Macro-environmental Analysis for the Alberta Midstream Oil and Gas

Sector

Evans Bargorett

APRJ-699

Word Count: 15,943

May 30, 2014

Bernie Williams

Abstract

The province of Alberta is blessed with the third largest proven crude oil reserves in the world, after Saudi Arabia and Venezuela, estimated at 170 billion barrels; in addition, Alberta has 35 trillion cubic feet (Tcf) of conventional and unconventional natural gas reserves, not including shale gas reserves whose volumes are yet to be fully assessed. With the global demand for energy increasing, particularly in the Asia region, and demand in the US decreasing amid increased production from its own reserves, the Alberta oil and gas industry is in a position that presents a great need to exploit the province’s abundant resources to meet the growing energy needs overseas. However, several factors, many beyond the control of the Canadian industry, continue to limit its ability to supply these overseas markets and to utilize refining capacity in the US needed to process Alberta’s increasing supply of crude oil. The main obstacle is limited pipeline capacity to export points in the eastern and western Canadian coasts, and to refineries in eastern Canada and the US, particularly on the Gulf Coast.

This research focused on the Alberta midstream oil and gas sector, which provides the crucial link between the producers in the upstream sector and the consumers in the downstream sector through processing, transportation, storage, and marketing of oil and gas products. The objective of this research was to identify and analyse the key macro-environmental factors impacting the sector, including those that limit its ability to meet the urgent need for access to more markets for Alberta’s increasing supply of oil and gas products. The research also had the objective of identifying effective strategic responses of sector members in the prevailing macro-environment using the case of Enbridge Inc., the leading midstream sector company in Alberta. Macro-environmental analysis was performed using the DEPEST framework after which the SWOT framework was used for a situational analysis of Enbridge, leading to the analysis of its strategic responses. It is clearly understood that a firm’s micro-environment or industry environment has a significant impact on its strategies and actions, however this research was specifically limited to macro-environmental factors and related strategic implications.

The most significant macro-environmental factors identified included: (1) labour shortages in the province; (2) demand and supply trends in the North American region and globally; (3) strong opposition to the midstream sector’s expansion projects; (4) environmental impacts of the sector’s activities and incidents such as pipeline spills; (5) social problems attributed to the sector that challenge its “social license” to operate; (6) technological advancements that significantly increase the capability to extract energy products especially from unconventional sources; and (7) technological advancements applied to the development of solutions for some of the industry’s key challenges.

In analysing the case of Enbridge, it was concluded that capabilities in strategic management and large projection execution, as well as a strong financial base coupled with the ability to attract external funding, were critical to achieving success in the Alberta operating environment. Also, a stable customer base and a strategically positioned asset base that is flexible and can reach new sources of supply and demand

faster and more cost-effectively than competitors, complemented by an innovative capacity, are key strengths. Effective strategic responses were those that provided a close strategic fit between the company’s strengths, resources and capabilities with the happenings and trends in the macro-environment. In the case of Enbridge, strategic fit was crucial to its success and allowed it to effectively execute a strategy involving growth and diversification. However, the company, and the oil and gas industry in general, will need to continue addressing stakeholder management and communication challenges while developing lasting solutions to the environmental and social problems associated with their activities in order to counter opposition to their projects. They must also find ways to reduce the impacts of over-dependency on the US market for their products while creating more access to overseas markets.

Table of Contents

1  Introduction ............................................................................................................... 1 

2  Research Purpose and Research Questions .......................................................... 1 

3  Literature Review ...................................................................................................... 2 

3.1  Definition of the Macro-environment ......................................................................... 3 

3.2  The Need for Macro-environmental Analysis ............................................................ 3 

3.3  Macro-environmental Analysis Tools and Frameworks ............................................ 4 

3.4  Overview of the Alberta Midstream Oil and Gas Sector ........................................... 6 

4  Research Design ....................................................................................................... 7 

4.1  Keywords .................................................................................................................. 8 

5  Macro-environmental Analysis Using DEPEST Framework .................................. 8 

5.1  Demographic Factors ............................................................................................... 8 

5.2  Economic Factors ..................................................................................................... 9 

5.3  Political Factors ...................................................................................................... 11 

5.4  Environmental Factors ............................................................................................ 13 

5.5  Sociocultural Factors .............................................................................................. 15 

5.6  Technological Factors ............................................................................................ 16 

