA has
also identified and mapped very large-scale potential traps that could contain gas,
condensate, and/or oil. Large-scale gas/condensate opportunities exist along the
North Eastern part of the margin in deep water and a predicted oil-charged play in
the South West of the margin.
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The diversity of the opportunity set makes Nova Scotia of interest to a wide range
of companies. Combined with the proximity to the worlds largest market and the
political stability of a G8 nation, this makes Nova Scotia Offshore a very valuable
investment opportunity for the oil industry. This became evident when,
subsequent to the completion of the PFA, two call-for-bids rounds were held. In
2011, Shell Canada was awarded four deep water parcels in the southwest for a
combined work expenditure bid of $970 million. In 2012, BP was awarded four
deep water parcels in the region south west of Sable Island for a total work
commitment of $1.05 billion. Additionally, Shell Canada was also awarded two
deep water and two shelf parcels for a combined work commitment of $32
million. In total, this resulted in $2.05 billion in work commitment bidding
including the highest bids received in Atlantic Canada on both a per bid round and
per block basis.
The 2013 call-for-bids focused on the shallow water regions north and east of the
Sable Island area. Since this call, the province has completed new geoscience
analysis including seismic reprocessing. Although there werent any bids in 2013,
the industry expects positive results in future as the province will release new
geological data when these areas again come up for bid.
The 2014 call-for-bids is in the Laurentian Subbasin. The province will release
new geoscience research in time for the 2014 call-for-bids. This new information
will address many geological questions for the industry.
7.1.6 Industry Sexiness
The Canadian offshore oil & gas industry can be considered sexier than the
onshore industry. This can be attributed to the lack of its impact on the
environment, which can also be attributed to the lack of production within this
industry. However, this is a very small industry and has not generated significant
attention as most of the attention has been focused on the industry in Western
Canada. According to Jim Logan Forbes, Senior Subsea Engineer at Wesi, the
industry has faced significant opposition from the fishing industry, and the
environmentalists. However, there have not been any spills so far which is
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beneficial for the offshore oil & gas industry. In addition, the industry is small and
has not significantly impacted the Canadian economy yet.
7.2.1 Natural Resources
According to National Energy Board of Canada (2013b), initial oil reserves in

Newfoundland and the Grand Banks totalled 2,152 million barrels, out of which
1,290 million barrels (or 60% of initial reserves) have been explored, and 862
million barrels (or 40% of initial reserves) of established reserves are remaining.
In Nova Scotia, cumulative oil production totalled 44 million barrels, and the area
offshore Nova Scotia has no significant remaining established oil reserves
(National Energy Board of Canada 2013).
7.2.2 Operating Environment

According to Max Ruelokke, former deputy minister within the government of
Newfoundland and Labrador, and currently Senior Manager at Aker Solutions,
Newfoundland and Labrador and Nova Scotia are very expensive areas to drill.
The most expensive well drilled was in Newfoundland and Labrador. He stated
that the costs in Atlantic Canada were approximately 50% for drilling, and 50%
for support services, such as helicopter flights. In addition, the operating
environment in this region is very harsh, and is considered significantly harsher
than the operating environment in Norway. This is proven by the fact that in
Norway, the well head can be placed on the sea bed, while in Newfoundland, it is
important to go ten metres into the seabed in order to prevent iceberg impact.
Furthermore, it is essential to have a Floating Production Storage and Offloading
(FPSO) vessel in Newfoundland and Labrador as all the facilities attached to the
seabed need to be rugged enough to withstand iceberg impact. The safety and
regulatory regime is very stringent, and this can be attributed to the potential for
environmental damage. According to Max Ruelokke, these factors have
contributed to oil & gas projects in Atlantic Canada having a much lower ROI.
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It is also important to note that the vessels need to be mobilized from Europe,
which is very expensive the mobilization cost for the construction vessel bought
to the Deep Panuke project cost $1 billion, and they had to do it twice. In addition,
the industry is very cyclical, and due to the weather conditions, operations can
only take place between May and October, which is the Canadian summer, and
many individuals within the industry prefer being on vacation.
7.2.3 Labour
Similar to the onshore oil production in Alberta, labour shortage also hinders the
development of the offshore energy industry in Atlantic Canada. Based on our
interview with Max Ruelokke, the labour market in Newfoundland and Labrador
is tight, and hence costs have gone up due to stronger competition for labour. In
addition, it is important to note that companies that conduct business in
Newfoundland and Labrador have to train local people because it is cheaper than
hiring expatriates. The government has done a better job of having companies
employing locals and expect to see a transformation from 20% to 90% local
employees.
7.2.4 Transportation
According to National Energy Board (2014), over 80% of oil produced offshore in
Atlantic Canada is transported to refineries located in the U.S. East Coast by
tankers. According to Jim Logan Forbes, Senior Subsea Engineer at Wesi, the oil
is located between 1500 and 2000 metres under water, which it makes it
challenging to get the oil to the market. There is a very long drop off, and an
unstable bank, which prevents oil from being transported via pipelines. Therefore,
floating structures are needed and FPSOs are used which offload the oil into the
tankers. In addition, during certain months, the weather conditions do not permit
oil to be offloaded, which is why production needs to be reduced. This illustrates
that production and transportation of oil in Atlantic Canada is very challenging.
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7.2.5 Capital Markets

According to the World Federation of Exchanges, by the end of 2010, the Toronto
Stock Exchange (TSX) is the 3rd largest stock exchange by market capitalization
in the Americas, and the 8th largest stock exchange in the world (World Federation
of Exchanges 2010). The Canadian capital market is one of the leading players in
global energy financing, and Calgary is the hub of energy financing. Canada is
famous for having one of the worlds best banking systems, as stated above.
However, energy-financing activities are less active in Atlantic Canada as
compared to Toronto and Calgary.
7.3 Firm Strategy and Rivalry
7.3.1 Local Rivalry and Capital Spending

Current operators in this area are ExxonMobil (the Hibernia and the Sable
Offshore Energy project), Suncor (the Terra Nova project), Husky Energy (the
White Rose and the North Amethyst project), and Encana (the Deep Panuke
project). Several extension projects of existing producers are anticipated in the
years to come (INTSOK 2011).
All of the upstream operators that operate on Canadian offshore fields have both
conventional and unconventional outputs (Business Monitor International 2013).
Unconventional projects are characterized by massive reserves base, high cost,
and demand for technology. According to Canadian Association of Petroleum
Producers (2013a), the oil sands, which are unconventional output reserves,
account for 36.5% or $63 billion of total industrial capital spending which
includes spending on oil sands and on conventional energy. However, industry
capital spending in Atlantic Canada is only $1.5 billion, or 2.4% of national total
as illustrated by the figure below. The figure below illustrates relative capital
spending within the oil & gas industry in Canada.
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Energy Industry Capital Spending

(in $ billions)
Northern Canada
Oil Sands
Western Canada
37.6
38
36
23
22.7
1.5
0.3
East Coast Offshore
1.5
0.3
2011
23
1.5
0.5
2012
2013
Source: Canadian Association of Petroleum Producers, Newfoundland and

Labrador's Offshore Oil & gas Industry: Opportunities and Challenges
The minimal amount of investment in the Atlantic Canada region can be attributed
to small market size. Currently, there are only four offshore producing fields, three
in Newfoundland and Labrador and one Nova Scotia.
7.3.2 Local Content and Ownership

In addition to federal level regulations mentioned in the Onshore Diamond
section, in Atlantic Canada, benefits plans (i.e., employment and training) must be
submitted and approved by the Offshore Petroleum Board before any offshore
energy-related
activities
(Canada-Newfoundland
and
Labrador
Offshore
Petroleum Board 2014, Canada-Nova Scotia Offshore Petroleum Board 2014).

Despite local content promotion, major oil companies have not altered their plans
to explore and develop in the Atlantic offshore (Center for Energy Economics
2001).
According to Kinnon Kendziora, Project Manager at Talon Energy Services, due
to the local content requirement in Atlantic Canada, foreign companies acquire
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very small local service companies and aim to earn contracts via these companies.
They do not establish an office or head office within the province in Nova Scotia
or Newfoundland and Labrador. This illustrates that the local content requirement
has not been very successful.
The preference for local content by the provincial government in Atlantic Canada
has raised the cost of production, which negatively affects the attractiveness of the
industry. According to Hkon Skretting, Canadian firms in the oil & gas sector
have the tendency to seek protection, and this leads to high production costs and
inefficiencies. This also limits competition, and a lack of competition, as per
Porters diamond model is not beneficial for the local industry, as it prevents it
from being competitive globally.
7.3.3 Cyclical Offshore Oil Industry

Despite the fact that the petroleum sector provides significant construction
employment benefits when projects are in the development phase, local
employment history of the offshore projects has been characterized by a number
of construction phase peaks and valleys as illustrated in the figure below. This has
led to significant knowledge being lost about the local industry as talent has left
the industry due to a lack of opportunities during a trough. Consequently, the
local government believes that promoting local oil field service industry will help
to stabilize the employment fluctuations in the oil & gas sector (Newfoundland
Labrador Department of Natural Resource 2007).
Number of Employees in Offshore Projects in Newfoundland and Labrador
Source: Newfoundland Labrador Department of Natural Resource, the 2007

Energy Plan: Focusing Our Energy, Page 25
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Based on our interview with Kinnon Kendziora, the small market size and cyclical
nature of oil production in the Atlantic offshore make OFS hard to grow. This is
because industry is on and off, which corresponds to the development of offshore
oil fields. It is not easy to predict the market size in Atlantic Canada, because this
region is underexplored. He also stated that due to lack of collaboration, the
experience is not taken from one project to another.
7.3.4 Global Rivalry
As stated above, the Canadian offshore industry is very small. The figure below
contains global offshore production data for 2013, and it is clear that the Canadian
offshore industry is not a large global player due to minimal production.
Production (kbbl/d)
The figure below illustrates expected global offshore production in 2025, and it is
clear that Canada is not expected to be a large global player, although its total
production is expected to increase significantly. However, it is important to note
that both BP and Shell have each committed to $1 billion in exploration in
Atlantic Canada. This is a very large investment in exploration, and local industry
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is expecting a very large find. According to Kinnon Kendziora, Project Manager

at Talon Energy Services, this find could be as large as Norways total offshore
resources.
Production (kbbl/d)
7.4 Related and Supporting Industries
7.4.1 Deep Ocean Technology Cluster

Located in St. Johns, Newfoundland and Labrador, the Ocean Technology Cluster
(OTC) consists of more than 50 local companies and institutions in the Offshore
Energy, Ocean Observation/Science, Marine Transportation, Fisheries, Education
& Training institutions, Defence & Security, and Aquaculture (OceansAdvance
2012). The sectors revenues have risen from just over $100 million in 2001 to
over $500 million dollars in 2010 (Government of Canada 2011).
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Established in 2005, OceanAdvance Inc. is a private sector-led organization that

aims to foster and promote the development and expansion of the ocean
technology cluster in Newfoundland and Labrador. According to OceansAdvance
(2014), the aggregated cluster revenue is likely to reach $1 billion by 2015.
The primary driver for the formation of the Ocean Technology Cluster is the need
to overcome the harsh environment challenges in offshore energy exploration
which is dated back to as early as 1970s (OceansAdvance 2014). Moreover,
fishing and weather forecasting have also accelerated the ocean technology
development (Safer 2012).
In Canada, a typical ocean technology firm employs 10 20 people and generates
sales on average of $100,000 to $120,000 per employee (Government of Canada
2012). As of 2012, there were more than 500 ocean technology firms in Canada.
In 2012, approximately 25% of Canadian ocean technology firms were located in
the Atlantic Canada region (Newfoundland and Labrador, Nova Scotia, Prince
Edward Island and New Brunswick) (Government of Canada 2012).
The largest customer segments of Canadian ocean technology firms are
exploration, development, and production of offshore energy. In 2000, offshore oil
& gas exploration, development and production accounted for approximately 43%
of total domestic demand for ocean technology goods and services (Government
of Canada 2012). In Newfoundland and Labrador, offshore exploration and
development accounted for 98% of total domestic demand (Government of
Canada 2012). The presence of fast growing ocean technology clusters strongly
support the offshore oil industry in Newfoundland and Labrador and Nova Scotia.
7.4.2 Secondary Petroleum Industries

The government of Newfoundland and Labrador has acknowledged the
importance of achieving value-added and secondary petroleum industries.
Therefore, it is aggressively pursuing value-added secondary processing
opportunities in refining and petrochemicals (Newfoundland and Labrador
Department of Natural Resource 2007).
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The province only has one refinery that was built in 1970s. Very few opportunities
have been identified as feasible for adding value to oil & gas processing
(Newfoundland and Labrador Department of Natural Resource 2007). This can be
attributed to low and volatile margins on refining, which has led to low
international investment for capacity increases at refineries, or the construction of
new refineries. According to Paul Barnes, the refinery in Newfoundland and
Labrador is a sour refinery which uses sour crude oil as input, but the type of
crude oil produced in the offshore Newfoundland and Labrador is light sweet
crude oil. As a result, the local refinery is not designed to process the type of
crude oil produced offshore, and hence it would be cheaper to process offshore oil
into other products elsewhere.
1) Industrial Fabrication in Newfoundland and Labrador
Industrial fabrication is the metal fabrication process of equipment used in largescale
construction
projects
(Province
of
New
Brunswick
2012).The
Newfoundland and Labrador government is looking to promote a local

engineering and fabrication industry (Newfoundland and Labrador Department of
Natural Resource 2007). This is due to the fact that over the past 15 years, the
local workforce has accumulated intensive experience in the design, fabrication,
construction, integration, and commission of offshore production platforms
through offshore construction projects such as Hibernia, Terra Nova, and White
Rose. Major industrial fabrication infrastructures are located in Bull Arm and
Marystown, and the government plans to assist these local suppliers thrive in the
international markets when there are no large-scale projects in the vicinity
(Newfoundland and Labrador Department of Natural Resource 2007).
In 2007, a fund with an initial $5 million investment was established to provide
financial incentives and marketing avenues for export-based petroleum fabrication
and manufacturing suppliers (e.g., readily transportable module fabrication
packages) to expand (Newfoundland and Labrador Department of Natural
Resource 2007). The local government also invested in the industrial fabrication
sector through the ownership of Nalcor, which is the provincial Energy
Corporation that operates the Bull Arm industrial fabrication site.
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2)
01.09.2014
Industrial Fabrication in Fabrication in New Brunswick
The province of New Brunswick in Atlantic Canada also plans to further develop
its industrial fabrication industry. As of 2011, there were approximately 100
industrial fabrication companies in New Brunswick. This sector provides highskilled employment for 2,000 people (Province of New Brunswick 2012). More
than 170 local engineering firms also support the industrial fabrication industry.
3) Industrial Fabrication in Nova Scotia

The local industrial fabrication industry in Nova Scotia can create innovation
synergies for the shipbuilding industry and ocean technology sectors (Gereffi et al.
2013), which will ultimately create synergies for oil field services firms in terms
of developing technology used for offshore production. Therefore, a strong
fabrication industry in Nova Scotia will be beneficial to the OFS industry in
Atlantic Canada. Based on our interview with Svein Inge Eide from Statoil, Nova
Scotia has strong maritime and fabrication industries, but the companies in the
Nova Scotia do not autonomously have access to the construction projects in
Newfoundland and Labrador. This is because each province has a separate
petroleum board that looks after the interest of the province. As a result, the
incentive to look at the Atlantic regional development is low. This is illustrated by
the fact that the Canada Newfoundland Offshore Petroleum Board and the
Canada Nova Scotia Offshore Petroleum Board require operators to provide a
local benefits plan before conducting any offshore oil related activities. Both
provinces base their judgement on provincial benefits. This illustrates an approach
of provinces being concerned purely about development within their province, but
not within the region of Atlantic Canada as a whole.
7.5.1 Exports/Imports
Over 81% of oil produced offshore in Atlantic Canada is transported to refineries
located in the U.S. East Coast by ocean tankers, 16% to the U.S. Gulf Coast, and
3% to the U.K. (National Energy Board 2014). Unlike the oil produced in Western
Canada, oil production in the Atlantic Canada region is exported at the Brent
crude oil price, which is the world crude oil price benchmark.
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Offshore Atlantic Canadian Oil Export by

