A deal to create North America’s largest energy infrastructure company may actually be aiming to persuade investors that oil and gas companies can still make money, says a newly-released memo to Natural Resources Minister Jim Carr.
The memo was drafted by senior officials in the petroleum resources branch at the federal Natural Resources Department shortly after a major merger was announced on Sept. 6, 2016, between two pipeline giants — Calgary-based Enbridge Inc. and Houston-based Spectra Energy. The memo said that the deal’s architects may have been trying to reassure investors at a time when oil and gas production was mired in a global slump.
“Both companies have multiple projects at different stages of development aimed at ensuring long-term growth,” said the memo, released to National Observer through access to information legislation. “However, the outlook for some of these projects may be uncertain, given a context where the demand for new oil and gas pipelines has weakened with lower growth in oil and gas production due to weak commodity prices, and where pipeline projects face increased regulatory scrutiny and political uncertainty. The merging of the two companies may be a way to show continued financial growth to shareholders without all projects coming to fruition.”
If approved by regulators and finalized, the deal would create an energy company worth more than $165 billion, headquartered in Calgary and led by current Enbridge president and chief executive Al Monaco.
Enbridge declined to respond to questions about whether it agreed with the analysis in the memo about its motives. Instead, it referred National Observer to comments made by Monaco and Spectra Energy chief executive Greg Ebel during a conference call last fall with investment analysts.
At the time, Monaco and Ebel both said the new entity would be more competitive.
“Now getting bigger isn't the objective here and it's never been for us,” Monaco said during that call. “It's about growing cash flow and earnings per share that matters. But it is a fact that scale mitigates exposure to industry downturns and a challenging project execution environment and will generate new, large and more diverse opportunities for us.”
The deal is part of a series of mergers and acquisitions that have struck Alberta’s oil patch in recent years along with a series of bankruptcies and tens of thousands of job losses. But when asked about the memo's analysis, one environmentalist said it demonstrated that the world is moving away from oil.
"Mergers that create ever-larger pipeline companies can’t disguise the fact that the age of oil is coming to an end," said Keith Stewart, a senior energy strategist with Greenpeace Canada. "Rather than trying to delay the inevitable, the federal government should be focused on accelerating the transition off of fossil fuels in a way that maximizes the benefits of the new jobs that will be created and minimizes the impacts on workers in the affected industries."
The memo to Carr said that federal officials would continue to monitor developments regarding the merger, under review in both Canada and the United States. It noted that the deal was expected to trigger more than $540 million in savings as part of a more diversified company, but that the impact on jobs was not clear.
“Companies such as Enbridge and Spectra are appealing for investors looking for reasonably safe investments with predictable returns,” said the memo. “It is likely that the main objective of the merger is to enhance this investors’ appeal.”
When asked whether the government's analysis had changed since the fall, a spokeswoman for Natural Resources Canada said that the context for industry had changed.
"Since the note was drafted in fall 2016, commodity prices have continued to strengthen and upstream drilling activities in the North American oil and gas industry are beginning to show signs of renewed growth," the department told National Observer in an email on Monday. "This could help to support market decisions to invest in new energy infrastructure, where it can be developed in a sustainable manner."
Enbridge and Spectra shareholders overwhelmingly voted to approve the merger at the end of 2016. If approved by regulators, the merger would give Enbridge shareholders control of about 57 per cent of the new company and is considered to be the largest takeover of a foreign company in Canadian history.
Editor's note: This article was updated at 8:30 pm ET on Monday, with new comments from Natural Resources Canada.