6  Enbridge SWOT Analysis ....................................................................................... 18 

6.1  About Enbridge ....................................................................................................... 18 

6.2  SWOT Factors ........................................................................................................ 18 

6.2.1  Strengths ...................................................................................................... 20 

6.2.2  Weaknesses ................................................................................................. 20 

6.2.3  Opportunities ................................................................................................ 21 

6.2.4  Threats ......................................................................................................... 22 

6.3  Conclusions from SWOT Analysis .......................................................................... 23 

6.4  Enbridge’s Strategic Response .............................................................................. 23 

6.4.1  Description of Enbridge’s Strategy ............................................................... 23 

6.4.2  Strategic Fit .................................................................................................. 24 

7  Analysis of Results ................................................................................................. 26 

7.1  Key Macro-environmental Factors Impacting the Midstream Sector ...................... 26 

7.2  Strategic Implications ............................................................................................. 28 

8  Recommendations .................................................................................................. 30 

9  Conclusion .............................................................................................................. 33 

10  References ............................................................................................................ 35 

11  Appendix I: The Alberta Midstream Oil and Gas Sector ................................... 45 

11.1  Main Sector Players ............................................................................................ 45 

11.2  Main Activities ..................................................................................................... 46 

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1 Introduction

The province of Alberta is highly dependent on its oil and gas resources. The province is blessed with the third largest crude oil reserves in the world, which are estimated at 170 billion barrels. It also has 35 trillion cubic feet (Tcf) of proven conventional and unconventional natural gas reserves, an estimate which could increase as recovery from more unconventional reserves continues to be assessed (Government of Alberta, 2014). The oil and gas industry contributed $85 billion of Alberta’s $312 billion GDP in 2012 (Government of Alberta, 2014), underscoring the critical importance of the oil and gas industry to the province’s economy. The midstream oil and gas sector, which provides the vital link between the producers in the upstream sector and the consumers in the downstream sector, is a very active participant in the Alberta economy, hence the reason it was chosen as the subject of this research.

The objective of this research was to identify the most significant macro-environmental factors impacting the Alberta midstream sector, and to use the case Enbridge Inc., a leading member of the Alberta midstream sector, to identify and analyse the strategic responses that sector players can use to be effective in this environment. The first part of the paper is a literature review, which provides the definition of the macro-environment and an explanation of the strategic need for its analysis. It also describes the tools and frameworks used in macro-environmental analysis, and provides an overview of the Alberta midstream oil and gas sector.

The literature review is followed by the results of macro-environmental scanning performed using the DEPEST framework and a situational analysis of Enbridge performed using the SWOT framework. This is followed by a critical analysis of the results of the DEPEST and SWOT analysis, as well as an analysis of the strategic implications for Enbridge and the Alberta midstream sector. Finally a set of recommendations for Enbridge and the midstream sector in general is provided.

2 Research Purpose and Research Questions

As stated above, the objective of this research was to perform a macro-environmental analysis of the Alberta midstream oil and gas sector, and to assess the strategic responses of Enbridge Inc., as an example of how sector players can respond effectively to the macro-environmental factors. Trends are showing increased demand for oil and gas products in the downstream sector, and increasing exploration and production activities in the upstream sector. The midstream sector is therefore faced with the challenge of providing the needed capacity and infrastructure to link these producers and consumers of the oil and gas products. However, the sector’s ability to meet these growing market needs is being challenged by macro-environmental factors beyond its control. The aim of this research was to answer the following questions:

1. What are the key macro-environmental factors facing the Alberta midstream sector; what are the challenges these factors present to the sector that threaten or limit its

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ability to fulfil its role in the industry and fully exploit the significant growth opportunities?

2. Using the case of Enbridge Inc. as a representative of the sector members, how does a sector member respond to these macro-environmental factors in terms of the strategies they select and pursue in order to take advantage of the opportunities and counter the threats?

3. How effective are the above strategic responses?

4. What can Enbridge and the rest of the midstream sector do differently or otherwise to be more successful and effective in confronting these macro-environmental factors?

The focus of the research was on issues in the strategic management domain within the Alberta midstream sector; however it is recognized that many of the macro-environmental factors affect the oil and gas industry in general and are not necessarily limited to the province, most in fact have regional and global influence.

The assumptions of the research were:

1. Macro-environmental analysis is an important strategic planning activity applicable to the midstream sector to help it gain and maintain an understanding and keen awareness of the external environment.