Destinations
U.S. Gulf
Coast
16%
U.K.
3%
Atlantic Canada Refining Inputs

Eastern
Canada
20%
Imports
80%
U.S. East
Coast
81%
Source: National Energy Board of Canada, Canadian Energy Overview 2007 Energy Market Assessment
Although Canada is a net exporter, refineries in Atlantic Canada rely on the
imported oil as input. In 2007, 80% of the Atlantic refining inputs were met by
imports and the remaining 20% were met with oil produced in Eastern Canada
(National Energy Board 2014).
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7.6 Diamond Summary and Cluster Map
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Canadian Offshore (St. Johns) Oil Cluster Map Oil Production Value Chain
Oil Completion
Oil Exploration
&
&
Production
Development
Transportation
Oil Distributors
&
& End
Vessels
Customers
Oil
Refining
Operators with offshore production:
Irving, DOF
Three refineries in
Imperial Oils,
ExxonMobil, Suncor, Husky Energy,
Subsea, ROMOR
Atlantic Canada;
Petro-Canada,
EnCana
Ocean Solutions,
Over 80% of total
Devon Canada,
Genoa Design
production goes to
Gibson Energy,
International, IMV
refineries located
Nexen, Shell
Projects Atlantic
in the U.S. East
Energy, Sunwest
Coast via ocean

tankers
Operators with exploration licenses: Multi Klient Invest AS, ExxonMobil, Husky, GXT, Statoil,
Suncor, Chevron, ConocoPhillips, Petro-Canada, BP, Shell, HMDC
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Canadian Offshore (St. Johns) Oil Cluster Map
Exploration
Completion
Transportati
Distribution
&
&
on
Development
Production
&
End
Vessels
Customers
&
Refining
Oil Field Services / Contractors

Related Industries
Ocean Observation/Science,
Drilling & Drilling
Nalcor, WorleyParsons,
Marine Transportation, Mental
Wood Group PSN,
Equipment
Fabrication
Pennecon Ltd., AKAC

Inc., Hyflodraulic ltd.
Project
Development
Business Services
Engineering,
Fabrication,
Wood Group PSN, Kiewit
Construction &
Energy Financing & Capital Market:
Energy Canada Corp., Aker

Solutions, Amec Black &
Canadian Banks, State-Owned Enterprises,
Installation
Private Equity
McDonald
Accounting & Auditing / Law Compliance

Business Consulting
Underwater
Intervention
Specialized Institutions
Regulators:
Associations:
Research Institutions:
Training Centers:
The Federal &
CAPP, Oceans
Marine Institute,
Memorial University,
Provincial
Advance, NOIA, MEA
OERA, OSSC, OTEC,
College of the North
Governments
OERC, PRAC, NRC,
Atlantic, Dalhousie
CNLOPB, CNSOPB,
NSERCC, RDC-NL
University,
ACOA
SERT Centre
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8.0 Canada OFS Diamond

The OFS sector consists of firms that perform supporting activities for upstream
operators. The interaction within this cluster along the value chain or within the
lifecycle of a project is highly complex. The figure below illustrates the value
chain within OFS.
Negotiation of
Upstream
Exploration
Agreements &
Drilling and Well
Field Development
Completion
and Production
Licensing
Concession
agreements
Production
sharing
contracts
Risk service
agreements
Joint operating
agreements
Setting Fiscal
terms
Pre license
prospecting
Environmental
assessments
Geological services
Seismic surveys
(2D,3D, 4D)
Electromagnetic
techniques
Existing well data
Sedimentary
environment
analysis
Remote sensing
Scientific drilling
Well Planning
Well Design
(sections,
trajectory
subsurface
conditions)
Rigs systems
and equipment
Onshore/
Offshore
logistics
Subsurface
drilling
equipment
Remote
monitoring and
operations
support
Reservoir
management
Scheduling
Data
acquisition
interpretation,
and analysis
Reservoir
mapping
Reservoir
modeling
Subsurface
development
plan
Economic
evolution and
field
management
The OFS segment is divided into Equipment and Services. Equipment refers to all
the tools, machinery, high tech components, vehicles, vessels, and fabricated
pieces such as pipes, casing and cables that are used to locate and extract crude
oil. Equipment can be small pieces of apparatus such as handheld computer
equipment, or drill bits, while the largest equipment can be heavy machinery and
offshore platform systems. Services refer to the human resource requirements
necessary to operate the equipment in the search for, retrieval or transportation of
crude oil. Services can be general or skilled labour. Specialized expertise consists
of geophysical exploration, contract drilling, pumping, pipeline services, field
processing, transportation, engineering and geometrics.
Large extraction firms such as Imperial Oil, Husky, Shell and Statoil are highly
important in the OFS, as they represent a great portion of the demand for
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equipment and services.
8.1 Cluster Location
Alberta is Canada's principal producer of oil and petroleum products and has
approximately 68% of total Canadian oil production. According to Hathway
Management Consulting (2013), over 40 major energy companies have large
offices in Calgary, and nearly one in six working Albertans are directly or
indirectly employed in the energy sector. Many OFS companies also collocate
with operators. According to Hathway Management Consulting (2013), in
Canada, 20 operators dominate the upstream production, and there are over 8000
OFS firms with an average of 13 staff. Although we do not have an exact number
of OFS firms in Alberta, as Alberta has significant oil production, we would argue
that a large percentage of Canadian OFS firms are headquartered in Alberta. We
would argue that the Canadian Onshore Cluster (in Alberta) has reached a critical
mass due to large production, significant investment, and large number of
operators and OFS firms.
St. Johns, Newfoundland and Labrador is the location of the OFS cluster within
offshore technology. However, this cluster is very small and does not have critical
mass.
8.2 Government
8.2.1 Fiscal Environment
The province of Alberta which is the location of the OFS onshore cluster has
no municipal sales tax, provincial sales tax, provincial general capital tax,
inventory tax, machinery and equipment tax, or payroll tax. In Canada, Alberta
has the lowest provincial tax at 10%, while Canadas corporate tax rate is 15%.
Alberta has a flat personal income tax rate of 10%, and is the only Canadian
province to adopt such a tax scale. As a result, low tax regimes enhance Calgarys
attractiveness as the location of the OFS cluster.
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The province of Newfoundland and Labrador which is the location of the

offshore cluster does not have a fiscal environment which is as competitive as
that of Alberta. Its provincial tax rate is 14%, which is 4% higher than the
provincial tax rate in Alberta. In addition, like Alberta, there is a 15% federal tax.
8.3.1 Access to Capital

According to Chris Theal, President and CEO of Kootenay Capital Management
Corp, there has been a high acquisition trend in Canada. This can be attributed to
the challenge of attracting workers which has led to firms acquiring other firms in
order to gain access to employees. This was reiterated by Brian Pyra, Director of
Operations for Deloitte Canada, who stated that there are many large U.S. firms
such as Halliburton which acquire Canadian OFS firms. These firms see small
entrepreneurial companies develop complementary technology, which is why they
are eventually acquired. Geoff Hill, National Oil & Gas Leader for Deloitte
Canada agreed with this statement, and stated that Canadian firms struggle in the
commercialization phase due to a lack of funding and deep pockets. This
statement was reiterated by Anthony Patterson, CEO of Virtual Marine, who
stated that Canadian oil & gas technology companies are excellent at conducting
research and creating a prototype for a product. However, commercialization due
to a lack of capital is a significant issue and is preventing Canadian companies
from being competitive. According to Susan Hunt, Program Manager, HSE at
Petroleum Research Newfoundland and Labrador, there is a lack of capabilities
and capacities in Atlantic Canada, along with higher costs of doing business. This
leads to firms moving abroad in order to commercialize their technology.
According to Max Ruelokke, it is very difficult to grow an organization in Canada
as compared to the U.S., mainly because sources of start-up funding are limited.
He also stated that Americans are more entrepreneurial, while Canadians are risk
averse, which contributes to more innovation and start-ups being formed in the
U.S. as opposed to Canada. Anthony Patterson, CEO of Virtual Marine, stated that
all the junior venture capital companies are essentially an extension of mining
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companies he referred to them as The Junior Mining Board while there are a
significant number of venture capital companies with the software industry.
However, the venture capital market for hi-tech companies in Canada is nonexistent. He also stated that Virtual Marine requires the capital to grow and is
more likely to be acquired by an American or European company. However, this
would be unlikely if the venture capital market in Canada was strong, which
would enable Virtual Marine to expand its operations globally. According to
Kinnon Kendziora, Project Manager at Talon Energy Services, the venture capital,
and capital markets are even weaker for Atlantic Canada, as compared to the rest
of Canada, and this significantly deters companies from commercializing their
technology or growing further.
8.3.2 Investment
Between 2005 and 2011, FDI in the support activities industry has increased from
$3.6 to $11.6 billion, with the U.S. being the dominant player accounting for 72%
of the total FDI. Foreign Inflows into professional services have increased from
$9.4 billion in 2005 to $14.1 billion in 2011, while outflows of capital have not
risen significantly (The Conference Board of Canada 2012). However, Canada
performed well in engineering services exports, which totalled $3 billion in 2010,
although the number is down from $3.3 billion in 2005.
Source: The Conference Board of Canada, Fuel for Thought: The Economic
Benefits of Oil Sands Investment for Canada's Region, Page 20
Indirect investment in oil production produces jobs in six sectors as outlined in the
figure above (The Conference Board of Canada 2012). It is interesting to note that
all of the sectors in the figures outlined above pay high than average wages. The
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lowest paying sector outlined above is transportation and warehousing, and even
its earnings are 5% higher than the average. Oil field services have average
weekly wages of over $1600, which equals more than $80,000 annually (The
Conference Board of Canada 2012). The average weekly wages in Alberta are
$1140, while the average weekly wages in Canada are $932. This illustrates how
the OFS sector has significantly higher wages. This sector has been most affected
by investment in the oil sands because many of the services such as well
development and maintenance are labour intensive tasks and need to be conducted
on site.
8.3.3 Human Capital
Despite the high wages in the OFS industry, firms have had issues attracting
labour (The Conference Board of Canada 2012). 33% of large and medium sized
Canadian organizations reported difficulty in recruiting and retaining engineers
(The Conference Board of Canada 2012). This can be attributed to firms focusing
purely on the domestic market, as they do not have the resources to grow exports,
considering access to skilled labour is a significant issue for both the oil & gas
and the OFS sector. These findings were reiterated via a survey conducted by the
Petroleum Service Association of Canada, where 65% of the respondents of OFS
service firms stated that their firm was facing a shortage of labour, which led to
48% of those firms turning down new business, 65% stated that this constrained
company growth, while 45% stated that it led to succession planning challenges.
This was reiterated in a confidential Government of Canada report, which also
forecasted an increase of competition between firms for new talent, and forecasted
that operations are likely to be scaled back due to a lack of human capital. Mark
OBryne, President of Schlumberger Canada stated that the lack of qualified
personnel was a significant concern and had driven up labour costs
According to Kelly Morrison, from Canadian Petroleum Services Association, this
shortage is compounded with barriers to bring in workers from foreign
jurisdictions, along with workers having to work in remote towns with minimal
infrastructure which require them to have a fly-in and fly-out lifestyle, adding to
the issues in recruiting and retaining skilled labour. In a survey conducted by
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PSAC, 65% of the respondents within the OFS sector stated that they had
employees who needed to have a fly-in and fly-out lifestyle.
A confidential Government of Canada report stated that due to the depressed
prices of crude oil since 2008, there has been significant competition between
companies in regards to cost. This has put pressure on equipment and service
providers, as the sector has demanded lower costs within exploration and
extraction in order to maintain project viability. Employment costs are expected to
rise as is competition for human resources within the next 5 10 years, since a
number of senior employees will retire. This concern is most significant in
pipeline contracting due to recruitment challenges (seasonality, and remote
locations)
Source: The Conference Board of Canada, Fuel for Thought: The Economic
Benefits of Oil Sands Investment for Canada's Region, Page 21
The figure above illustrates the number of jobs created per $1 billion of
investment in the oil sands. Engineering falls under professional services instead
of oil field services. It is still likely that not all engineering services provided were
within for oil field services, but it can be safe to assume that a significant
percentage of engineering jobs were created in OFS (The Conference Board of
Canada 2012). The graph demonstrates that a disproportionate number of
engineering jobs are created in Alberta, which has led to a shortage of labour, and
disproportionately high wages for engineering professionals.
According to Jim Logan Forbes, Subsea Engineer at Wesi, the skill set within
upper management is not present in Atlantic Canada, which is why management
within companies in oil & gas in Atlantic Canada typically consists of individuals
from the U.K. and Norway. However, the skill set is being built and there should
be adequate human capital within this segment in the future. In addition, there is a
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lack of drilling and subsea engineers, leading to a number of small companies

such as Wesi which hire subsea and drilling engineers. In addition, the expertise in
Atlantic Canada is not present, although the skill set for managing potential
offshore platforms is present.
8.3.4 Education
There are many educational programs within petroleum management, geology,
chemical science, energy finance, and oil & gas engineering as specified in the
table below.
Programs
Institute
Petroleum Energy Technology diploma
Northern Alberta Institute of

Technology (NAIT)
Chemical Production & Power Engineering Lambton College

Technology Diploma
Heavy Oil Operations Technician Diploma
Lakeland College
Petroleum Engineering Technology Co- Northern College of the Atlantic

op program
Bachelor of Commerce with a concentration University of Calgary
in Petroleum Land Management (One of six
such programs globally)
Mineral Resource Engineering
Dalhousie University
Oil & Gas Engineering
University of Calgary, Dalhousie

University
Petroleum Engineering
University of Alberta, University

of Calgary, Dalhousie University
Petroleum Systems Engineering
University of Regina
Processing Engineering
Memorial University
Bachelor of Science in Petroleum Geology
MBA in Energy Finance
Additionally there are thirty independent research institutions in Calgary (City of

Calgary 2008).
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There are a number of research facilities and specialized educational programs on

the east coast. Dalhousie University in Nova Scotia offers engineering, petroleum
studies and oceanography, Memorial University offers programs in engineering,
geology, oceanography and nine research chairs related to oceans and offshorerelated projects. There is also an NRC lab for ocean and river engineering which
develops creative and practical solutions for engineering challenges in marine
environments.
Several offshore activities and complementary clusters are located close to
offshore activities, such as University of Victoria, Ocean Engineering Research
Group, Hydraulics and Maritime Research Centre, and marine transportation
service firms like ROMOR Ocean Solutions. These activities suggest Canada has
a strong infrastructure for facilitating collaboration, research and innovation.
In the figure below, Canadian universities awarded more degrees, diplomas and
certificates in 2008 than in 1992. It is important to note that growth was most
significant at the graduate level, with an increase of 88.6% at the masters level,
and 77.9% at the doctorate level. In addition, the field of engineering experienced
growth of 61.5%, which is an excellent sign for the OFS industry.
Educated workforces
Educated Workforces
Educated workforces
Growth Ra te from 1992 to 2008
Canadian Universities: Degrees, Diplomas or

Certificates
Canadian Colleges: Degrees, Diplomas or
Certificates
Engineering Students
88.6%
244,380
168,870
137.8%
159,444
77.9%
61.5%
44.7%
67,062
11,535
1992
18,627
Master's
Level
2008
Doctorate Students in Canadian Canadian

Level
the Field of University Colleges
Engineering Graduates Graduates
Source: Conference Board of Canada
8.3.5 Innovation
Porter (1998b) stated that innovation is an important element which illustrates the
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clusters performance, because it enables competitive advantage to be sustained.

In the Emerald Model, R&D activities are considered important due to their
ability to continuously develop and create new knowledge (Reve and Sasson
2012). A popular conceptual measure of innovation is the National Innovative
Capacity (NIC) defined by Porter and Stern (2001). The main elements are
infrastructure, firm specific conditions and the quality of the links between them.
Canada is ranked 18th within university and industry R&D collaboration (Schwab
2013), which illustrates that there is significant room for growth in order to
enhance the National Innovative Capacity.
As per the Energy Policy Institute of Canada, most of the worlds energy R&D is
undertaken in International Energy Agency (IEA) member countries. Canadas
share is 4% of the two year average, which is not proportionate with its 11.5%
overall share of total energy production from IEA countries. However, this does
not take into account the amount invested by energy companies in their
laboratories and in field experiments, which is estimated at $1 billion annually.
There are no specific numbers on the OFS sector, but Canadian oil & gas
(extraction) has had a decrease in total R&D expenditures from $929 million in
2009 to $757 million in 2011 (- 18.6 %) (Statistic Canada 2013). Keeping in mind
low levels of R&D spending in Canada, a further reduction is a significant cause
of concern.
8.3.6 Research Programs

According to Geoff Hill, Partner at Deloitte Canada, the research credits offered
by the government are not as attractive as they used to be, as the definition of
credits has narrowed substantially. Another source also stated that the government
lacks funding, and the research credit programs are not run efficiently by the tax
authorities, while there are significant inconsistencies in terms of eligibility.
According to Richard Grant, Partner at Gowlings Law Firm, the oil & gas sector
does not have the R&D credits it used to have, and that the lack of tax incentives
for technology and research is limiting R&D. According to Mark Salkeld,
President and CEO at Petroleum Services Association of Canada, a large number
of OFS firms do not apply for research grants, while several small OFS firms do
not know that a significant portion of the work that they are performing on site is
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classified as R&D and is eligible to be subsidized by the government.

