Back in business school in the late 1970s, I took a business policy course where we talked about the Boston Consulting Group's (BCG) "Growth-Share" model, developed to explain company strategy on the back of a napkin. This model is still taught in business schools today. The crux of it is you need to understand which of these four categories of businesses you have: dog, star, question mark or cash cow. If you don't categorize your business correctly, you will miss out on opportunities or throw money away.
It's a simple model but as the statistician George Box once said, "All models are wrong, some are useful." This one is useful, that's why it is still taught all these years later. Let's look at our government’s oilsands policies through that model's lens and see how we're throwing money away.
For much of the 1980s and 1990s, the oilsands were a question mark. They had low market share in the high-growth oil market of the US Midwest. Investments were made at a fairly slow strategic pace, like Imperial Oil's phased Cold Lake project, now one of the longest running oilsands projects. During that time, large volumes of offshore crude came by ship to the US Gulf Coast and flowed by pipeline all the way up to Chicago area refineries.
Somewhere nearer the 2000s, US Midwest refiners decided they wanted more oilsands crude. It was cheap, the offshore supply was more expensive and the refiners began investing billions to expand their capacity to run it.
The other big thing that started happening around 2000 was the Chinese economic miracle. For almost the next twenty-five years, 50 per cent of global oil demand growth would come from China. As that demand ramped up and traditional supplies like the North Sea declined, the global price of crude surged after twenty years below $20 per barrel, climbing to more than $140 in 2008.
It looked like the world needed more crude. The majors like ExxonMobil focused on the oilsands because they were a known reserve. Though the bitumen was expensive and complicated to produce and transport, the expected price would support the big investment. The oilsands became a star, growing market share in a growing market. Or so the big companies thought. Imperial and ExxonMobil invested $30 billion to develop the Kearl Lake bitumen mining project during this period.
But then the fracked oil revolution started in the late 2000s and by the 2010s the world flipped. The oilsands were no longer the attractive play because innovative companies figured out how to produce oil from shale deposits in places like the Bakken in North Dakota and the Permian Basin in Texas. Heavy crude was no longer a growth industry. There was plenty of cheaper, better quality light crude closer to markets and that's where the smart money went. ExxonMobil buying Permian producer Pioneer in 2023 for US$60 billion is a case in point.
No major oilsands project has been announced since 2013. The oilsands shifted from star to cash cow almost overnight, high market share in a slow-growing heavy crude business. Here's what the BCG model says for cash cows: milk them by making minimum investments while pulling cash out for better purposes elsewhere. And that’s exactly what the oilsands companies did.
They funneled the profits into shareholder wealth, dividends and share buybacks, rather than investment in Canada. The oilsands Big Four (Imperial, Suncor, Cenovus, CNRL) paid $6 billion per year out to shareholders in 2011-2013. By 2021-2024 that number was $20 billion per year and nearly three quarters of that left the country. Imperial Oil just increased their dividend by a staggering 21 per cent even as they eliminated their head office functions to run the company from Houston. That's a classic cash cow move: milk it for all it's worth, but don't spend money you don't have to.
Do our governments understand this? They should, but they don't act like it. In the recent federal mini-budget, Prime Minister Mark Carney wants to continue the Trudeau strategy of offering tens of billions of public money for carbon sequestering to companies that are busy buying back their own shares instead of focusing on growing their investments in this country.
And here's another change to worry about as Carney prepares to hand billions more to these companies: A cash cow can move to a dog just as fast as our 2000s star oilsands moved to cash cow in the 2010s. The Chinese demand growth I mentioned earlier peaked around 2019 and is now declining. That's not going to reverse, because you can't unsell tens of millions (and counting) of electric vehicles.
The UAE leaving OPEC is also a sign of future dog days for oil. The UAE knows that if you don't pump it now, you might not get to pump it later. As electrification takes hold, oil demand will peak and fall. The UAE doesn't want to play the OPEC capacity-rationing game anymore. The future will be a fight for market share, with Middle East producers holding the lowest-cost supply. For the oilsands in that scenario, cash cow is the best we can hope for while dog is the worst — declining market share in a declining market. You don't want to be dumping public money into dogs.
Carney, with a PhD in economics from Oxford, knows all this. We need to stop pretending the oilsands are ever going to be a star again and create policies so Canada benefits from our cash cows, not just oilsands shareholders. After all, it is Canada's crude oil, and the money Carney wants to hand them is our money. Prime Minister, don't get confused about what kind of business you're dealing with. Otherwise you're just throwing our money away.