2. Sector players plan and adjust their strategies to achieve and maintain a strategic fit with the macro-environment.

3. It is possible to identify improvements that can be made to strengthen the current strategic positions of sector players through recognition of opportunities and threats revealed by macro-environmental analysis.

4. An analysis of the strategies of the leading firm in the sector will reveal some of the most significant strategic responses to macro-environmental factors.

5. It is possible to identify the firm’s strategic responses to the macro-environment in Alberta even though the firm has national and regional operations.

6. This qualitative analysis will provide the necessary insight into the macro-environment without the application of a quantitative analysis element.

3 Literature Review

This review of the literature related to the analysis of macro-environmental factors impacting the midstream oil and gas sector in Alberta covered the following areas: (a) definition of the macro-environment, (b) the strategic importance of its analysis, (c) macro-environmental analysis tools and frameworks, and (d) description of the midstream oil and gas sector.

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3.1 Definition of the Macro-environment

The business environment of an organization consists of both internal and external environments. The internal environment consists of the organization’s resources and capabilities, goals and values, and structures and systems (Yuksel, 2012; Grant, 2010). The external environment is made up of those elements that exist outside the organization’s internal environment and have potential to impact all or part of the organization (Daft & Armstrong, 2012).

The external environment is defined by Duncan (1972, p. 314) as the “relevant physical and social factors outside the boundary of the organization that are taken directly into consideration” during organization decision-making. Grant (2010) adds that it consists of all the external influences that affect the organization’s decisions and performance; to Maier, Rainer, and Snyder,“it consists of all those events, happenings, or factors with a present or future influence on the organization that, at the same time, lie outside the organization’s immediate control” (1997, p.179).

The external environment can further be classified into the micro- and macro- environments. The micro-environment, also known as the industry, task or sectorial environment is the close proximity of an organization’s competitive environment where it sources its inputs and sells its products to customers (Yuksel, 2012) and where it builds and manages its relationships with customers, suppliers, and competitors (Grant, 2010). The sectors in the micro-environment interact directly with the organization and impact its ability to achieve its goals (Daft & Armstrong, 2012).

The macro-environment, also known as the general environment, is the wider environment involving sectors, trends and events that affect the organization directly and indirectly, but over which it has little or no control. These include the demographic, economic, political, environmental, socio-cultural, and technological environments that impact the organization currently and in the future, and form the opportunities and threats facing the organization (Grant, 2010; Yuksel, 2012; Kottler & Keller, 2012). The macro-environment is also a source of uncertainty and turbulence and imposes significant constraints on the choices an organization can make (Daft & Armstrong, 2012).

3.2 The Need for Macro-environmental Analysis

The primary reason for an organization to conduct macro-environmental analysis is to enable the organization to develop strategies that match its internal resources and capabilities to the opportunities that exist in the external environment (Grant, 2010). Cross (2000) states that a thorough analysis of both internal and external environments is the first step in developing a business strategy. Maier et al (1997) add that it forms the foundation for strategic planning and decision making, and also guides product and service development. Grant (2010), Elenkov (1997), Yuksel (2012), Kottler & Keller (2012), and Jeffs (2008) all point to the critical importance of macro-environmental analysis in identifying the opportunities and threats facing the organization.

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In summary, the literature reviewed linked macro-environmental analysis to the concept of strategic fit, whereby organizations need to develop strategies that best allow them to apply their internal resources to the current and future state of the macro-environment in order to survive and succeed.

The process, intensity and frequency of macro-environmental scanning and analysis largely depend on the individual organization and the nature of the environment it is operating in. According to Maier et al (1997), the magnitude and frequency of changes in the macro-environment and the level of dependency of the organization on the environment for survival will determine the intensity of macro-environmental scanning and analysis. Daft and Armstrong (2012) link the frequency of scanning activities to the organization’s perceived level of the strategic uncertainty in the environment.

Jeffs (2008) recommends a continuous scanning process to enable early recognition of the environmental changes and opportunities it presents, so as to maximize potential benefits. Maier et al (1997) place scanning activities in a continuum from irregular (reactive, specific, and crisis-driven scanning performed by regular staff) to continuous scanning (proactive scanning performed by a scanning unit which is part of the organization’s strategic planning process). However, Grant (2010) warns that such systematic and continuous scanning and extensive analysis of a wide range of environmental factors could be costly and could create an information overload. Instead, he recommends focusing on the more vital industry environment and how it is affected by the macro-environmental factors. Elenkov (1997) adds that macro-environmental scanning presents difficulties to managers because they are limited in terms of time and the ability to fully comprehend the environment.