According to the Conference Board of Canada (2012), the Scientific Research and
Experimental Development (SR&ED) program is the
largest source of
government support for R&D, which gives firms cash refunds or tax credit for
R&D expenditures. This accounted for $3.53 billion in 2010, of which 8.7% was
in the mining and oil & gas sector. Total federal support for R&D was $6.44
billion, and it was interesting to note that mining, and oil & gas received only
3.8% of the total support.
8.3.7 Patents
Canada had 881 oil & gas technology related patents in 2013, which is a
significant increase from 240 in 2003. However, according to Matthew Foss,
Executive Director, Economics and Markets at the Department of Energy,
Government of Alberta, this can be attributed to advancement in horizontal and
multi stage fracking, which led to several patent applications within that specific
field. This included innovations within bits, drilling apparatus and safety
equipment. He also stated that the broad range of operating conditions in the
province enable it to function as a research laboratory for OFS companies.
8.4 Firm Strategy, Structure & Rivalry
8.4.1 Structure
The Canadian OFS industry is dominated by small and medium sized firms. The
majority (75%) of Canadian oil & gas equipment and service companies can be
classified in this category. Although the number of firms might be significant, it is
important to note that the top 4 firms earn 49% of the revenue, while the top 10
firms earn 75% of the revenue, as per the figure below.
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Canadian OFS Companies Revenue

Distribution 2013 (MUSD)
$13,154
(100%)
Total
Top 10
$9,859 (75%)
$6,473
(49%)
Top 4
Average
37 firms
$356
(3%)
0
5000
10000
15000

As per a confidential Government of Canada report, 85% of the members of the
Canadian Association of Geophysical Contractors are considered as small
enterprises, while 70% of the members of the Offshore Technologies Association
of Nova Scotia are small to medium enterprises, and these small companies often
take on high-risk jobs that larger companies are not willing to undertake. It is
important to note that the oil & gas extraction business brought in $34.5 billion in
investment, making it the largest private sector investor in Canada. The number of
OFS firms cannot be established as there are a large amount of operators within
this segment who operate on a very small scale they have anywhere between 1-5
employees.
8.4.2 Rivalry Onshore

As per the figure below, and as stated above, four Canadian firms have dominated
the North American market. These firms are: Precision Drilling, Trican
Wellservice, Ensign Energy, and Calfrac Well Services. Precision Drilling and
Ensign Energy are large drilling firms, while Trican Wellservice and Calfrac focus
on fracturing and tubing. This illustrates that Canadians firms have expertise
within these two segments.
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Revenues of Large Canadian OFS Companies
in North America Market 2013
(MUSD)
$1,893
$2,000
$1,797
$1,800
$1,506
$1,600
$1,400
$1,277
$1,200
$1,000
$800
$600
$400
$0
Aecon
Bird Construction
Black Diamond
Bonnets Energy Corporation
Calfrac Well Services
Calmena Energy Services
Canadian Energy Services
Canyon Services Group
Cathedral Energy Services
CHC Helicopter
Eagle Well Servicing
Enerflex
Enseco Energy Services
Ensign Energy
Essential Energy Services
Finning
Gasfrac Energy Services
Hyduke Energy Services
Macro Enterprises
McCoy
Mullen Group
Orion
Pason Systems
PHX Energy Services
Precision Drilling
Pulse Seismic
Ridgeline Energy Services
Savanna Energy Services
Secure Energy Services
ShawCor Industries
SNC-Lavalin
Strad Energy Services
Trican Wellservice
Wenzel Downhole Tools
Western Energy Services
Winalta
Xtreme Drilling and Coil
$200

According to Brian Pyra, Director of Operations at Deloitte Canada, there is
significant local competition in Canada as compared to the U.S., where 5 firms
control the market. There are 61 firms controlling the market in Canada, which
demonstrates that there is significant competition in the Canadian OFS sector. It
needs to be taken into account that 4 large firms account for most of the revenue.
The figure below illustrates the location of the headquarters of the largest OFS
companies in North America, and Canada seems to have the second highest
number of headquarters after the U.S. This is positive because headquarters are
where most of the knowledge intensive tasks take place. This suggests that a large
amount of knowledge intensive tasks within OFS are taking place in Canada.
According to Mark OBryne, President of Schlumberger Canada, there are a total
of 250 service companies, and 75,000 employees within this cluster. However,
profitability is lower than in other regions of the world. He also stated that this
market is very competitive due to the low entry barriers as there a large number of
producers. Although the larger firms align with the larger producers, there are a
number of smaller operators looking for alternative service providers, known to
offer cheaper services.
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Headquarter of Large OFS Companies

in the North America Market
2013
69
37
13

As per the figure below, U.S. firms earned the highest amount of revenue in the
North American market, followed by Canadian, Swiss, and U.K. based firms.
Total Revenues Made by Headquarters of Large OFS Companies
2013 (MUSD)
$13,154
$1,190 $498 $5,024
$0
$188
$5,009
$428
$109
$40
$936
$1
$2,508 $1,782 $1,120
$90,674
$10,294 $7,167

However, it is interesting to note that average revenue per Canadian OFS firms in
the North American market is significantly lower as compared to the U.K., Swiss,
U.S., French and Bermudan firms.
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Average Revenue of Large OFS Companies

2013 per Firm per Country (MUSD)
$2,512
$2,059
$1,314
$1,120
Avg.$636
$595 $498
$835
$796
$468
$356
$418
$137
8.4.3 Rivalry Offshore
Many value added activities are conducted via large companies such as
Halliburton, Baker Hughes, Schlumberger and Weatherford. According to Max
Ruelokke, Senior Manager at Aker Solutions, integrated operators such as
ExxonMobil prefer having one company which conducts all the work along the
value chain under one offshore OFS contract. This is very different from the
onshore OFS environment, because onshore operators like to have multiple
contractors specializing in niches. This demonstrates that it can be challenging to
operate in offshore OFS industry as there are significant barriers to entry, the most
significant being the need to be vertically integrated.
8.4.4 Competitive Advantage Onshore

According to a confidential Government of Canada document, Canadian onshore
drilling equipment and technology firms, which are mainly located in Western
Canada, are considered some of the best in the world. Mark Salkeld, President of
the Petroleum Services Association of Canada, stated that Canada has strict safety
and environmental regulations, and these regulations have enabled Canadian OFS
providers to become global leaders in developing environmentally sustainable
technologies while adhering to strict safety regulations. He also stated that
Canadian OFS firms are strong within the manufacturing and engineering
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segments, and the reason for significant strength in manufacturing can be

attributed to the strong fabrication industry.
Richard Wayken, Vice President Pipelines at Alberta Innovates, stated that OFS
firms need to enhance performance in metal fabrication, and focus on innovation
within leak detection for pipelines, which is a massive market, as over 95% of
Canadas oil is transported via pipelines. Furthermore, OFS firms in Canada need
to increase collaboration with the Aerospace Cluster in Montreal in order to
enhance synergies.
It is important to note that most of Canadas oil deposits are classified as
unconventional and heavy and are found in sand or shale deposits. As per a
confidential Government of Canada document, this has driven the development of
technologies that can separate oil from impurities, and other technologies such a
horizontal drilling and fracking. This can be attributed to the reason behind why
four of the largest Canadian OFS companies operate within these segments.
According to Mark Salkeld, Canadian OFS firms are global leaders in multi stage
fracking and horizontal drilling. This is consistent with Porters diamond, which
iterates the importance of strong local demand and sophisticated customers as
integral component of developing industry. It is interesting to note that production
of unconventional resources in both Canada and the U.S. is expected to rise
significantly over the next decade, which could enable these OFS companies to
grow further.
8.4.5 Competitive Advantage Offshore
Offshore technologies are dominated by U.S., U.K. and Norwegian firms, while
Canadian OFS service companies lack the expertise in offshore technology.
According to Max Ruelokke, Senior Manager, Aker Solutions, Canada, this can be
attributed to the fact that there are only four offshore producing wells (three in
Newfoundland, one in Nova Scotia). This is consistent with Porters diamond,
which emphasizes the importance of strong local demand as a key component of
developing the industry.
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According to Max Ruelokke, Atlantic Canada has the harshest and one of the most
expensive operating environments in the world. As introduced previously in the
Canada Offshore Oil Diamond section, the cost of operating in the icebergs
environment is very high it can cost $500,000 to drill per day, with the services
required to support drilling costing a similar amount. In addition, it is important to
have an FPSO vessel which must be able to be disconnected very quickly because
of several icebergs. This illustrates the difficulties of operating in Newfoundland
and Labrador. As per the Porters diamond, sophisticated local demand is a key
driver for industry development. We would argue that challenging operation
conditions would benefit the Canadian offshore OFS industry.
8.4.6 Lack of Global Canadian OFS Firms
The Canadian OFS cluster also consists of large international firms such as
National Oilwell Varco, Shell, Baker Hughes and Halliburton. However, there is a
lack of globally strong Canadian OFS firms, despite those firms having excellent
developed technologies and knowledge. According to Chris Theal and Brian Pyra,
this can be attributed to lack of access to investment capital. Geoff Hill, National
Oil & Gas Leader for Deloitte Canada, stated that there is a poor venture capital
and angel-investing infrastructure in Alberta. This was reiterated by Richard
Wayken who stated that it is essential to develop an innovation system to connect
the industry with venture capitalists. This will provide OFS firms the opportunity
to grow as opposed to being acquired by the asset heavy firms such as
Schlumberger, Haliburton and Baker Hughes. According to Tore Sorheim, General
Manager Trican Well Services Norway, when the big four firms acquire smaller
firms, they typically allow a grace period of two years, where the small firms are
allowed to conduct their operations. After that period is over, the knowledge from
these firms is absorbed into the head office. This view was reiterated by Mark
OBryne, President of Schlumberger Canada. This is not very beneficial for the
cluster, as it could lead to expertise leaving the local industry.
There is significant North American demand, which has led to firms going
international only when there has been a reduction in local demand. According to
Peter Tertzakian, Chief Energy Economist and Managing Director of ARC
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Financial Group, profitability within Canada is very high, which prevents firms
from going global. In addition, several firms went to international markets in the
1990s, and were unsuccessful. These failed ventures have led to other firms within
the industry being pessimistic of the international market. In addition to North
America being a comfort zone for many firms, the economy has been strong,
which is the reason why Canadian OFS firms have not needed to expand.
Furthermore, Canada is geographically distant from many markets that require oil
field services, and this makes it difficult for Canadian OFS firms to go global.
Max Ruelokke stated that Canadians are not as entrepreneurial as Americans,
while being more risk averse, which is preventing these firms from going global.
Craig Watt, Executive Director, Premiers Office, Southern Alberta, Government
of Alberta stated that the lack of asset heavy companies in Canada is not purely
attributed to the oil & gas sector, but across other industries as well. According to
Brian Pyra, this is due to the Canadian psyche, which essentially plans for failure
by making small investments in small operations. He stated that for firms to
operate effectively in global markets they need to have production of 500,000
barrels per day. He gave an example of an undisclosed client who has an operation
in Australia but is facing difficulty being competitive because the operation is not
large enough to attain economies of scale.
Hkon Skritting, from INTSOK, also stated that Canadian companies which come
to Norway do not fully establish their operations, and take an unserious
approach by attending fairs with other companies from the region, and not doing
the market research and analysis required to be successful. He stated that many of
these companies have the technology and capabilities to be successful in Norway,
but their lack of commitment to the market prevents them from gaining clients.
Brian Pyra stated that in order for firms to be successful, they need to attain
economies of scale, and follow their current clients in going global. Furthermore,
firms need a combination of capital markets, strong local competition, good
management, and understanding of the global environment, while ensuring that
they sign contracts which provide them with a good return. In addition, they need
to spend time in the local environment in order to fully understand the market and
the drivers which will make them competitive. The lack of capital markets,
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venture capital and private equity has led to Canadian firms not being globally
competitive. Brian Pyra also stated that private equity firms in the U.S. have been
looking at OFS firms in Canada, and if these firms get an influx of private equity,
it could help them go global.
According to Richard Wayken, OFS firms have several projects they are working
on, hence they do not have the resources or capacity to innovate, and this could
negatively impact the industry as innovation is a significant driver in obtaining
and sustaining competitive advantage.
8.5.1 Domestic Demand
The figure below illustrates that demand conditions in Canada within OFS, and it
is clear that demand is expected to rise within the next decade as production
increases.
180000
160000
140000
120000
100000
80000
60000
40000
20000
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
2023
2024
2025

As per the figure below demand conditions for onshore OFS are very strong and
demand is expected to increase in all components within onshore OFS, especially
within maintenance, operational and provincial services, well services, drilling
tools and internal EP expenditure. However, demand conditions within offshore
OFS are poor as reflected by the demand for subsea equipment and installation
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expenditure. This can be attributed to the small number of wells in Atlantic

Canada. However, it is important to note that BP and Shell have spent $1 billion
each on exploration in Atlantic Canada and are expecting very large finds.
Therefore, there could be a significant increase in demand, although it could be
after 2025. According to Mark OBryne, President of Schlumberger Canada, the
Canadian oilfield market has changed dramatically since the shale revolution.
From shallow gas dominated market it has moved to capital intensive horizontal
drilling environment. The fastest growing segments of the market are hydraulic
fracturing, horizontal drilling, supply logistics, high temperature artificial lift &
associated measurements.
Distribution of OFS Expenditures

2000 - 2025
Distribution of OFS Expenditures

2000 2005
Maintenance Services EP Expenditure (MUSD)

Operational and Professional Services EP Expenditure (MUSD)
Engineering EP Expenditure (MUSD)
Procurement, Construction and Installation EP Expenditure (MUSD)

Well Service EP Expenditure (MUSD)
Drilling Tools and Commodities EP Expenditure (MUSD)
Rigs and Drilling Contractors EP Expenditure (MUSD)
Topside and Processing Equipment EP Expenditure (MUSD)
Subsea Equipment and Installation EP Expenditure (MUSD)

Transportation and Logistics EP Expenditure (MUSD)
Seismic and G&G EP Expenditure (MUSD)
Internal EP Expenditure (MUSD)

According to Svein Inge Eide, Canadian OFS companies in Atlantic Canada face a
significant disadvantage because projects are unstable. This is not beneficial as it
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prevents the accumulation of knowledge and drives away human capital.

Ultimately, it prevents companies in Atlantic Canada from growing. This was
reiterated by Kinnon Kendziora, Project Manager at Talon Energy Services, who
stated that this prevented investment, especially significant investment by Subsea
companies. He attributed this to being the reason why large offshore machinery
comes from overseas.
8.5.2 International Demand
As per the figure below, the large four Canadian OFS firms earn the most amount
of revenue abroad, and there appears to be only ten firms which earn in excess of
$ U.S. 500 million in revenue from international operations.
Canadian OFS Companies Abroad
2013 (MUSD)
$2,500
$2,000
$1,500
$1,000
$500
Trican Wellservice
Ensign Energy
Precision Drilling
Calfrac Well Services
CHC Helicopter
Secure Energy Services
Savanna Energy Services
Mullen Group
Canadian Energy Services
Enerflex
PHX Energy Services
Western Energy Services
Tuscany International Drilling
Bird Construction
Essential Energy Services
Canyon Services Group
Xtreme Drilling and Coil Services
SNC-Lavalin
Macro Enterprises
Cathedral Energy Services
Strad Energy Services
Finning
ShawCor Industries
Gasfrac Energy Services
Bonnets Energy Corporation
Calmena Energy Services
Hyduke Energy Services
Enseco Energy Services
Wenzel Downhole Tools
Pason Systems
Computer Modelling Group
Eagle Well Servicing
McCoy
Orion
Pulse Seismic
Black Diamond
Winalta
Ridgeline Energy Services
NXT Energy Solutions
Discovery Air
$0

The Canadian Energy Research Institute (2013a) estimated that in 2006, the
Canadian petroleum services sector contributed $65 billion to the Canadian GDP
(4.8% of Canadas GDP), which is second only to the producers in the resource
sector (Angevine and Green 2013). In 2011, oil & gas extraction (exploding OFS)
contributed to 6% (about $94 billion in 2011 nominal term, or $ U.S. 89 billion,
based on 2014 July exchange rate) of Canadas GDP (Angevine and Green 2013).
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The total revenue of Canadian OFS firms is $ U.S. 16.5 billion. The figure below
demonstrates that 77% of the revenue distribution of Canadian OFS firms comes
from the North American market, while 6% is generated from the European
market and 5% from the South American market. This figure further reinforces the
statement made by Brian Pyra, that Canadian firms prefer conducting business in
North America as the market is favourable, and it is within their comfort zone.
However, this can also be attributed to the fact that Canadian OFS firms have
strengths within unconventional resources, and as per the data above, production
of most of the unconventional resources is located in North America. In addition,
production within this region is expected to rise. Therefore, it is likely that we can
see an increased percentage of revenue from this market.
Revenue Distribution of Canadian OFS

