Canadian oil sector may be a good bet as prices ‘bleed’

As Baron Rothschild once noted, “the time to buy is when there’s blood in the streets”. Could the recent decline of crude oil prices to six-year lows represent just such an opportunity for Indian companies to consider investing in the North American (and particularly Canadian) oil sector?

With Brent and WTI crude in the US$45-50 range in mid-January, valuations of oil companies in Canada are falling and restructurings of Canadian oil companies may soon follow. That could be an opportune time for India to consider investing in the Canadian oil sector (including oil sands).

Time to diversify

India imports more than 70% of its crude oil requirements, with the vast majority of that supply coming from the Gulf region. As announced by India’s oil minister Dharmendra Pradhan in July 2014, India is diversifying its sources of oil imports to reduce dependence on any one region.

Canada is the world’s sixth largest producer of oil and gas with the third-largest proven oil reserves (including oil sands) in the world and offers a stable source of supply. While Canadian oil often sells at a (sometimes steep) discount to world crude prices, traditional barriers to export of Canadian oil to India have included shipping costs and issues as to whether Canadian grades of crude could be refined in India.

Late in 2013, Husky Energy broke that barrier by selling 1 million barrels of crude to Indian Oil Corporation, to be shipped from Canada’s east coast to Indian Oil’s refineries in India. India’s refineries include some of the most advanced in the world and the Husky Oil-Indian Oil deal shows that at least lighter grades of Canadian crude can be successfully processed and refined in India.

In addition, as noted by Pradhan in a written reply in the Lok Sabha on 8 December 2014, India’s refining capacity has more than tripled over the past 15 years and India’s present refining capacity exceeds the demand for petroleum products in the country. Accordingly, India could become a consistent net exporter of petroleum products if it can obtain reliable and economic sources of crude, and the Canadian oil sands may present such a source.

Raj Sahni is a partner and chair of the India Business Group at Bennett Jones LLP, a law firm with offices in Calgary, Toronto, Edmonton, Ottawa, Vancouver, Washington DC, Doha, Bermuda, and a representative office in Beijing.