3.3 Macro-environmental Analysis Tools and Frameworks

The PEST and the SWOT frameworks are recognized as two of the most commonly used tools for macro-environmental analysis (Cross, 2000; Grant, 2010; Chapman, 2010). The PEST analysis is an acronym that stands for Political, Economic, Socio-cultural, and Technological analysis while the SWOT framework is an acronym that stands for Strengths, Weaknesses, Opportunities, and Threats.

The PEST analysis is most applicable in identifying macro-environmental factors most likely to impact the organization currently and in the future. Kottler and Keller (2012) state that it is necessary for companies to recognize and respond profitably to needs and trends in the external environment in order to be successful, and they must monitor six major forces in the external environment: demographic, economic, socio-cultural, natural, technological, and political-legal forces. To Cross (2000), the PEST framework enables the research and evaluation of the four business influences that have a potential to influence the nature and level of demand, industry structure, and the sources of competitive advantage. Chapman (2012) underscores the usefulness of PEST in understanding market growth or decline, while to Jurevicius (2013) it enables the organization to exploit any opportunities and to defend against any threats arising from environmental changes.

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Due to the dynamic nature of the PEST framework, many variations have developed through the inclusion of additional factors such as those listed by Kottler and Keller (2012), and further division of the four original elements. This is an important feature of PEST in that it can be modified to provide the necessary focus on the critical forces affecting the organization in question (Jurevicius, 2013).

The SWOT framework classifies the influences on the organization into the four categories in its acronym, with strengths and weaknesses relating to the internal environment and opportunities and threats relating to the external environment (Grant, 2010). This is a framework for evaluating the organization’s internal position relative to the external environment as revealed by a PEST analysis (Cross, 2000; Chapman, 2010; Lu, 2010; Hagos & Pal, 2010; Buys 2012). The philosophy behind the SWOT framework is identified by Lu (2010) as that of providing a match or strategic fit between the organization’s internal strengths and weaknesses, and the threats and opportunities in the external environment. Buys (2012) states a similar view that the SWOT is the basis of providing a strategic fit between the organization’s internal resources and capabilities and the external environment.

In practice, organizations use both tools; typically the PEST analysis is performed first to uncover the important external factors, and then a SWOT analysis builds on these findings by further evaluating the organization’s internal environment and its position in relation to the external factors. Literature by Buys (2012), Cross (2000), Chapman (2010), and Hagos and Pal (2010) all concur on this procedure.

Despite their popularity, there are some criticisms of the PEST and SWOT frameworks. Yuksel (2012) points out that the PEST framework lacks a quantitative element that can be used to analyse the relative importance of the various factors to the organization. In addition, the framework’s independent analysis of the various factors does not reflect any interdependency between them. Hagos and Pal (2010) criticize SWOT for presenting the list of factors uncritically and without prioritization. Lu (2010) points to the lack of a logical link between the two critical stages of SWOT - analysis and formulation of strategic options. Grant (2010) questions whether it is worthwhile to classify internal factors into strengths and weaknesses and external factors into opportunities and threats, adding that such distinctions are difficult to make in practice.

There are other environmental analysis tools available such as Porter’s Five Forces framework and scenario planning, however the PEST and SWOT frameworks are the most applicable to the form of macro-environmental analysis required for this research. These two analytical tools will be used in sequence as recommended by the authors cited above. Demographic and Environmental dimensions are added to the PEST framework to make it a DEPEST framework in order to capture a wider range of relevant factors. The DEPEST analysis will uncover the most significant macro-environmental factors and the SWOT will build on its findings to identify the opportunities and threats facing the sector, and to evaluate Enbridge’s strengths and weaknesses that influence the alignment of its strategies to the external environment.

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3.4 Overview of the Alberta Midstream Oil and Gas Sector

There are three major sectors of the oil and gas or petroleum industry: the upstream sector, which performs exploration and production activities for oil and natural gas products; the midstream sector which processes, stores, markets and transports these commodities; and the downstream sector which refines, distributes, and sells oil and natural gas commodities (Petroleum Services Association of Canada (PSAC), 2014).