Companies
by Regions
2013 (MUSD)
$1018,
6%
$852,
5%
$12689,
77%
Australia
Asia
Middle East
Africa
America S
America N
Europe
Russia
Unknown
N/A
8.5.3 Sophisticated Customers
As mentioned above, Canadian oil producers are sophisticated producers, and this
has led to the development and innovation within hydraulic fracturing and
horizontal drilling. According to Matthew Foss, Canadian firms are pioneers
within enhanced recovery techniques. It is also important to note that there are a
broad range of operating conditions ranging from shallow to deep operating
depths within Canada. This has led some oil fields in Western Canada serving as a
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laboratory for operators interested in innovating. As per the Diamond Model,

onshore wells have both sophisticated customers and strong demand conditions,
and demand is expected to increase substantially within the next decade.
Therefore, we can expect the OFS sector to grow significantly in the future.
As mentioned above, the operating environment in Atlantic Canada is one of the
harshest in the world within offshore oil & gas. Therefore, in order for OFS firms
to be successful they have to innovate. However, the demand conditions are not
strong due to the presence of four offshore wells currently. Therefore, in order for
the OFS industry in Atlantic Canada to develop, it is important to enhance
exploration, which will ultimately enhance production, leading to stronger
demand for OFS, which will ultimately help the industry grow.
It is important to note that the Canadian oil & gas sector has very stringent safety
and environmental regulations. This has led to Canadian OFS firms developing
competencies in terms of developing technology which takes into account the
safety and environmental regulations.
8.6.1 Onshore Cluster Value Chain
According to Richard Wayken the biggest gap within the value chain is in terms of
understanding the adopters and users of technology. Therefore, it is essential to
create models for companies to develop or validate the technology they eventually
develop. He stated that Albertas strength is that it has a comprehensive value
chain within oil field services. However, areas for improvement include leakage
detection in pipelines and spill response, along with greater collaboration between
the aerospace and oil & gas industries could lead to synergies within both
industries. In addition, improvement within metal fabrication is required as there
are a large number of small metal fabrication companies which use old
technology. Richard Wayken also stated that there are many small companies
within the OFS sector which can put together pilot projects within weeks, and this
illustrates that there are several early adopters within the province, which is
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beneficial for the innovation environment.
8.6.2 Onshore Cluster Related industries

Related industries within this cluster are fabrication, and petrochemicals, and
Alberta has a very strong industry within both sectors. There is significant
fabrication expertise from Edmonton to Calgary. Greater detail about related
industries within this cluster has been stated above.
8.6.3 Offshore Cluster Value Chain
The value chain within the offshore cluster in Atlantic Canada is not as
comprehensive as the value chain within the onshore cluster. According to Max
Ruelokke, Senior Manager, Aker Solutions, the strength within the value chain is
in providing services and capabilities to support both the project development and
operations phases, while a weakness due to the small labour pool is a shortage of
both skills and non-competitive compensation expectation in some sectors.
According to Kinnon Kendziora, Project Manager at Talon Energy Services, there
is a lack of Subsea companies, which is why this work is outsourced to foreign
firms. In addition, local firms lack the capital and machinery required for most
capital intensive projects, which is why most of the machinery in Atlantic Canada
is from overseas.
8.6.4 Offshore Cluster Related Industries
An Ocean Technology Cluster is in its infancy stage in Newfoundland and

Labrador, but is expected to grow gradually. Nova Scotia has a strong maritime
industry, but due to the Atlantic Accord and local content requirements, the oil &
gas industry in Newfoundland and Labrador has not been able to benefit from this
expertise. Greater detail about related industries within the offshore cluster has
been stated previously in the Offshore Oil Diamond section.
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8.7 Diamond Summary
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9.0 Norwegian National Diamond

9.1 Government
9.1.1 Governance Structure

The Ministry of Petroleum and Energy has the overall responsibility in organizing
production of the Norwegian petroleum sector (Ministry of Petroleum and Energy
2013). Under the Ministry of Petroleum and Energy, the Norwegian Petroleum
Directorate provides technical support, including resource estimates and other
geological and engineering support.
In addition to the Norwegian Petroleum Directorate, Petoro AS and Gassco AS are
responsible for oil & gas transportation, while Statoil ASA is the partially
privatized national operator. Parallel to the Ministry of Petroleum and Energy, the
state organization of the petroleum sector also involves the Ministry of the
Environment (regulating emissions), Ministry of Labour (ensuring health and
safety conditions), Ministry of Fisheries and Coastal Affairs (governing spill
emergency and preparedness), and Ministry of Finance (managing petroleum tax
and government global pension fund) (Ministry of Petroleum and Energy 2013).
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Stortinget (Parliament)
The Government
Ministry of
Ministry of
Ministry of
Ministry of
Ministry
Petroleum and
Climate and
Labour and
Transport and
of
Energy
Environment
Social Affairs
Communication
Finance
The
Norwegian
The
The Norwegian
Government
Norwegian
Environment
Petroleum
Coastal
Pension
Petroleum
Agency
Safety
Administration
Fund
Directorate
Authority
Global
The
Petoro AS
Petroleum
Tax office
Gassco AS
Statoil ASA
Source: Ministry of Petroleum and Energy

The State holds shares in oil & gas fields, and related infrastructures. The States
Direct Financial Interest (SDFI) is a cash-flow system that is managed by Petoro
AS under the Ministry of Petroleum and Energy, owned by Ministry of Finance,
and funded by the States fiscal budget (Ministry of Petroleum and Energy 2013).
Net cash flow from SDFI portfolio is transferred to the Government Pension Fund
Global which invests globally. Although the Government Pension Fund Global
is part of the States fiscal budget, no more than 4% of the funds return can be
spent annually (Ministry of Petroleum and Energy 2013). The purpose of the
Government Pension Fund Global is to stabilize the impact of the petroleum
sector on the Norwegian economy and manage the financial challenges of an
aging population (Ministry of Petroleum and Energy 2013).
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9.1.2 Industry Specialization
Norway has a strong industry specialization which is oil & gas, as illustrated by
the diagram below. Over 50% of its exports are oil & gas, and this industry has
positively affected the Norwegian economy significantly. GDP per Capita in
Norway has increased by approximately 350% since 1960 which is prior to when
oil was discovered. At that time Norways GDP per Capita was below countries
such as Italy and Ireland and was ranked 17th in the world. However, GDP per
Capita in Norway is within the top 3 countries currently. The figure below
illustrates the impact of the oil & gas industry in Norway.
Source: National Accounts, Statistics Norway, Facts 2013, Norwegian Petroleum

Directorate 2013
This study has not included a quantitative study of the articles written by the
industry, however, based on our knowledge and conversations with interviewees,
it can be stated that the Norwegian oil & gas industry is incredibly sexy.
9.1.4 Political Consensus
Since the early stages of the Norwegian oil & gas industry, there has been political
consensus about the importance of finding optimal socioeconomic development
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that benefits most coastal cities on the NCS. Prior to the 1980s, it was widely
acknowledged that the State would be the ideal candidate to ensure the
foundations for monetizing resources are well laid out, and this was later
recognized as the infant industry protection, which the Norwegian oil regime
shared with other European oil policies at that time (Sasson and Blomgren 2011).
However, what differentiates Norwegian petroleum policy from other infant
industry protections in the1970s and 1980s are threefold:
(1) Although the State requires local content, the policy favours Norwegian-based
but not necessarily Norwegian-owned inputs (Heum 2008, Sasson and Blomgren
2011). As a result, in 2011, the foreign ownership among Norwegian OFS
suppliers was about 51% (Sasson and Blomgren 2011).
(2) The State signed a goodwill agreement with operators, requiring foreign
operators to conduct as much oil & gas R&D in Norway as possible (Sasson and
Blomgren 2011). As a result, foreign operators conducted significant R&D on
NCS. It is argued that while other oil-rich nations focused on providing works for
nationally owned companies, the Norwegian petroleum policy focused on value
creation and facilitating extensive collaboration between multinational companies
(Heum 2008, Sasson and Blomgren 2011). The States petroleum policy
maximized the value created by the petroleum sector through creating stability
and helping local players gain competitiveness in collaboration with foreign
operators. When the NCS was deregulated in 1994, the local competitiveness in
the OFS had been established (Sasson and Blomgren 2011). This goodwill
agreement laid the foundation for the Norwegian oil & gas innovation (Heum
2008). This pro-innovation mentality was further reflected in the generous tax
credits given for oil & gas R&D on the NCS. Since the tax rate on the net profit is
extremely high (50% on oil tax in addition to 28% corporate tax), R&D tax credits
provide operators with a strong incentive to innovate. As a result, the NCS is an
attractive place for oil & gas R&D (Sasson and Blomgren 2011). It is said that as
of 2011, 31% of all Norwegian-based oil & gas companies use 4% or more of
sales on R&D, and innovate more than other Norwegian industries (Sasson and
Blomgren 2011).
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(3) Although the State has the right to grant licenses and require local content, and
decide tax credits, the state has acted in a understandable and friendly manner by
providing transparency and stability for foreign operators on the NCS (Sasson and
Blomgren 2011), which are key features of Norwegian petroleum policy (Ministry
of Petroleum and Energy 2013). Today, as outlined in the Ten Commandments,
the goal, the general licensing process, and the governance structure of the
Norwegian petroleum sector are largely the same as what they were 50 years ago.
This shows that there is consistency in the Norwegian Petroleum policy, which
has provided stability to the industry. Public hearings are in place for each
decision made by the State regarding each block. The state does not discriminate
between domestic or foreign operators and bases the licensing decision on the best
geological understanding, technical expertise and past records (Ministry of
Petroleum and Energy 2013). Although the State has a 67% ownership in Statoil,
Statoil is taxed the same as and competes with other foreign operators. The
conflict of interest is further diminished as dividend income from national
operator, Statoil, is only a small portion of overall cash flow generated in the
petroleum sector to the State (Ministry of Petroleum and Energy 2013).
Despite the governance continuity in the Norwegian model, as the production in
the North Sea entered mature stage, and technologies became more obtainable, the
State reduced its participation in the industry. This is reflected in progressive
policy easing since the 1990s, the deregulation of the petroleum sector in 1994,
and the privatization of Statoil in 2001. The policy shifts are further explained in
the figure below.
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0% local content requirement in 1969, increased to

60% in the 1980s, deregulated in 1994
The Norwegian Petroleum Model in Developing OFS industries
Policy easing since 1990
Accumulating local
competitiveness in the OFS
Globally competitive
OFS industry in the
2000s:
First oil field discovery in 1969
Aker Solutions, Fred
Olsen Energy ASA
Fields licensed to foreign

operators
No domestic capacity
Songa Offshore,
Statoil
Local cont legislation 1970-1975-1980s
Introduced targeted regulation, and created local oil companies

Goodwill agreement with foreign operators / Statoil established
strategic collaboration with foreign operators (BP) / Statoil built
partnership with Norwegian OFS companies
The state invested heavily in R&D and new technologies
Source: McKinsey Global Institute report
9.1.5 Licensing System
The licensing system is based on discretion instead of auctions (Ministry of

Petroleum and Energy 2013). Integrated companies with the required experience,
technology expertise, and financial strength were preferred at the initial stage
(priory to 1970s). It was a necessary strategy at the beginning, because in the late
1960s and early 1970s, Norway possessed little national expertise in developing
oil & gas (Ministry of Petroleum and Energy 2013).
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As per a confidential EY report, the authorities realized very early that they had
the opportunity to influence the pattern of the players on the NCS through policies
of awarding new production licenses, and by approving or withholding approval
of transfers. The overall policy objective was to help secure a pattern which
ultimately promoted the most effective resource management, while laying the
basis for maximizing value and government revenues. As per this confidential EY
report, the government searched for a concession system where the companies
chosen as operators were evaluated strictly based on their experience and
competence, and their plans for the development and production of that specific
field. Therefore, instead of the auction system, companies were invited to seek
permission to explore for and exploit submarine deposits in the first licensing
round in 1965.
According to the confidential EY report, the concession regulations were the
principal controlling instrument for the Norwegian state in determining which
companies should be granted permission to operate on the NCS, and where the
operations should be concentrated. Therefore, this system strengthened Statoils
dominance, as it received big shares and privileges for different licenses. For the
Norwegian industry, this meant that the knowledge of domestic industrial capacity
and competence was present in different licensing groups, as these were
represented by both foreign and Norwegian oil companies. Statoil also received
50% interest in oil licenses, and had no development costs. The sliding scale
meant that this interest could increase to 80% on larger finds. In addition, skills
transfer and local R&D were rewarded in the subsequent licensing rounds. The
figure below illustrates how licenses were awarded.
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Experience
R&D
Good Will
Competence
Points
Award of Licenses
Development
Knowledge
Plans
Transfer
Production
Plans
Source: Confidential EY Report

9.1.6 Stepwise Opening
The opening of new blocks was a structured process (Ministry of Petroleum and
Energy 2013). The purpose was to ensure geological knowledge, experience and
technological developments and accumulation before moving into new regions.
Over time, the opening moved north, starting with the southern parts of the North
Sea and moving up to the Norwegian Sea and the Barents Sea. The purpose was to
ensure that local players involved in the initial production area had sufficient time
to absorb global best practices, and then develop local competences. In addition,
stepwise opening helped in maximizing the recovery rate in the initial production
area before moving north.
Currently, stepwise opening is no longer a concern on the North Sea, which is
considered a mature area, because geological knowledge, experience, and
technologies are mature. This is reflected by emergence of a strong local OFS
supply industry, which gained experience as the NCS functioned like a laboratory
for technology development (Ministry of Petroleum and Energy 2013). According
to Jon Myran of BW Offshore, Norwegian companies developed technology and
immediately employed them on an oil field, unlike other foreign companies,
which did not move forward as rapidly in terms of applying their innovations.
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This led to rapid technological development on the NCS. In the North Sea priority
has shifted to improving recovery rates and utilizing existing infrastructure
(Ministry of Petroleum and Energy 2013). This is because a small percentage
improvement in recovery rate means an exponential increase in revenue for the
state, due to significant quantities of oil. As the production technologies mature,
best utilizing existing infrastructures would provide new opportunities for
reducing production costs on the NCS.
9.1.7 Consistent Policies
The State put in place the Ten Oil Commandments in 1971. These oil
commandments have significantly influenced the direction of the Norwegian
petroleum sector, because the States strong participation in the energy sector was
enforced (Norwegian Petroleum Directorate 2010). The ultimate goal is to ensure
the energy sector benefits the entire Norwegian community, and the State was the
best candidate to safeguard the national interests. The oil commandments are as
follows:
1. National supervision and control must be ensured for all operations on the
NCS.
2. Petroleum discoveries must be exploited in a way which makes Norway as
independent as possible of others for its supplies of crude oil.
3. New industry will be developed on the basis of petroleum.
4. The development of an oil industry must take necessary account of existing
industrial activities and the protection of nature and the environment.
5. Flaring of exploitable gas on the NCS must not be accepted except during brief
periods of testing.
6. Petroleum from the NCS must as a general rule be landed in Norway, except in
those cases where socio-political considerations dictate a different solution.
7. The state must become involved at all appropriate levels and contribute to a
coordination of Norwegian interests in Norways petroleum industry as well as the
creation of an integrated oil community which sets its sights both nationally and
internationally.
8. A state oil company will be established which can look after the governments
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commercial interests and pursue appropriate collaboration with domestic and

foreign oil interests.
9. A pattern of activities must be selected north of the 62nd parallel which reflects
the special socio-political conditions prevailing in that part of the country.
10. Large Norwegian petroleum discoveries could present new tasks for Norways
foreign policy.
Source: NPD
The ten principles can be considered fulfilled, especially the first and the seventh
commandment regarding national supervision (Norwegian Petroleum Directorate
2010). The state has managed and controlled the energy sector through a tripartite
model, including central management (Ministry of Industry, and replaced by
Ministry of Petroleum and Energy in 1972), administrative (NPD), and
commercial functions (Statoil). Despite the fact that changes have taken place
with these functions when the SDFI cash flow system was created in 1984, and
when Statoil was listed in 2001 (i.e. Petoro was created to manage the SDFI
portfolio and Gassco was created to operate the gas transport network), the state
has still played an integral role in managing and controlling the offshore energy
sector (Norwegian Petroleum Directorate 2010).
9.1.8 Industry Promotion INSTOK
The Norwegian energy industry jointly made strong efforts to expand

internationally. It did so by establishing INTSOK, which is a network based
organization that aims to enable Norwegian oil & gas companies to go global. It
represents approximately 90% of the Norwegian companies with international
presence. It acts as a local advisor for international markets, provides market entry
strategies, organizes workshops and provides an in-depth market report on an
annual basis. INTSOK also allows its partners to exchange experience and
knowledge of market developments internationally by encouraging dialogue
between
oil
companies,
technology
suppliers,
service
companies
and
governments. This is an interesting aspect and illustrates how the Norwegian

industry has benefited from a collaborative approach.
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It is important to note that Norwegian embassies promote trade in various

countries across multiple industries. INTSOK differs as it consists of oil & gas
professionals and provides assistance only to the oil & gas industry.
9.2.1 Reserves and Production
In 1969, the first commercial discovery, Ekofisk, was announced. Since then, the
reserves have increased significantly, due to a number of big discoveries.
Source: Facts 2014, the Norwegian Petroleum Sector, page 10

As of December 2013, the total reserves (i.e., oil, gas, NGL, and condensate) on
the Norwegian Continental Shelf (NCS), which includes North Sea, Norwegian
Sea, and Barents Sea, had an expected value of about 14.2 billion standard cubic
metres of oil equivalent (billion Sm3o.e.) (Norwegian Petroleum Directorate
2010), which is equivalent to approximately 89 billion barrels, of which crude oil
amounted to 7.2 billion Sm3 o.e., which is equivalent to another 45 billion barrels.
The majority of the crude oil reserves are located in the North Sea (Norwegian
Petroleum Directorate 2014b). The figure below illustrates total crude oil reserves
in Norway.
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Total Crude Oil Reserves

as of December 2013
(million Sm3o.e.)
North Sea
Norwegian Sea
Barent Sea
Potentialfrom improved recovery (have not been broken down by area)
5,384
1,095
598
155
Source: Facts 2014, the Norwegian Petroleum Sector

Only 44% of the total reserves on the NCS have been extracted (Norwegian
Petroleum Directorate 2010). The North Sea area has accounted for the majority
of oil & gas produced on the NCS and is considered to be a mature region for oil
exploration. As of December 2012, 615 wildcats have been drilled (Norwegian
Petroleum Directorate 2014a). As of February 2014, there were 12 active
exploration wells on the NCS, 8 of which were located on the North Sea, and 2
each in the Norwegian and Barents Seas (Norwegian Petroleum Directorate
2014a). At the end of 2013, the North Sea had 60 producing oil fields, while the
Norwegian Sea and Barents Sea together had 17 producing fields (Norwegian
Petroleum Directorate 2014a).
9.2.2 Historical Production
Since 2000, crude oil production has fallen significantly. Crude oil production in
2013 was roughly half of what it was in 2001 (Norwegian Petroleum Directorate
2013a). Over the same period, gas production has increased significantly, and this
has helped keep the total production on the NCS constant over the last decade.
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Source: Facts 2014, the Norwegian Petroleum Sector, page 63

The NCS has about 50 years of oil & gas production history. Over the first 30
years, 1967 1997, on average, the production rate was less than discoveries.
Over the most recent 15 years period, 1998 2012, production has been
significantly higher than new discoveries. Most recently, the production between
2008 and 2012 was roughly on par with new discoveries. This improved ratio
between discoveries and production is largely due to the significant discovery in
the Johan Sverdrup field, located in the central North Sea (Norwegian Petroleum
Directorate 2013b). Over time, the average size of discoveries has decreased
significantly, and this indicates that the petroleum production on the North Sea has
entered the mature stage as the early oil fields have reached peak production. To
address the anticipated trend in petroleum production on the NCS, the government
has come up with three solutions: improving the recovery rate, increasing the
number of production wells, and considering opening new areas (Sasson and
Blomgren 2011). The figure below illustrates the reduction in new discoveries.
Production and Discoveries

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Source: The Petroleum Resources on the Norwegian Continental Shelf 2013

Exploration, Norwegian Petroleum Directorate
9.2.3 Operating Conditions
The operating conditions on the NCS are considered to be very harsh and this has
led to Norwegian companies having to develop innovative technology in order to
operate in these conditions. According to Porter, sophisticated customers within a
local industry enhance the competitiveness of the industry, as they require
companies to innovate. This ultimately enhances the competitiveness of the
industry.
9.2.4 Labour and Human Capital
According to the McKinsey Global Institute report, in the early years of offshore
energy development, the offshore energy industry tapped into manpower from
other related industries, such as maritime services, finishing, and construction
(Dobbs et al. 2013).
From 2005 to 2008, the energy-related education attractiveness has improved at
the bachelor and master level, while worsened at the PhD level (Sasson and
Blomgren 2011). A declining number of PhD students might be an early sign
indicating lower advanced R&D-based value addition (Sasson and Blomgren
2011).
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According to Sasson and Blomgren (2011), over the last few decades, demand for
a higher educated workforce in the oil & gas industry has increased significantly.
As a result an increasing number of engineers work in this industry. There is also
a significant increase of employees with a business or economics education
background. The number of foreign workers has also increased significantly over
the last decade.
9.2.5 Efficiency of Human Capital
According to Hkon Skretting, Regional Director, INTSOK, Norway has

developed competencies within the oil & gas sector because companies in Norway
are more efficient than companies in other parts of the world. He compared
efficiencies in Canada and Norway, and stated that as per his industry experience,
it takes approximately five times longer to install pipelines in Canada as compared
to Norway, and this illustrates how efficient the Norwegian industry is, and how
inefficient the Canadian oil & gas industry can be.
9.2.6 Access to Capital
The Oslo Brs Stock Exchange and the Oslo Axess Stock Exchange are two
listing markets in Norway. Oslo Brs Stock Exchange is preferred by more
established companies, whereas Oslo Axess Stock Exchange is suitable for
companies that have less than three years of history. As of June 2014, the number
of issuers is 179 on the Oslo Brs Stock Exchange, and 34 on the Oslo Axess
Stock Exchange (Oslo Brs Stock Exchange 2014b). In addition, the energy sector
accounts for around half of the market on Oslo Brs Stock Exchange. Based on
the number of firms listed, the TSX, NYSE, and Oslo Brs Stock Exchange are
among the top three stock exchanges for OFS firms (TMX Group 2014). Other
than the energy sector, the Oslo Brs Stock Exchange consists of a variety of
companies within the shipping and seafood sectors (Oslo Brs Stock Exchange
2014a). More than half of the brokerage firms active on Oslo Brs Stock
Exchange are international firms, and this indicates that firms listed on the
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exchange have access to international capital (Oslo Brs Stock Exchange 2014b).
Over the last decade, accesses to capital and quality of financial services have
improved (Sasson and Blomgren 2011). According to Hkon Skretting, Regional
Director, INTSOK, it is easy to grow a new business within OFS, because
entrepreneurs with great ideas can utilize many local resources, such as seminars,
factories, and engineers. The whole supply chain understands the elements
required to grow a new enterprise. In addition, there are well documented
standards for all processes to test new technologies. Local investors and financial
institutions are important in the entrepreneurial phase, but when the capital needed
surpasses the amount that local investors could provide, firms often turns to
foreign banks (Sasson and Blomgren 2011).
According to the McKinsey Global Institute report, the State also provided direct
funding to universities on a large scale, such as the University of Stavanger and
RF-Rogaland Research programs (Dobbs et al. 2013). Statoils LOOP program is
a venture capital fund that supports high-tech start-ups in the OFS. Over the last
20 years, this program has provided over 600 million NOK (about $104 million)
to support more than 260 companies and technologies. Based on our interview
with Arnt Inge Enoksen, from EY, venture capital from operators and government
has provided good access to capital for OFS firms. However, the funding from
government has reduced overtime, which has led to the current debate about
whether the support from the Norwegian government is adequate.
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9.2.7 Infrastructure
According to the U.S. Energy Information Aministration (2014), the offshore oil
fields are connected to onshore processing terminals via pipelines. There are eight
major domestic oil pipelines with a total capacity of around 2 million barrels per
day. In addition to eight major domestic pipelines, ConocoPhillips operates the
Norpipe pipelines that connect the Ekofisk oil field to the oil terminal and refinery
at Teesside, England. The Oseberg Transport System and the Troll I and II
pipeline systems are the major pipelines systems, and Statoil is the operator for
these major pipeline systems.
Norway has an excellent rail infrastructure which connects Oslo with Stavanger
and Bergen which are the largest cities in Norway and the locations of multiple
aspects of the oil & gas cluster. In addition, Oslo has three airports, which have
high frequencies of international flights. The airport in Stavanger is well
established and connects with other international and local destinations, including
a direct flight to Houston, Texas. The airport in Bergen is also well developed. It
is important to note that costs of local air travel can be considered significant after
taking into account the distance and travel time between these cities.
9.2.8 Innovation
Norway has strong oil & gas oriented research institutes. The state, oil companies,
and educational and research institutions together drive innovation in Norway. As
per a confidential EY report, these institutions are also responsible for the largest
amount of R&D investments. It is also important to note that Statoil is a
demanding user, and acts as a project sponsor and provider of information of
expertise. Therefore, it can ensure that the necessary technology is developed and
can be utilized to develop the entire petroleum sector. Most entities are dependent
on each other. Therefore, there are not only linkages between various entities, but
also between national and international oil companies, and between SMEs and
new technology based firms.
As per the confidential EY report, this has facilitated knowledge transfer and led
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to the creation of science parks in the oil & gas cluster. It is also important to note
that there is strong collaboration between academia, government, and industry,
and this has led to several relevant research projects within oil & gas.
According to Jon Myran from BW Offshore, a percentage of all investment was
given back to companies for investment within R&D in purely offshore oil & gas,
not downstream oil & gas. He also stated that once the technology was developed,
there was significant collaboration with the supplier industry about drilling and
seismic models. As per Jon Myran, this reiterated the importance of jumping from
laboratory research to pilot projects, and enabled Norwegian companies to
establish competencies within those fields.
9.2.9 Laboratory for Technologies Development
Together with the Gulf of Mexico, the North Sea retains leadership position in
demonstrating continuing technology advancements in the offshore oil & gas
industry (Pinder 2001). Boosting recovery rates in mature fields has become
increasingly important in the North Sea, because the state plans to maintain the
same level of oil & gas production through gradually opening new areas, and
improving recovery rates of mature fields (Ministry of Petroleum and Energy
2013).
The NCS has functioned as a laboratory for technologies development, because
innovative solutions were needed as the costs of developing and producing in the
offshore oil fields were very high and complex. Without creating innovative
technologies in order to make production feasible, the NCS would not be an
attractive location for oil & gas production. It is important to note that several key
stepwise technologies changes (i.e. platform-based, subsea & floating, and subsea
to shore) were implemented in one pilot project in an oil field. Due to their
success, these technologies became standard across the industry. Using the NCS
as a laboratory for technology development has lead to a strong local OFS supply
industry that competes globally (Ministry of Petroleum and Energy 2013).
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9.3 Firm Strategy and Rivalry
9.3.1 Structure
Over the past 20 years, technology on the NCS has matured, and an increasing
percentage of small to medium size operators have been present on the NCS. This
is because offshore exploration technology has advanced over time, making
operation more feasible for operators who are not fully integrated (Norwegian
Petroleum Directorate 2013a) As a result, the state no longer prefers integrated
multinational operators. Another reason that contributes to the increasing presence
of small-to-medium sized operators is that the NCS has a competitive local OFS
supplier industry, which has ultimately reduced the advantages of being an
integrated operator.
9.3.2 Competition
As of 2008, there were 2,500 firms in the oil & gas cluster (Sasson and Blomgren
2011). In 2009, 10 operators earned in excess of 1 billion NOK in revenue (which
is roughly equivalent to $173 million), while 94 operators reported negative
revenue (Sasson and Blomgren 2011). The large number of firms on the NCS
prove that the Norwegian oil & gas cluster has achieved a critical mass (Sasson
and Blomgren 2011). The large spread of revenue earned also demonstrates a
healthy diversity of large, medium, and small size firms across the value chain
(Sasson and Blomgren 2011). It can be stated that large numbers of firms in each
category within the value chain indicate strong local competition.
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Distribution of Firms in Clusters
1,229
376
178
142
191
Operators
Geo &
Seismic
Drill & Well
Unprofitable
0-10 MNOK
10-1O0MNOK
100-1BNOK
1BNOK or above
Topside
Subsea
6%
Operators
11%
53%
18%
Topside
8% 0%
0% 11%
Operations
Support
12%
Drill & Well
Geo & Seismic

4%
84
6%
0% 8%
13%
18%
27%
32%
59%
47%
67%
Subsea
10% 0%
Operations Support
1%0%
7%
15% 18%
33%
50%
66%
Source: Knowledge Based Oil & gas Industry
9.3.3 Effective Private and Public Collaboration
An important success factor of the Norwegian Model is the close R&D

collaboration between public R&D institutions and firms. According to Jon
Myran, Head of Best Practice and Start-Up at BW Offshore, programs promoting
innovation, such as DEMO 2000 have led to technology breakthroughs. Private
firms close collaboration and willingness to participate in these research
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programs has increased the usefulness of technologies developed. Some of these

programs are listed below:
1) Research Council
Started in 2003, the Research Council of Norway provides long-term funding for
Centre of Excellence programs in order to improve the quality of Norwegian
research (The Research Council of Norway 2014a). Thirteen programs were
initially funded. Today, there are 21 Norwegian Centers of Excellence. The host
institutions are universities, university colleges, or research institutes. The host
institutions cooperate with other research entities and enterprises. Among the 21
Centers of Excellence, Centre for Arctic Gas Hydrate which focuses on gas
hydrate research and Centre for Autonomous Marine Operations and Systems
which focuses on autonomous marine operations and systems directly benefit
from the offshore energy sector (The Research Council of Norway 2014a).
2) DEMO 2000
The Norwegian Ministry of Petroleum and Energy initiated the DEMO 2000
program in 1999 (The Research Council of Norway 2010). This program aims to
improve the production attractiveness on the NCS by lowering production costs.
This program funds collaborative projects with participants from OFS, operators,
and Norwegian research institutions. By 2005, the government had provided 342
million NOK in funding (about $59 million), while industry provided additional
investment. The total funding was around 1.5 billion NOK, which is about $260
million (Hansen, Karlsson, and God 2005). This program is considered
successful, because based on the evaluation survey among 612 project
representatives, 97 (or 16%) project representatives categorized the DEMO 2000
project as having a high or extremely high direct impact on cost reduction and
enhancing recovery (Hansen, Karlsson, and God 2005).
As of 2005, it is estimated that DEMO 2000 program has increased participating
firms sales between 900 million NOK and 1.3 billion NOK (about between $156
million and $225 million). International sales based on technology developed
through the DEMO 2000 program accumulated to at least 800 million NOK.
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4) PETROMAKS
The PETROMAKS programme was launched in 2004 by the Norwegian
government. The Research Council of Norway had an annual budget of $50
million for petroleum R&D in 2006. This project assisted in implementation of the
strategies and plans for the governments strategy initiative titled Oil & Gas in the
21st century (The Research Council of Norway 2014b). According to the
Research Council of Norway, this programme has helped bring the Norwegian
petroleum related research and industry together, while enabling Norwegian
companies to become market leaders in innovative technologies.
This was a ten year programme where the Research Council was awarded NOK 2
billion ($325 million USD) in funding to focus on the following areas of research
(Criscione 2013):
Environmental technology for the future
Exploration and reservoir characterization
Enhanced recovery
Cost effective drilling and intervention
Integrated operations and real time reservoir management
Subsea processing and transportation
Deep water and subsea production technology
Gas technology
Health, Safety and Environment (HSE)
Public funding for this programme has been matched 50/50 with the industry via a
collaborative cost sharing model. The programme eventually attracted more
industry funding than initially anticipated in similar public research programmes
in Norway, which ultimately lowered the threshold of high risk projects which
would have never taken place via co-operation between the academic and private
sectors.
9.3.4 Technology
According to Jarand Rystad, Partner at Rystad Energy, in 1970s, only the

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American oil companies were present in Norway, and the industry was influenced
by craftsmanship. Craftsmen could smell if the oil was viable, and based on the
smell, they would start conducting calculations. The Norwegian companies turned
this craftsmanship into a scientific methodology because the fields were
significantly larger. In Jarand Rystads words we took what we learned from the
Americans and took it to the next level.
9.4.1 Oil Field Services
As of 2012, the Norwegian petroleum sector contributed 23% of GDP, 30% to the
states revenue, 29% of total investment, and 52% of total exports (Ministry of
Petroleum and Energy 2013). In 2012, oil & gas extraction including services
created approximately 700 billion NOK (about $123 billion) in revenue. This
illustrates that Norway has developed a very strong oil & gas supply and service
industry. In 2012, the market share of Norwegian suppliers in global markets was
close to 80% on drilling equipment, and 50% on seismic and subsea equipment
(Hansen, Karlsson, and God 2005). Norwegian companies, such as PGS
Geophysical AS, Aibel AS, FMC Kongsberg Subsea AS, Subsea 7 Norway NUF,
Schlumberger Norge AS and Aker Solutions MMO AS are benchmarks in the
subsea supply and service industry.
After the financial crisis in 2008, a high oil price improved the margins of both
operators, on the demand side, and oilfield service providers on the supply side of
the offshore oil & gas industry (EY 2014). From 2008 to 2012, the oil-related
supply and service industry increased revenue and employment by approximately
20% (EY 2014). In 2012, the oilfield service industry earned 385 billion NOK,
which is equivalent to about $70 billion, in revenue, employed 4% of the
employees, and accounted for 7% of value creation and 39% of exports in
mainland Norway (EY 2014).
According to Jarand Rystad, there is significant vertical integration within the
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Norwegian oil & gas industry. Companies such as Statoil, Norsk Hydro, and Saga
are all vertically integrated. In addition, it is important to note that there were joint
ventures between the largest players in the industry, (Statoil with FMC, Norsk
Hydro with Aker Solutions, and Saga with GE/Vetco) which led to stronger
competition, enabling Norwegian oil & gas companies to become market leaders.
This enabled Norwegian companies to develop very complex subsea equipment,
such as automated equipment which didnt require divers. According to Jarand
Rystad, this is why three of the four biggest players in subsea are Norwegian
companies.
As per Jarand Rystad, there was a similar pattern within the Seismic industry. An
oil field was mapped within the U.K. side, while there were no significant
amounts developed on the Norwegian side. Therefore, Norway had to quickly
develop that field. The industry invested a very significant amount in developing
Seismic equipment, and this has enabled Norwegian companies to develop
competitive advantages in Seismic equipment.
9.4.2 International Operations of OFS
The figure below illustrates revenues of Norwegian OFS firms from international
vs. local operations in 2012. The total revenue of Norwegian OFS firms in 2012
was 461 million NOK (which is about $U.S. 74 million), out of which 60%
percent was from local operations, and 40% percent from international operations.
As per the figure, it is clear that Norwegian firms earn a significant portion of
their revenue from international operations. It is also clear that total revenue of
Norwegian OFS firms has increased significantly over the past decade.
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Revenues of Norwegian OFS Firms