The midstream sector performs a wide range of important processing, transportation, and logistical activities as well as the management of demand and supply of energy products. The sector transports oil, natural gas and natural gas liquids (NGLs) via pipeline systems, rail, truck, and barge; it also performs the gathering, fractionation, treatment, processing, and storage of hydrocarbons (Fasullo, 2003; Spence, 2013; Pan, 2013; PSAC, 2014). The sector provides the link between the upstream and downstream sectors and is the bridge between energy producers and consumers; it helps link the supply side of the value chain to the demand side for any type of energy product (Fasullo, 2003). Spence (2013) describes the sector as being huge and vital and one that successfully handles one of the most difficult logistical challenges in the world. Another important service is providing hedging and price risk management products as well as wholesale marketing of products (Riverstone Holdings, 2012).

The major midstream sector players in Alberta and the main activities they perform are listed in Appendix I. Most of these companies build and operate liquids and natural gas pipelines and storage facilities, among many other activities. Many are vertically integrated and are involved in some upstream and downstream activities; they operate geographically across Canada and the United States, with some having overseas operations.

The midstream sector in Alberta is faced with many opportunities as well as a number of critical challenges. The key opportunities arise from Alberta’s huge conventional and unconventional oil and gas reserves. Increasing production from Alberta’s oil sands coupled with increasing demand for petroleum products particularly from the Asian region, as well as the increasing demand for NGLs and natural gas for oil sands production, provides huge opportunities for the midstream sector. The above trends have stretched existing pipeline systems to near full capacity and to keep up, the midstream sector needs to provide additional access to refining capacity in the US Gulf Coast and to ocean ports for export. The main challenge is acquiring regulatory approval in the face of strong opposition from environmental and political groups in Canada and US who are against new projects, especially pipelines (Hoberg, 2013; Sorensen, 2013; Rubin, 2014; PriceWaterHouseCoopers, 2013).

Analysis of the above trends and several others that present opportunities and threats to the midstream sector, and the strategic responses required to match these macro-environmental conditions was the key objective of this research and will be further examined in the sections to follow.

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4 Research Design

This research can be categorized as the development of a conceptual paper which involved scanning of the macro-environment of the Alberta midstream oil and gas sector through the collection of secondary data from the various sources listed below, and performing analysis with the application of the DEPEST and SWOT frameworks. An analysis of Enbridge’s strategy and actions was performed using secondary data and information provided by the company in its website, communications, reports, and news releases and from other sources listed below.

Data, facts, and opinions that were collected and utilized in the analysis cover the past 10 years; however some of the academic references that relate to the theories and fundamentals of the topics researched are older.

The following are the sources of information used in this research:

Textbooks and journals covering relevant management topics such as strategic management, marketing, organization theory, and project management.

Websites of Federal, provincial, and municipal governments and their agencies.

Athabasca University library and databases such as ABI/INFORM Global, JSTOR, and SpringerLink.

Websites and publications of industry associations such as CEPA, CAPP, PSAC, PHRCC, and Alberta Pipeline Operators Council.

Industry and government publications and newsletters such Alberta Oil and Gas Industry Quarterly Update, Oil and Gas Inquirer, and so forth.

Research papers and publications from academic institutions, academic journals, and other sources.

Company websites, their annual reports and press releases.

Business and financial websites such as Yahoo! Canada Finance, The Globe and Mail Investor, Wall Street Journal, and so forth.

Blogs, postings, and other web content revealed by keyword searches.

News, reports, and editorials in the general media.

The approach was to identify the most important macro-environmental happenings and trends from each of the DEPEST elements and to rationalize their current and future impact on the sector. A SWOT analysis of Enbridge as well as research of its strategies and actions was performed to identify the responses to the macro-environment. An assessment of the effectiveness of these responses was performed. Finally, based on the observations, gaps identified, success stories, and innovative ideas revealed, a set of recommendations were developed.

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4.1 Keywords

The keywords used in literature searches included: macro-environment , macro-environment analysis, macro-environment analysis tools and frameworks, external environment, PEST analysis, DEPEST, SWOT, strategic planning, oil and gas midstream sector, Alberta midstream sector, Alberta demographics, Alberta labour shortage, Alberta economy, Alberta energy resources, Alberta oil and gas politics, Alberta oil and gas regulation, Alberta oil and gas environmental impact, greenhouse gases, emissions, Alberta oil spills, Alberta oil and gas social impact, Alberta worker safety, oil and gas technology, non-conventional energy, Alberta carbon capture, and Enbridge’s strategy.