International and Local Operations
1995 - 2012 (MUSD)
International Revenue
2012 (MUSD)
Others
1 NOK = 0.16 USD
Local
International
To 20 OFS fimrs
30MUSD
(186 MNOK)
7 MUSD
(42 MNOK)
26
22
13
10
7
32
3
13
19
15
35
38
44 MUSD
(275 MNOK)
23 MUSD
(143 MNOK)
19
1995 1998 2001 2004 2007 2010 2011 2012
2012

As per Rystad Energy, the top 20 Norwegian OFS firms earned the majority of the
international revenue, which amounted to 75% of total international revenue. It is
interesting to note that the top 20 companies earned 69 billion NOK (about $U.S.
11 billion) via local sales, which was 68% less than their revenue from
international operations. The remaining OFS companies in Norway had local
revenue of 206 billion NOK (about $U.S. 33 billion) and 17% of local revenue
came from international operations.
As per the figure below, it is clear that Norwegian OFS firms earn the majority of
their revenue in four regions, East Asia, Western Europe (excluding Norway),
South America and North America. The countries generating the most revenues
for Norwegian OFS firms are South Korea, U.K., Brazil and the U.S.
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International Revenue by Region

(MUSD)
5.9 MUSD
(37 MNOK)
East Asia
Western Europe (Excluding
Norway)
5.6 MUSD
(35 MNOK)
5.3 MUSD
(33 MNOK)
South America
North America
Western Africa
2.7
Southeast Asia
2.6
Australia
Russia
Other 9 Regions
Other 9 Russia
Regions 2%
Australia
8%
5%
3.4 MUSD
(21 MNOK)
East Asia
20%
Western
Europe
(Excluding
Norway)
19%
1.4
0.6
2.4
South
America
18%
Southeast
Asia
8%
Western
Africa
9%
North
America
11%

As per a Rystad Energy report, out of the 20 largest companies, 8 are
characterized as rig and ship owners, 1 yard, and the remaining 11 fall under the
equipment and services category. International revenue divided into categories is
shown below, and the figure illustrates that 100 billion NOK (about $U.S. 16
billion) in international sales come from four main segments, rig and drilling,
services, topside and processing equipment, and subsea installation and seismic.
The learning from the following figure is that Norway has benefited from related
and supporting industries to oil & gas, one of these industries is the maritime
industry, and knowledge sharing has helped develop strong rig and ship owners.
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International Revenue by Segment

(MUSD)
7.2 MUSD
(45 MNOK)
7.0 MUSD
(44 MNOK)
Rig and drilling services

Topside and Process Equipment
3.5 MUSD
(22 MNOK)
3.4 MUSD
(21 MNOK)
3.0 MUSD
(19 MNOK)
Subsea equipment and installation

Transport and Logistics
Seismic and G&G
Operational and professional
1.8
Procurement, construction and
1.6
Well services
Seismic and
G&G
10%
Topside and
Process
Equipment
23%
1.4
Engineering Services
0.5
Maintenance Services
0.3
Rig and
drilling
services
24%
Transport
and Logistics
11%
Subsea
equipment
and
installation
12%
Downhole drilling equipment and 0.2
9.4.3 Shipping
Norway has a strong shipping and maritime industry, which is Norways second
largest export industry after the energy sector. According to the Norwegian
Maritime department, Norway has been a major player for more than 150 years,
and the Norwegian maritime industry controls one of the worlds largest merchant
fleets (Norway's official websites abroad 2014). The Norwegian maritime industry
is an internationally competitive cluster, including leading shipping companies,
shipbuilding yards, equipment manufacturers, designers, service providers,
universities, research and development centers and regulatory bodies (Norway's
official websites abroad 2014).
According to Jarand Rystad, Managing Partner, Rystad Energy, Norwegian
shipyards are globally competitive, despite the competition from low-cost
shipyards. He said that this is because Norwegian shipyards focus on value-adding
activities, and gained construction contracts based on their technological
competencies. These related industries strongly support the development of the
offshore energy cluster, because the shipping companies participate in all phases
of offshore petroleum activities.
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9.5.1 Local Consumption
Due to a small population, the local consumption of crude oil accounts for an
extremely small percentage of total production, as illustrated in the figure below.
Source: Short-Term Energy Outlook, the U.S. Energy Information Administration
9.5.2 Export Markets
In 2013, the major crude oil export markets were: U.K. (42%), Netherlands
(21%), and Germany (10%). It is important to note that Norway is not dependent
on a certain market to purchase its oil, and has access to several export markets as
illustrated in the figure below.
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2013 Norway Crude Oil Exports by Destination

Ireland
2%
Rest of the
world
9%
France
5%
United States
5%
Sweden
6%
Germany
10%
United
Kingdom
42%
Netherlands
21%
Source: The US Energy Information Administration
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9.6 Diamond Summary
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10.0 Oil Costs Canada vs. Norway
10.1 Cost Analysis

Production Costs
Fiscal Burden
Operating Costs
o Labour Wages
o General & Administrative
Costs
o Finding & Development
Costs
Royalties
Taxes
o Interest
o Transportation Costs
Source: Team Analysis
10.1.1 Operating cost
In Canada, operating costs for both traditional energy production and oil sands
products are increasing. For traditional energy production, the industry average
operating cost was $7.7 per barrel of oil equivalent (BOE) in 2006, and increased
to $10.2/BOE in 2010; for oil sands production, the industry average operating
cost was $19.6/BOE in 2006, and increased to $25.5/BOE in 2010 (Tertzakian
and Baynton 2011). From 2005 to 2010, the operating costs for both oil sands and
conventional oil & gas increased over 50%.
In Alberta, the development of the energy sector leads to continuous wage
increases. From 2002 to 2010, the weekly wage earning for energy-related
occupations increased at any annual rate of 5.5% (McKibbon, Mortlock, and
Robinson 2011). As discussed in the cluster diamond section, labour supply
shortage, aging workforce, and high mobility within the energy sector all led to
wage increases.
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In the late 1990s, the general rule of thumb for General & Administrative Costs
(dominated by office salaries, leases and software licenses) in Canada was
$1/BOE. The industry average General & Administrative Costs was $1.7/BOE in
2005, and increased to $2.7/BOE in 2009 (Tertzakian and Baynton 2011). As of
2011, a $2.25/BOE General & Administrative Costs burden is considered
competitive in Canada (Tertzakian and Baynton 2011).
From 1996 to 2007, Finding & Development Costs increased 8% per year on
average in Canada (Tertzakian and Baynton 2011). According to Matthew Foss,
the Finding & Development Costs in Alberta are very competitive relative to the
global average. For instance, the success rate of drilling in Alberta is about 70% to
80% and is much higher than the international average, 10 20%. High finding
rate is a result of significant drilling activities in Alberta. According to the
Government of Alberta, since 1990, more than 300,000 wells have been drilled in
Alberta, and therefore geology has been reasonably mapped out.
Due to increasing financial capital supply, especially from Asian investors, the
cost of financing has decreased over time (Tertzakian and Baynton 2011).
However, costs of financing vary largely across operators due to different capital
structures, cash flows, corporate governances, and other company-specific factors.
Source: Turmoil and Renewal: The fiscal pulse of the Canadian upstream oil and
gas industry
Since 2009, the increase of Asian investment in Canadian oil sands has been
significant. From August 2009 to May 2011, $18.5 billion foreign capital, mainly
from China, South Korea, Thailand, and Japan, has been invested to the Canadian
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energy sector. About 55% of the $18.5 billion foreign investment targets the oil
sands (Tertzakian and Baynton 2011).
10.1.2 Transportation Costs
As stated above, lack of infrastructure to transport the resources produced in

Western Canada is a major challenge to the Canadian energy sector. The
consequence is that resources extracted in Western Canada are sold at a discount
to the U.S. market, while refineries located in Eastern Canada have to rely
primarily on more expensive imported oil.
Pipelines transports about 95% of Canadas crude oil and natural production
(Canadian Centre for Energy Information 2014b). This is because pipelines are
the least expensive and most efficient way to transport petroleum on land. Pipeline
tolls for heavy oil of the same routes are more expensive than light oil. There are
multiple routes available to transport the petroleum products to the target markets,
and the costs vary according to the routes. According to Matthew Foss, it takes
about $7 per barrel to $8 per barrel to transport heavy oil produced in Alberta to
the Midwest U.S. market, and about $10 per barrel to the U.S. Gulf Coast.
10.1.3 Royalties and Taxes
As discussed in the cluster diamond, the royalties of Canadian energy production

vary across provinces. Compared with conventional oil, oil sands projects are
characterized with higher risk. Therefore, the fiscal regimes for oil sands
production are featured with low tax and royalty rates, when the costs have not
been recovered.
10.1.4 Breakeven Costs
According to Matthew Foss, from Department of Energy, Government of Alberta,

the estimated breakeven WTI price of oil sands is between $65 per barrel to $90
per barrel. The production cost of expansion projects could be as low as $30 per
barrel.
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10.1.5 Increasing Costs
Production costs increased dramatically over the last decade for upstream
operators. The figure below of Husky Energy shows the extent of operating cost
increase. In FY 2013, Husky Energy produced 175.1 mbbls/day conventional oil
and oil sands in Western Canada, and 44.1 mbbls/day light crude oil in the White
Rose and Terra Nova oilfields that are located on the offshore Atlantic Canada.
The unit operating cost of Husky Energy was $6.24/BOE in 2003, and the cost
increased to $16.28/BOE in 2013, a 159% increase over ten years.
Source: Husky Energy Annual Reports 2000 2013

Several reasons can be attributed to the increase in costs. Rising oil prices are an
important factor behind the increase in costs. Edmonton light oil is a prime
example, where prices have increased from $40 per barrel to $90 per barrel, a
125% increase.
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Source: Alberta Oil, Economist Andrew Leach and Kirsten Smith pop the notion
of a bitumen bubble
Based on our interview with Shannon Chmelyk from AER, Alberta's strong
economy and tight labour market has driven wages up. In addition, increasing oil
prices have lead to more focus on output, exploration, and other activities than
cost control. Multiple mega projects being developed concurrently in Alberta have
bid up the price of inputs like skilled labour, steel and copper. Development in
China with their major engineering projects has also been putting high demands
on the pool of inputs over the last decade. In addition, increasing oil prices have
allowed higher cost projects to be developed and continued.
Moreover, the operating costs increase with energy prices, but do not necessarily
decrease if the energy price goes down in the sense that wages are sticky
(Tertzakian and Baynton 2011). For example, in 2009, energy prices dropped due
to the financial crisis, while the unit operating costs did not. The average
Edmonton light oil prices peaked at an average of $100 per barrel in 2008, and
dropped to an average of $60 per barrel in 2009. However, in the post-financial
crisis period, the unit operating costs continued to increase by 2%, which is a
conservative estimate (Tertzakian and Baynton 2011).
10.2 Cost Discussion Canada vs. Norway
Costs are broken down in two categories production costs and fiscal burden. As
per Mackenzies analysis of resource resource-driven economies (Dobbs et al.
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2013), Canadian energy production costs from 2013 to 2014, relative to Norway
are higher while the fiscal burden is lower. As per an interview with Hkon
Skritting, this can be attributed to both inefficiencies, and more intensive
operating conditions in Canada. The comparative analysis illustrates the
differences in the following figure.
Canada
Norway
Production Costs1
52%
29%
Fiscal Burden2
8%
52%
Overall Costs
60%
81%
Production costs include capital, operational and logistic costs
Fiscal Burden include profit sharing, royalty, and corporate taxes
Source: Maximizing the potential of resource-driven economies McKinsey Global

Institute
Forward-looking production costs (capital, operational and logistic costs) as a
percentage of revenue are higher in Canada (52%) than Norway (29%). However,
fiscal burden (profit sharing, royalty, and corporate taxes), is lower in Canada
(8%) than in Norway (52%). This illustrates that, oil production in Canada (60%)
has a cost advantage over oil production in Norway (81%).
However, it is
important to take into account that the cost of production might not be as relevant
as ROI, and based on our estimates, we assume that Norway has a higher ROI
because it is able to charge a higher price for its oil.
The cost structure in Canada demonstrates that the operating costs in Canada on
average are significantly higher than that in Norway, while keeping in mind that
GDP per Capita in Norway is almost twice as high. This illustrates that the cost of
production in Canada is significantly higher, and this can be attributed to the fact
that it is more expensive to operate in the oil sands than other locations. However,
this also demonstrates that there is significant room for improvement in terms of
efficiency and technological enhancement.
This also demonstrates that the more expensive cost structure in Canada has led to
the government having lower royalties and taxes. Therefore, enhancements in
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efficiency will directly benefit the Government of Canada, and Provincial

Governments as it will enable them to charge a higher economic rent for their
resource.
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11.0 Comparing the Canadian and Norwegian Oil Clusters
11.1 Cluster Attractiveness
In this section, we compare the NCS Oil Cluster, Canadian Onshore Cluster, and
Canadian Offshore Clusters through the lens of the Emerald Model.
11.1.1 Reserves
Canadian Onshore Cluster: This cluster has the largest reserves out of the three
clusters. Alberta has an estimated 1.49 billion barrels of conventional crude oil
reserves and 169.3 billion barrels oil sands reserves. According to CAPP, in 2012,
Alberta produced 556,000 barrels per day of conventional oil, and 1.74 million
barrels per day from oil sands. As per analysts, the oil sands have reserves for the
next 200 years. Unconventional production is expected to increase by 100%,
while conventional production is expected to stay stable over the next twenty
years.
Canadian Offshore Cluster: There are only four production wells in the offshore
cluster located in Atlantic Canada. According to the National Energy Board,
Initial oil reserves in Newfoundland and Grand Banks totalled 2,152 million
barrels, out of which 1,290 million barrels (or 60% of initial reserves) have been
explored, and 862 million barrels (or 40% of initial reserves) of established
reserves are remaining. In Nova Scotia, cumulative oil production totalled 44
million barrels, and the area offshore Nova Scotia has no significant remaining
established oil reserves. According to CAPP, in 2012, Newfoundland & Labrador
produced 197,000 barrels per day of oil. Nova Scotia has no major crude oil
production. Compared with Alberta, the production in the Atlantic Canada region
is small in scale. This suggests that there is no critical mass. Production is
expected to stay stable over the next twenty years. However, it is important to
note that Statoil has had a major discovery in Atlantic Canada over the past year,
and this is expected to enhance the interest of oil companies in Atlantic Canada. In
addition, BP and Shell have invested $1 billion each in exploration in Nova
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Scotia, and the local industry is expecting a huge find, perhaps equal to Norways
total reserves.
Norwegian Oil & Gas Cluster: Crude oil amounted to about 45 billion barrels,
and the majority of the crude oil reserves are located in the North Sea. Norway
has been producing a significant amount of oil over the past few decades, which
has led to 44% of the total reserves on the NCS having been produced. Since
2000, crude oil production has fallen significantly. Crude oil production in 2013
was roughly half of what it was in 2001. Oil production is expected to stay
constant, if not declining, unless there are major finds.
11.1.2 Location
Canadian Onshore Cluster: Over 98% of Canadas oil reserves are located in
Alberta, which is located in Western Canada. It is important to note that Alberta
is a landlocked province. Therefore, oil needs to be transported to markets via
pipeline or rail. This has limited oil producers in Alberta from diversifying their
markets.
Canadian Offshore Cluster: This cluster is located in Atlantic Canada, in the

city of St Johns in the province of Newfoundland & Labrador. These oil reserves
are linked close to the ports and can be transported.
Norwegian Oil & Gas Cluster: Norway has the ports necessary to transport the
oil to energy hungry markets in Europe.
11.1.3 Infrastructure
Canadian Onshore Cluster: Transportation of oil via rail is more expensive and
Canada does not have the required infrastructure. Transportation via pipeline is
the most viable option. However, there is limited capacity with current pipelines.
These pipelines are not owned by the government, but are owned by private
companies such as Enbridge and TransCanada.
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Canadian Offshore Cluster: Oil is transported via tankers and the infrastructure
is adequate for transportation. However, the oil is between 1500 and 2000 feet
under water in some wells, so it is challenging to drill. There is also a long drop
off and unstable bank which prevents pipelines from being used. Therefore,
floating offshore structures and FPSOs are needed. Oil needs to be loaded into
tankers, but weather conditions do not permit that during certain months, which
ultimately leads to a reduction in production.
Norwegian Oil & Gas Cluster: Offshore oilfields are connected to onshore
processing terminals via pipelines. Oil is mainly transported to international
markets via tankers. The infrastructure is considered adequate. The Oseberg
Transport System and the Troll I and II pipeline systems are the major pipelines
systems, and Statoil operates these major pipeline systems.
11.1.4 Demand
Canadian Onshore Cluster: Most of the oil produced in the onshore cluster is
either consumed locally or transported to the US. The oil produced in the oil sands
is classified as heavy crude and 97% of it is transported to specific refineries that
are capable of processing this oil. These refineries are located in the U.S. Midwest
and the Gulf Coast. However, most of this oil (72%) was transported to the U.S.
Midwest. It is important to note that Canada is largely dependent on the U.S. to
purchase its oil.
Canadian Offshore Cluster: 81% of this oil is transported to the U.S. East Coast,
which makes it the largest market for oil from Atlantic Canada. The remaining oil
is exported to the U.S. Gulf Coast (16%) and the U.K. (3%).
Norwegian Oil & Gas Cluster: Due to a population of approximately 5 million,

local consumption of crude oil accounts for an extremely small percentage of total
production. The major crude oil export markets are the U.K. (42%), Netherlands
(21%), and Germany (10%). It is important to note that Norway is not dependent
on one country to purchase its oil, and this is a significant advantage as it
mitigates risk.
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11.1.5 Competition
Canadian Onshore Cluster: The biggest customer is the U.S. Midwest.