5 Macro-environmental Analysis Using DEPEST Framework

5.1 Demographic Factors

Alberta’s population stood at 4.1 million on January 1, 2014. It has grown at an annual average rate of 1.7% over the last three decades and is projected to average over 1.5% through the next three decades to reach 6 million by 2041; about 40% of the projected increase is attributed to international migration. The population will be concentrated in urban areas, especially along the Calgary-Edmonton corridor (Alberta Treasury Board and Finance, 2013). In recent years, after slowing down from 2.33% in 2008 to 1.4% in 2010, the growth rate recovered to reach 3.4% in 2014 (Alberta Treasury Board and Finance, 2013; Alberta Treasury Board and Finance 2014). Most of this population growth was due to migration with 25% resulting from net inflow from inter-provincial migration, which was the strongest in Canada.

The current trend shows that the population of Alberta is aging, a national as well global trend. The median age in Alberta is projected to rise from 36 years to 41 by 2041 (Alberta Treasury Board and Finance, 2013). However, Alberta’s population is still the youngest in Canada; in 2011 the median age was 36.5 years while the national average was 40.5. This is attributed to net inflows of working age migrants seeking employment opportunities. The proportion of the population in the working age of 15 to 64 years was 71% in 2012 and is projected to drop to 65% by 2041. In addition to aging, the population will grow more diverse due to international migration (Alberta Treasury Board and Finance 2014).

Alberta’s labour force is getting more educated; the proportion with high school diplomas, post-secondary certificates or diploma, and university bachelors and graduate degrees as their highest level of education increased 13.6%, 5.7%, and 2% respectively from 2009 to 2013. Of those with university degrees, women increased their share from 48.2% to 51.8% over the same period (Alberta Treasury Board and Finance, 2013).

As a result of good economic conditions in recent years, Alberta’s employment rate, i.e. the percentage of adults aged 15 years and over working for pay, stood at 70% in 2013. Annual average employment has grown steadily from 1.8 million in 2005 to 2.2 million in

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2013. The unemployment rate declined steadily from 4.6% in 2004 to 3.6% in 2008; it rose to 6.6% in 2009 following the 2008 financial crisis before returning to 4.3% in 2014. (Alberta Treasury Board and Finance, 2008; Alberta Treasury Board and Finance 2013). Average private forecasts and the provincial government forecast concur that unemployment will remain steady at 4.3 % through 2017 (Government of Alberta, 2014).

The above demographic trends coupled with the good economic conditions have created labour supply problems for the oil and gas industry, compounded by the fact that the oil and gas resources and operations are located in remote and sparsely populated regions, creating attraction and retention challenges (University of Alberta, 2013; Emery, 2008; Petroleum Human Resource Council of Canada (PHRCC), 2013). Beveridge and Hopkins (2011) identify baby-boomer retirement, slow population growth, competition from other jurisdictions and shortage of skilled labour as contributing factors to Alberta’s labour shortage. The PHRCC (2013) estimates that Alberta’s oil and gas industry needs to fill between 54,000 and 73,000 jobs between 2012 and 2022, adding that industry activity levels, age-related attrition and workforce competition are the three key factors driving demand for labour. It also projects that the labour shortage experienced in 2007 at the height of the oil boom will return in 2014; this concern is heightened by a report by the University of Alberta (2013) which indicated that the current provincial unemployment rate is well below where it was at the beginning of the previous boom. The study also cites evidence from previous booms as an indication that a labour demand shock could particularly affect the skilled trades, production workers, operators and labourers, a segment of the labour force that is critical to the midstream sector.

5.2 Economic Factors

Alberta’s economy has experienced steady growth, leading all Canadian provinces for the last two decades by averaging an annual GDP growth rate of 3.7% from 1992 to 2012. Alberta’s GDP has grown by 50% in the last 10 years to reach $312 billion in 2012; the GDP per capita of $80,200 in 2012 was the highest of any province or state in North America and the $25,251 investment per capita it attracted was more than twice the Canadian average (Alberta Treasury Board and Finance, 2014). The economy is forecast to continue growing at an average rate of 3% in the medium term (Government of Alberta, 2014).

The energy sector is Alberta’s largest contributor to economic growth, accounting for 23.3% of the province’s GDP in 2012. The sector provided 70% of Alberta’s $94.8 billion in exports in 2012, 86% of this being crude oil exports. Alberta has the third largest reserves of crude oil in the world with proven reserves of 170 billion barrels. It is also blessed with abundant conventional natural gas reserves estimated at 33 Tcf in addition to 2.4 Tcf of coalbed methane. Ultimate reserves could reach 74 Tcf of conventional gas, not including shale gas reserves that have not been fully assessed. Alberta produces 2.5 million barrels per day of crude, mostly from oil sands, most of which is exported via pipeline to refineries in the US (Government of Alberta, 2014; Walker, 2013).

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Taxation and royalties are key issues that concern the oil and gas industry. Alberta has the lowest combined federal and provincial corporate tax rates in Canada with no provincial sales or capital tax, in addition to other tax incentives (Government of Canada, 2014). However, the tax and royalty regimes have been criticized for not adequately balancing the need to generate revenue for the province while at the same time stimulating investment (Montgomery, 2012; Fawcet, 2013).

Currency fluctuations have an impact on the oil and gas industry. The Canadian dollar has dropped sharply against the US dollar since early 2013 reaching 90 US¢/C$ in early 2014. Projections for 2014 are 95.1 US¢/C$ (Alberta Treasury Board and Finance, 2014). This has a positive impact on oil revenue from exports, allowing the industry to recoup its investments sooner although it increases the costs of imported inputs.

Demand and supply trends for oil and gas products show continued growth. Demand from China, India, and developing countries is forecast to be high, countering the decreasing demand in the US and other OECD countries and resulting in overall projected demand and supply growths of 1% per year till 2030 (Natural Resources Canada, 2010; Dancy, 2013). Investments in the Alberta oil and gas industry are expected to continue with the Canadian Energy Research Institute projecting $250 billion in investments over the next 25 years. This will result in oil sands production increasing to 3.7 million and 5.2 million barrels per day by 2021 and 2030, respectively (Government of Alberta, 2013; Hoberg, 2013; Sorensen, 2013). With low natural gas prices amid abundant supply in North America, Alberta’s midstream sector is increasing its focus on liquids-rich natural gas development boosted by the high demand for NGLs from oil sands production. There is also more focus on liquid nitrogen gas (LNG) export infrastructure targeting higher demand Asian markets (PHRCC, 2013; Oil & Gas Inquirer, 2014).

As described in section 3.4 above, supply and demand patterns are challenging Alberta’s midstream sector in terms of its ability to bridge the province’s oil and gas supplies to refineries and consumers in the US as well as high demand markets overseas. Lack of adequate pipeline capacity and dependence on the US as the sole customer at a time when the US is experiencing her own increased levels of supply continues to force the price of Alberta crude (Western Canadian Select or WCS) to sell at a discount relative to the West Texas Intermediate (WTI) and Brent benchmarks (Sankey, 2013; Holberg, 2013; Sorensen, 2013). The discount was as much as $40 US per barrel in 2013 but has reduced to $19.50 by January 2014 due to increased pipeline and refinery capacities as well as a boost from rail transport (Jones, 2014). Compounding this is oil price volatility risk resulting from global macro-economic and geopolitical factors and events (Ernst&Young, 2011) and difficulty in predicting future commodity prices. Deloitte is forecasting softening oil prices that will level out at $85 per barrel in 2017 through 20121 (Reuters, 2013) which is lower than Natural Resources Canada averages, but an OECD study predicts prices of between $150 and $270 per barrel in 2020 depending on the responsiveness of demand and supply (Dancy, 2013).

Project cost containment is a key challenge to the global and Alberta oil and gas industry. Ernst&Young (2011) lists it as a top ten risk to the industry resulting from

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demographic trends as well as physical, political, and environmental factors. A review of the industry’s projects in Alberta reveals significant and frequent cost and schedule overruns (Jargeas, 2009; Chanmeka, Thomas, Caldas & Mulva, 2012) resulting from overlapping engineering and construction phases, inadequate planning and project management, labour shortage and productivity, and difficult climatic conditions among other factors.