However, Canadian oil competes with the WTI, and the Maya from Mexico. Oil
production has increased significantly within the U.S. It is also important to note
that Canadian oil does not have the pipelines to transport to the Gulf Coast, which
has led to oversupply to the U.S. Midwest. This has led to a differential of 21%
between the WCS and WTI. As per Hathway Management Consulting (2013), 20
operators dominate production, while there are 800 OFS firms in Canada with an
average of 13 staff. This is not divided into onshore or offshore OFS, but we can
assume that most of it is based in onshore as that is where most of the production
takes place. Therefore, we can argue that there is a critical mass in this cluster.
Canadian Offshore Cluster: Current operators in this area are ExxonMobil,

Husky Energy, Suncor, and Encana. Competition on the operators side is limited
as production level is low. This has led to the cluster not having developed a
critical mass.
Norwegian O&G Cluster: As of 2008, there were 2,500 firms in the oil & gas
cluster, and this demonstrates that the Norwegian oil & gas cluster has achieved a
critical mass (Sasson and Blomgren 2011). There is a large spread of revenue
earned, and it demonstrates a healthy diversity of large, medium, and small size
firms across the value chain (Sasson and Blomgren 2011). In addition, the large
numbers of firms in each category along the value chain indicates strong local
competition (Sasson and Blomgren 2011). Competition for the purchase of the
final product (oil) is not significant as Norway is located close to energy hungry
markets.
11.1.6 OFS Value Chain
Canadian Onshore Cluster: There are several companies within the Canadian
Onshore Cluster, and most of these companies specialize in hydraulic fracking
and horizontal drilling the marriage between these two technologies has
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significantly improved recovery rates. It is important to note that there is a

comprehensive value chain in oil field services for onshore activities in Canada.
Canadian Offshore Cluster: There is no comprehensive value chain within this

cluster, especially in terms of capital equipment and subsea technology. There are
a lot of suppliers within this industry who are also present in Stavanger, Norway.
Norwegian Oil & Gas Cluster: The value chain and supplier list is very
comprehensive.
11.1.7 International OFS Firms
Canadian Onshore Cluster: There are several Canadian OFS firms with
international operations. However, the large four firms are not all present in all
regions. In addition, their proportion of international to domestic revenue in 2013
was 15%. It is important to note that 77% of the revenue of Canadian OFS firms
in 2013 came from the North American market, while the European market placed
second with 6% of total revenue. This illustrates that Canadian OFS firms do not
have a strong international presence.
Canadian Offshore Cluster: There is not a large number of globally competitive

firms. This can be attributed to a small number of projects, and the industry in
Atlantic Canada being on and off. This prevents companies from growing.
Norwegian Oil & Gas Cluster: Norwegian firms are market leaders in multiple
segments of the value chain within offshore technology. They also have
significant global presence, which is demonstrated by the fact that over 40% of
the revenue with OFS came from international operations in 2012. In addition,
68% of the revenue of the large four firms came from international operations,
which is a stark difference from the largest Canadian firms.
11.1.8 Supporting Industry
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Canadian Onshore Cluster: Fabrication is a supporting industry and expertise

within fabrication has been beneficial. However, the Canadian fabrication sector
is not considered very innovative as it still uses very old methods, and is not a
global market leader.
Canadian Offshore Cluster: The maritime and shipping industries strongly

support the offshore industry. However, most of the OFS companies are located in
Newfoundland & Labrador, where the shipyards are small, while the large
shipyards are located in Nova Scotia. Due to the Atlantic Accords, Nova Scotia
shipyards have had minimal access to the OFS companies in Newfoundland &
Labrador. The Ocean Technology cluster in Newfoundland & Labrador has
recently gained importance and is in the process of growing. Its growth could be
beneficial for the OFS industry, and collaboration could lead to synergies.
Norwegian Oil & Gas Cluster: Norway has a very strong shipping and maritime
industry and this has been beneficial for the oil & gas industry. There has been
significant collaboration between shipping and maritime, and the oil & gas
industries.
11.2 Education Attractiveness
Canadian Onshore Cluster: In Alberta, the University of Alberta and University

of Calgary offer energy-related programs at bachelor, master, and PhD levels.
Canadian education has a good international reputation. According to Richard
Wayken, Vice Present of Alberta Innovates, Alberta has a rich engineering asset.
Many interviewees also confirm this. However, as discussed in the Canadian
National Diamond section, Canada has a low number of PhD graduates (88 PhD
graduates per 1million population aged 25 to 39, in 2011). This could mean a lack
of interests in performing high intensity R&D.
Canadian Offshore Cluster: University of Dalhousie and Memorial University

offer energy-related programs at the bachelor, master, and PhD level. Similar to
the onshore cluster, a lack of PhD graduates negatively impact the cluster
competitiveness. It is safe to say that all of the three clusters have good general
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and oil-specific education systems to support energy industry development.

However, since the market size is relatively small in Atlantic Canada, we would
argue that this would negatively influence the oil-related education attractiveness
in the offshore cluster.
Norwegian Oil & Gas Cluster: Compated to Canada, Norway has a high number
of PhDs (132 PhD graduates per 1million population aged 25 to 39, in 2011),
which demonstrate a strong willingness of performing high intensity R&D and a
high degree of education attractiveness. However, from 2005 to 2008, the energyrelated education attractiveness has improved at the bachelor and master level,
while worsened at the PhD level (Sasson and Blomgren 2011). It is argued that
declining PhD students might be an early sign of declining advanced R&D-based
value addition in the energy sector (Sasson and Blomgren 2011).
11.3 Talent Attractiveness
11.3.1 Human Capital
Canadian Onshore Cluster: In Alberta, labour shortage is an ongoing issue

without a short-term fix. As we have discussed in the Onshore Diamond section.
Although Canada has various immigration policies, new immigrants tend to stay
in big cities like Toronto, Montreal, and Vancouver. Provinces like Alberta are not
a popular choice. Lack of lifestyle attractiveness also contributes to the fact that
Canada in general does not prefer energy production occupations, such as field
managers, truck drivers, operators, and controllers. Labour shortage also
contributes to significant wage increases in Alberta. Wages in Western Canada are
significantly higher than the rest of Canada because of a shortage of both skilled
and unskilled workers. Lack of qualified workers would be the major challenge
for the cluster to develop further.
Canadian Offshore Cluster: There is a shortage of skilled labour in Atlantic

Canada, while wages in Newfoundland & Labrador are higher than the average
wages in Canada.
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Norwegian Oil & Gas Cluster: The industry has gone through a professional
process over the last few decades, many engineers, and employees with business
education backgrounds work in this industry (Sasson and Blomgren 2011).
Similar to the other two clusters, there is a shortage of both skilled and unskilled
labour within the oil & gas cluster in Norway.
11.4 R&D and Innovation Attractiveness
11.4.1 R&D Requirement
Canadian Onshore Cluster: Companies are not required to invest a percentage

of their revenue or expenditure into R&D
Canadian Offshore Cluster: As per the Atlantic Accord, companies are expected
to invest a percentage of their production revenue, or exploration expenditure in
R&D within the province.
Norwegian Oil & Gas Cluster: There is a goodwill agreement between the state
and the operators about allocating as much R&D as possible in Norway. As of
2011, 31% of Norwegian based oil & gas companies used 4% or more of their
sales on R&D (Sasson and Blomgren 2011).
11.4.2 Innovation
Canadian Onshore Cluster: R&D grants have decreased significantly over the
past year, which has led to a reduction in R&D spending. However, there has been
an increase in patents over the past decade.
Canadian offshore Cluster: Industry investment in the Canadian offshore is very

low. According to CAPP, in 2013, the Atlantic Canada region only received $1.5
billion, or 2.4% of national energy industry capital spending. As production levels
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are low, we would argue that low production levels and small industry capital
spending negatively influence the innovation attractiveness of the Atlantic Canada
region.
Norwegian Oil & Gas Cluster: Norway has strong oil & gas oriented research
institutes. The state, oil companies, educational and research institutions together
drive innovation in Norway, and according to a confidential EY report, they are
also responsible for the biggest amount of R&D investments.
11.4.3 Collaboration
Canadian Onshore Cluster: There is minimal collaboration among operators,

and between operators and OFS providers. However, the largest oil producers
have collaborated to form the Canadian Oil Sands Innovation Alliance (COSIA),
which is a joint initiative to develop environmentally friendly technology. In
addition, there appears to be minimal cooperation between the industry, academia
and government.
Canadian Offshore Cluster: There is no real long term collaboration between

the cluster members. However, there are joint bids. Some examples include GJ
Cahill bidding for EPC services with Wood Group PSN, Keiwit and Kvaerner
performing on the Hebron GBS construction, and Kiewit and Kvaerner/Kentz
bidding on the Hebron module integration. There appears to be greater
collaboration between industry and academia within this cluster. However, there
is minimal collaboration with the government.
Norwegian O&G industry: There is significant collaboration in the Norwegian

industry as stated above within the diamond. The largest companies have
collaborated and have had several joint ventures as specified above. In addition,
there has been significant collaboration between industry, academia and
government. Programs such as DEMO 2000, GCEs/NCEs, and Research Councils
have enabled the industry to become more competitive.
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11.4.4 Sophisticated Customers
Canadian Onshore Cluster: The geological landscape in this cluster is variable.

However, the oil sands makeup a significant part of this cluster, and are
characterized by high production costs as stated above. Therefore, the
development of efficient technology to enhance recovery rates and reduce costs is
essential. In addition, operating conditions in this cluster are complex and require
innovative technology.
Canadian Offshore Cluster: As stated above, this cluster has one of the most
complex and harsh operating conditions in the world. In addition, operating costs
within this cluster are the highest within the offshore oil segment.
Norwegian Offshore Cluster: The operating conditions within this cluster are
very complex, and this has led to the development of innovative technologies
specifically for this cluster.
11.5 Ownership Attractiveness
11.5.1 Fiscal environment
Canadian Onshore Cluster: Canadian oil & gas producers pay tax and royalty to
federal and provincial governments. The federal corporate tax rate is 15%. The
provincial fiscal environment in Alberta is very favourable; the corporate tax rate
in Alberta is 10%, which is the lowest in Canada. In Alberta, the royalty for
conventional oil varies with the price of oil, ranging from 29% ($50 per barrel) to
47% ($95 per barrel) of the gross profit. Royalties for oil sands are 1% when
development costs are not recovered. Once development costs are recovered,
royalties range from 25% to 40% of net profit. Royalties, exploration costs, and
development costs are tax deductible for both conventional and oil sands
production. Royalties for energy production on First Nations reserves are
negotiated on a case-by-case basis. In addition, the 20% federal tax credit on
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Scientific Research and Experimental Development expenditures was eliminated

in 2013 and this is likely to negatively influence innovation.
Canadian Offshore Cluster: The fiscal environment is favourable. The corporate

tax rate in Newfoundland & Labrador is 14%, while the corporate tax rate in Nova
Scotia is 16%. Similar to Alberta, royalties, exploration costs, and development
costs are tax deductible. In Newfoundland & Labrador, royalties on gross revenue
range from 1% to 7.5% as cumulative production increases. Once the project
breaks-even, royalties on net profit range from 20% to 30% and rise as project
profitability rises. In Nova Scotia, royalties on gross revenue range from 2% to
5% before the offshore project breaks-even, and increases to 20% of net profit
after offshore project breaks-even.
Norwegian Oil & Gas Cluster: The tax rate on the net profit is extremely high
(50% on oil tax in addition to 28% corporate tax), and R&D tax credits provide
operators with a strong incentive to innovate.
11.5.2 Licensing
Canadian Onshore Cluster: Licenses are awarded to the highest bidder.
Canadian Offshore Cluster: Offshore Regulatory Boards issue exploration,

discovery and production licenses for offshore energy production. Operators have
to present local benefit plans in order to get exploration and production licenses.
Norwegian Oil & Gas Cluster: Licenses are not awarded to the best bidder, but
to the most suitable company. The companys record of accomplishments and
technology play a significant role.
11.5.3 Protectionist Policy
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Canadian Onshore Cluster: Foreign companies have to pay higher taxes, while
local content is preferred for projects. In addition, there is a requirement for
foreign companies to have a head office in the province in order to operate oil &
gas properties. There are some trade agreements with other provinces, where
offices in those provinces are recognized by the Government of Alberta. There is
a 25% surtax in terms of income tax for foreign companies.
Canadian Offshore Cluster: Regional content is preferred, which puts Canadian

and international companies at a disadvantage.
Norwegian Oil & Gas Cluster: Local content requirement was as high as 60% in
1980s, but the industry was deregulated in 1994. Currently, there are no
protectionist policies. As per Porters Diamond, competition is encouraged and
this has led to the creation of several market leading Norwegian companies.
11.5.4 Capital Markets
Canadian Onshore Cluster: Calgary is the hub of energy finance, and 17 of the
top 20 banks are located in Calgary. The TSX and TSXV are also very strong
sources of capital within energy in Canada. The capital market is considered very
weak for oil & gas technology companies in Canada. The venture capital market
has been referred to as The Junior Mining Board by several individuals in the
industry, due to its stronger focus on mining, and not technology.
Canadian Offshore Cluster: Capital markets are located in Calgary and Toronto,
and the offshore cluster can benefit from it. However, the capital market is strong
for mining and software, but not oil & gas technology. Access to capital is a
significant issue for several companies within Canada.
Norwegian Oil & Gas Cluster: Measured by number of firms listed, the Oslo
Brs Stock exchange, along with TSX and NYSE, are among the top three stock
exchanges for OFS firms list their firms. Other than the energy sector, the Oslo
Brs Stock Exchange is a popular place for companies within the shipping and
seafood sectors. More than half of the brokerage firms active on Oslo Brs Stock
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Exchange are international firms. This indicates that firms listed on the exchange
have strong capital access to international capital.
11.6 Environmental Attractiveness
Canadian Onshore Cluster: The industry sexiness is very low for this particular
cluster, as several articles portraying the industry poorly have been written. In
addition, the environmentalists have strongly opposed the development of the oil
sands. In addition, there has been strong opposition due to environmental reasons
to Keystone XL.
Canadian Offshore Cluster: This industry can be considered sexier than the
onshore industry due to the lower perceived environmental impact. In addition,
the industry is small and is not expected to grow significantly.
Norwegian Oil & Gas Cluster: Industry sexiness for this cluster is very high. It
can be attributed to how this industry has positively impacted the economy of
Norway, making it one of the worlds strongest economies, with a GDP per
Capita within the top three countries.
11.6.2 Environmental Awareness
Canadian Onshore Cluster: Despite of the economic benefits, the current debate
concerns whether the oil sands development is at the optimal rate that balances
economic and environmental outcomes, and Environmental organizations (i.e.
Greenpeace and Pembina Institute) and local First Nations have been strong forces
against oil sand projects (Best and Hoberg 2008). To ease the burden of
greenhouse emissions, water consumption and tailings pond management related
to the oil sands production, the current solution proposed by the provincial and
municipal governments is to support the development of renewable energy and to
produce and consume fossil fuels in a cleaner way (Government of Alberta
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2014a). These efforts would improve the environmental attractiveness of energy

production.
Canadian Offshore Cluster: The environmental debate seems less heated in

Atlantic Canada due to its smaller market size. The government also focuses on
developing renewable energy and cleaner fossil fuels production and consumption
to improve the environmental attractiveness.
Norwegian Oil & Gas Cluster: It is suggested that the Norwegian energy
industry could develop more environmental friendly solutions and introduce more
environmentally friendly standards (Sasson and Blomgren 2011). The rationale is
to create a strong incentive to make sure NCS is at the far front of technology
development. We would argue that strong environmental awareness positively
impacts cluster development.
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11.7 Comparative Analysis Summary
Comparing Three Clusters Based on Emerald Model
Page 169
Cluster
Attractiveness
o
o
o
o
o
o
o
o
Reserves
Location
Infrastructure
Demand
Competition
OFS value
chain
International
OFS firms
Supporting
industry
Education
Attractiveness
Talent
Attractiveness
01.09.2014
Canadian Onshore
Canadian Offshore
Norwegian Oil & Gas
Cluster
Cluster
Cluster
+ High Reserves
+ Access to markets
+ Access to energy
+ Strong local OFS
- Low Reserves
hungry markets in Europe
industry
- Weak local OFS
+ Critical mass
+ Critical Mass
industry
+ Internationally
- Landlocked province,
- Lack of Critical Mass
competitive OFS industry
lack of market access
- Protectionism tendency
+ Sufficient infrastructure
- Exported to the U.S,
- Declining production
which has declining

demand
- Limited pipeline and
transportation capacity
+ Specialized programs
Similar to onshore
+ High number of PhD
+ Excellent schools
students
- Low number of PhD
- Declining number of
students
PhD applications
- Short of both skilled and
Similar to onshore
unskilled workers
- Short of both skilled and

unskilled workers
- Lack of lifestyle
attractiveness
R&D and
+ R&D requirement
Innovation
- Weak industry,
+ Strong public and
government and academia
private collaboration
Attractiveness
o
o
o
o
R&D
requirement
Innovation
Collaboration
Sophisticated
customers
Ownership
Attractiveness
o
o
o
o
Fiscal
environment
Licensing
Protectionist
policy
Capital
markets
Similar to onshore
+ R&D requirement
collaboration
+ Favourable fiscal
- Local content
- High royalty rate
environment
requirement
+ Generous credits for
- Local content
- Week local and
R&D
requirement
domestic venture capital
+ Venture capital for OFS
- Week local and
- Absence of local stock
technology start-ups
domestic venture capital
exchange
+ Strong government
support in OFS
technology
commercialization
o
o
Environmental
- Negative public
+/- Less discussed due to
Attractiveness
impression
small market size
Industry
Sexiness
Environmental
awareness
Page 170
+ Good reputation locally
01.09.2014
12.0 Recommendations to Upgrade the Canadian Oil Clusters
12.1 Cluster Attractiveness
1) Infrastructure improvements across the cluster

In order to enhance the cluster attractiveness, it is recommended that both
provincial and federal governments partake in infrastructure improvements in the
cities and towns where oil is located. Both Calgary and St Johns have an
insufficient frequency of flights, and a lack of destinations for flights. Fort
McMurray, the location of an extremely large oil field has only two international
destinations; Las Vegas and Cancun, and it is safe to assume that travellers to
these destinations are very likely to go for leisure purposes. In addition, it is
important to note that the highway connecting Fort McMurray to other parts of
Alberta is a single lane highway. This can make transportation of inputs and
outputs, and individuals more time consuming and costly.
2) Create venture fund to fund start-ups filling the gaps within the value chain
The value chain in Atlantic Canada is not as comprehensive as the value chain for
the onshore industry in Western Canada, or within the offshore industry in
Norway. In order to enhance the cluster attractiveness of this industry, there needs
to be a comprehensive value chain, and a venture fund will enable companies to
fill in the gaps within the value chain.
3) Interest free loans for fabrication industry in Western Canada, in order to
upgrade their equipment
As per interviews conducted, the fabrication industry in Western Canada is using
older methods and equipment. Interest free loans in order to upgrade their
equipment will entice these suppliers to do so, while improving the quality of the
final product, which will positively impact the oil & gas industry
12.2 Ownership Attractiveness
1) Enhance access to capital via more government funding, and establish a

venture capital fund for Canadian oil & gas companies
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As stated earlier, the lack of access to capital is significantly affecting companies

from growing. As per interviews conducted, the impact of the lack of capital is:
acquisition of Canadian firms by foreign firms, lack of ability to grow and be
internationally competitive, and becoming uncompetitive as compared to rivals.
According to Arnt Inge Enoksen, of EY, the venture capital industry in Norway
has significantly assisted the Norwegian oil & gas industry in being competitive
as access to capital has been very simple. In addition, the government has also
been very generous with providing firms with capital. Therefore, it is
recommended that the Canadian government follow a similar approach, while also
establishing a venture capital fund for oil & gas firms.
2) Abolish investment restrictions within the Investment Canada Act
Canada does not have adequate capital markets. Its venture capital market is
mainly focused on software and mining. Therefore, foreign investment is needed
in order to develop the industry cluster.
3) Reduce transaction costs by adopting a simple regulatory regime and one
provincial body to regulate the industry
It is unlikely that the provinces will agree to one Federal institution to oversee the
entire oil & gas industry in Canada. Therefore, it is recommended that there be
one regulatory body instead of multiple institutions that operators typically have
to go through. In addition, Atlantic Canada has a more ad-hoc system, which can
be unattractive for operators as they have to negotiate with the provincial
institution on a project by project basis. This leads to uncertainty and an increase
in transaction costs. A consistent regulatory regime and one provincial body will
reduce transaction costs and provide greater transparency.
4) Maintain attractive fiscal environment
Alberta has a very attractive fiscal environment in terms of corporate taxes, while
the fiscal regime in the other provinces also appears to be more attractive, as
compared to Norway. However, it is important for the government to maintain its
fiscal regime if it is to retain foreign headquartered companies within Canada,
especially Calgary. Headquarters of companies within the country are very
beneficial, as it can leads to significant knowledge accumulation for the workforce
since most knowledge intensive activities take place at the headquarters.
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5) Access to Asian markets for oil from Western Canada

Providing access to Asian markets from Western Canada is an integral driver in
enhancing investment into the oil sands. Access to market issues have led to the
WCS trading at a 21% differential to the WTI. This ultimately impacts firm
profitability, which ultimately reduces the royalties received by the government.
In addition, US production is increasing, while US demand is decreasing, and it is
the only consumer of the WTI. Therefore, it is essential that Canada diversify its
markets for risk management purposes.
6) Project containing geoscience data of exploration activities
The Nova Scotia government has partaken in a project titled Play Fairway. This
project has mapped out geological risk and potential hydrocarbon reserves. The
province of Alberta has its Geology reasonably well mapped out. However, as per
some interviewees, there are still small fields which can be developed by smaller
operators, and in order to determine the feasibility of these fields, more
exploration work needs to be conducted.
7)) Abolish local content requirement
One of the reasons Norway has done very well within the OFS industry, is the
lack of protectionist measures undertaken by the government. This has allowed its
companies to compete for local projects, and considering the strong competitive
environment within the home market, these companies have had to innovate in
order to stay competitive. This has enabled Norwegian companies to establish
competitive advantages both locally and internationally. It is consistent with
Porters views on competition as well, and it is recommended that Canada adopt a
similar policy.
7) Enhance provincial collaboration
As per the Atlantic Accord, local content is preferred. This has reduced synergies
across industries, such as maritime and offshore oil & gas. In addition, the local
content requirement in regards to preferred tax rates for organizations with offices
in the province is another requirement which forces companies to choose within
provinces, or not conduct business within a province. Therefore, it is
recommended that the provinces collaborate to create a strong national industry,
as opposed to a strong provincial industry.
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8) Regulatory federal board for oil & gas activities

As per interviews, many companies struggle with going through multiple
organizations for approval, especially in Alberta. In addition, they have to go
through significant bureaucratic red tape if they are to expand their operations to
another province. Therefore, it is recommended that one federal organization,
essentially a one stop shop be set up to ensure timely response to companies.
12.3 Talent Attractiveness
1) Ensure individuals stay employed within the oil & gas industry by providing
suitable living conditions in oil & gas towns and cities
As per our interviews, it was determined that many individuals are not interested
in living in Fort McMurray because of its lack of infrastructure. This has led to
individuals adopting a fly-in and fly-out life style, which has ultimately made a
career within the oil & gas industry unattractive. Other areas with oil & gas have
had similar problems. Therefore, it is recommended that the government improve
infrastructure within such areas.
2) Invest in developing and marketing an immigration programme tailored to the
Canadian oil & gas industry
Most immigrants in Canada in absolute terms move to the provinces of Ontario
and Quebec. This has led to a high unemployment rate in those provinces. As
most of the population lives in those provinces, which is also where the national
capital is located, there is significant pressure upon the government to adopt a
strict immigration policy. However, the provinces of Alberta and Newfoundland
have a shortage of labour, and a significantly higher GDP per Capita. Many oil &
gas companies have stated that they have had to turn down projects, or not had the
ability to grow due to a lack of labour. Therefore, an immigration programme
tailored to the oil & gas industry for both skilled and unskilled labour would be
beneficial
3) Government & industry collaboration to recruit from Central Canada
Recruiting from parts of Canada that have higher unemployment rates will be
beneficial for both the industry and the government. Therefore, it is recommended
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01.09.2014
that the government create funding programs for the oil & gas industry to recruit
from Central Canada, or provide relocation assistance for individuals from Central
Canada who are interested in moving to Alberta, or Newfoundland.
4) Organize a federal and provincial level public relations campaign to enhance
industry sexiness
Industry sexiness within the Canadian oil & gas industry is very low as stated
above. It is particularly low in Western Canada as compared to Eastern Canada
due to the perceived environmental impact of the oil sands. This has led to
significant leakage of talent from the industry into other industries. Therefore, it is
recommended that both federal and provincial governments coordinate a
campaign to boost the image of the industry not just provincially or nationally but
also globally. This will enable Canada to attract the best global talent within the
oil & gas industry.
12.4 Educational Attractiveness
1) Increased government and industry funding for students within the sciences
and engineering
Engineering education in Canada is very expensive. Therefore, more funding for
such education will reduce the cost and make it more accessible for students. In
addition, scholarships and loans are more likely to make these fields of interest for
students. A greater number of students within these fields will mean a larger
number of students
2) Attract international students within the sciences and engineering
Foreign students within post-secondary institutions in Canada are highly likely to
stay after graduation, especially within the province of their education. Therefore,
collaboration with the Ministry of Education, Provincial governments, and
industry to provide scholarships to foreign students with the highest grades will
make them consider studying in the provinces of Alberta, Saskatchewan, and
Newfoundland. This may provide the industry with a chance to retain these
students after they graduate.
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01.09.2014
3) Develop specific programs in collaboration with industry

There are programs specific to the petroleum industry, including an MBA in
Energy Finance at the University of Calgary such a programme is offered by
less than five schools globally. However, specific programmes at universities
should collaborate with industry, as such tailored programmes will ensure
individuals entering the industry have the required knowledge.
4) Provide universities with a focus on petroleum, and petroleum engineering
programmes with added funding
A high ranking university is likely to attract high calibre students to study at the
institution and this will benefit the knowledge dynamics within that region.
Providing greater resources for universities with a focus on petroleum will
enhance their ability to attract faculty of the highest calibre, and invest greater
amounts in marketing and research.
5) Enhance government funding at the University of Calgary & Memorial
University
These two universities have the highest number of programs tailored to the oil &
gas industry. Memorial University is based in Atlantic Canada and has a strong
focus within the offshore aspect of the industry, while the University of Calgary
has a strong focus on the onshore industry. As per the authors of the Emerald
Model, Torger Reve and Amir Sasson, universities can be the foundation of
educational attractiveness, and examples of this are the universities in clusters in
San Francisco and Boston. Therefore, enhancing the ranking and quality of
universities within this cluster is likely to enhance total educational attractiveness.
12.5 Environmental Attractiveness
1) Strengthen environmental regulations

According to several interviewees, Canada has very strong environmental and
safety regulations. In addition there have been significant developments within
technology such as the creation of Steam Affected Gravity Drainage (SAGD).
Furthermore, the largest operators within the oil sands are collaborating under the
Canadian Oil Sands Innovation Alliance (COSIA) in order to develop
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01.09.2014
environmentally friendly technology.

Strengthening environmental regulations will benefit the cluster in becoming more
environmentally competitive, which will enable the firms to have a competitive
advantage within this niche globally. Although this report has not focused on
exploration and production in Arctic Canada, it is important to note that
production within the arctic is expected to be economically viable within the next
decade. It is also important to note that significant concerns about exploration and
production in the arctic are safety and environmental sustainability. Therefore,
stronger regulations could lead to the Canadian offshore cluster being a market
leader within safety and environmental sustainability.
12.6 R&D & Innovation Attractiveness
1) Establish a cluster organization

Norway has assigned multiple industries within the country National Centers of
Expertise (NCE) and Global Centers of Expertise (GCE) status. This has led to
not only funding for these industries, but also an organized initiative to assist
these industries in moving forward via an association headed by a prominent
executive known within the industry. It is recommended that the both the offshore
and onshore clusters within Canada are awarded a similar status by the federal
government. This will not only lead to greater collaboration between members,
but also collaboration between organizations across provinces.
2) Create an organization similar to Alberta Innovates in Atlantic Canada
Alberta innovates is an organization which allows industry, government and
academia to share resources, expertise and ideas across sectors. In addition, it
allows university researchers to work together, unrestricted by academic barriers.
An organization similar to this is needed in Canada, as it would enhance
collaboration between the maritime and oil & gas industry, which is currently
lacking.
3) Establish organization for commercialization of technology
According to Svein Inge Eida, Research Lead at Statoil, Canada has a very well
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01.09.2014
developed system of financing through the public system. It has rigorous

processes of attracting and defining projects. In addition, it has clear criteria,
which requires significant bureaucratic effort for the application to be processed,
which leads this process to being very rigid and lacking in agility. In addition, this
process is extremely academic in Canada, while it is more practical in Norway.
This has led to the Canadians struggling with commercialization of technology.
Therefore, an organization which could assist start-ups in commercializing
technology while acting as a liaison with academic institutions in order to ensure
that projects remain practical and the funding process quick and agile, would be
beneficial for the industry as it would enable greater technology development.
4) Fund for PHD students within oil & gas
As stated above, Canada has a very low number of PhD students, and a higher
number of PHD students leads to more research. Greater education is expected to
enhance the quality of research. Therefore, it is recommended that the government
fund programs for students interested in pursuing a PhD and conducting research
with oil & gas.
5) Award tax credits and grants for R&D
As per several interviews, the provinces have a very complex system of awarding
grants for research. In addition, this system is not very transparent. It is also
important to note that the tax incentives for R&D have decreased significantly.
Norway on the other hand has significant tax credits and it is recommended that
both provincial and federal government award more tax credits and grants in order
to enhance innovation
6) R&D collaboration between public institutions and industry
Production costs in Canada are significantly higher than in Norway, especially
when taking into account the GDP per capita differences between both countries,
which mean that labour is more expensive in Norway. Therefore, the Canadian or
provincial governments should fund collaborative projects between operators,
OFS providers, universities and R&D institutions in order to lower production
costs.
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01.09.2014
Conclusion
This study has demonstrated that Canada needs to enhance provincial
coordination, increase collaboration between players, and increase the focus on
R&D and innovation. In addition, providing access to markets for oil in Western
Canada is essential, as oil production in the U.S. is expected to increase, while
demand is expected to decrease.
Canada will become a larger player within oil in the next decade as per production
estimates. In addition, the offshore industry is expected to grow rapidly
considering the significant exploration amounts committed to offshore Nova
Scotia. Last but not least, several industry experts have stated that drilling in the
arctic will be feasible in the next decade. Keeping these factors in mind, the
government needs to enhance its focus on developing the oil field service industry
in Atlantic Canada, as this would significantly enhance the prosperity of this
region.
In conclusion, it is imperative that the stakeholders within the industry prevent

protectionist policies, and learn from the Norwegian industry, which has
succeeded due to the intense local rivalry and collaboration between the largest
players. The future is bright for the industry, but if Canada wants to move beyond
merely taking advantage of its natural resources and focus on value creation, then
it needs to ensure the industry environment is conducive for firms to become
globally competitive
Page 179
01.09.2014
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BI Norwegian Business School Master Thesis

The Canadian and Norwegian Oil

Examination code and name:

Master Thesis in GRA 1900

Master Thesis in GRA 1900

Master Thesis in GRA 1900

Master Thesis in GRA 1900

bid, as it is done in Canada. In addition, government funding and tax incentives,

Master Thesis in GRA 1900

Master Thesis in GRA 1900

1.0 Introduction and Custer Theory ......................................................................... 1

Master Thesis in GRA 1900

3.0 Canada Overview.......................................................................................... 22

Master Thesis in GRA 1900

Master Thesis in GRA 1900

7.3.3 Cyclical Offshore Oil Industry ............................................................. 84

Master Thesis in GRA 1900

8.6.2 Onshore Cluster Related industries ................................................. 116

Master Thesis in GRA 1900

9.5.1 Local Consumption............................................................................. 145

Master Thesis in GRA 1900

11.5.3 Protectionist Policy ........................................................................... 165

Master Thesis in GRA 1900

1.0 Introduction and Custer Theory

1.1 Research Topic

Master Thesis in GRA 1900

1.3 Research Question

1.4 Research Methodology

1.4.1 Secondary Research

Master Thesis in GRA 1900

order to develop a more thorough understanding.

1.4.2 Primary Research

Master Thesis in GRA 1900

Master Thesis in GRA 1900

Master Thesis in GRA 1900

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