5.3 Political Factors

The Alberta midstream sector is faced with a continually changing political environment. A positive aspect of the political landscape is that the Alberta and Canada governments continue to experience political stability, and both are supportive of the oil and gas industry. In Alberta, the Progressive Conservative Party has been in power since 1971 and has generally promoted the oil and gas industry as the province’s economic backbone (Hathaway Management Consulting (HMC), 2013; Oxford Analytica, 2011). Before her resignation in March 2014, former Premier Alison Redford actively promoted Alberta’s oil and its pipeline projects within Canada, in the US and overseas, including signing a co-operation agreement with China to increase energy trade between the two jurisdictions (Richards, 2013; HMC, 2013; Smith & Hershenfield, 2014). Current Canadian Prime Minister, Steven Harper, a Conservative and an Albertan, is also supportive of the industry with declared aspirations of turning Canada into an energy superpower (Sorensen, 2013; HMC 2013).

Even with federal and provincial government support, various political factors impact the industry. The 2013 Global Petroleum Survey by the Fraser Institute found that the province was rated poorly relative to competing jurisdictions in the areas of regulations and cost of regulatory compliance, uncertainty regarding protected areas, disputed land claims, and trade barriers (Wilson, Angevine, & Cervantes, 2013). However, it was ranked highly in terms of legal systems processes, taxation, commercial environment, and fiscal terms.

Due to Alberta’s land-locked geography, other jurisdictions such as provincial governments in Canada and state and federal governments in the US, as well as other interested parties outside the province, have a great impact on the midstream sector’s activities especially on pipeline projects. Recent proposed pipeline projects to the East, West and South of the province, urgently needed to access overseas markets and refineries in the US, have encountered significant opposition from environmental, Aboriginal, and political groups. In addition, resistance from governments at various levels has been significant; examples include TransCanada’s Keystone XL and Energy East pipeline projects encountering resistance by the US and Ontario governments respectively, and Enbridge’s Northern Gateway and Line 9B reversal projects that have been resisted by British Columbia and Quebec governments respectively. These complications are a result of the involvement of a large number of stakeholders whose interests do not always coincide (HMC, 2013; McCarthy, 2013; Hoberg, 2013).

Alberta’s regulatory environment for oil and gas activities has undergone many changes in recent years but indications are that it is achieving more clarity with the introduction of

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a new regulator, Alberta Energy Regulator (AER), in 2013 - the third new regulator in six years after the EUB and ERCB. AER provides regulatory oversight of energy resource developments from application and construction to abandonment and reclamation (Government of Alberta, 2014). For the midstream sector, pipelines that cross provincial boundaries are regulated by the federal government but may also be subject to regulation by provincial or municipal governments (CAPP, 2014).

Recent developments in the regulatory front include government actions following heightened public concern over the number of recent pipeline incidents and the safety of the extensive pipeline systems in the province. In one case, AER has issued orders for auditing Plains Midstream’ s operations and placed higher scrutiny on its projects following a number of pipeline spills. The Alberta Auditor General is planning an audit on industry’s compliance to, and the province’s enforcement of, Alberta’s pipeline regulations. Alberta is also renewing its oil and gas emissions in September 2014, preliminary proposals made in 2013 were for more stringent greenhouse gases (GHG) reduction targets of 40% per barrel of oil produced and a penalty price of $40 per tonne of carbon dioxide above that level by 2020. CAPP is fighting for less stringent targets of 20% reduction with a $20 penalty price per barrel of oil (Linnit, 2013).

Taxation in Alberta is considered to be competitive relative to competing jurisdictions, as described earlier. The royalty regime has undergone changes in recent years and has been a bone of contention between the petroleum industry and the government. However, the New Royalty Regime introduced in May 2010 appears to have been better received; land sales topped the $2 billion mark by September 2010, bypassing a record set in 2005 and suggesting that sector players were more comfortable with the new regime (Czarnecka, 2010). There is continuing debate in Alberta on whether or not the current royalty rates need to be raised or lowered especially in the context of the province’s current budget deficits. In March 2013, Alberta’s Finance Minister stated that that no changes were planned to the current horizontal drilling royalty incentives; however changes to the current regime in the near future cannot be ruled out.

Trade barriers that impact the midstream sector in Alberta include infrastructure and its increasing costs and shortage of labour (Angevine & Leiffers, 2007), in addition to inter-provincial trade barriers. Another barrier is the Canadian government’s revision in 2013 of the guidelines for investments by foreign state-owned enterprises (SOE’s) in Canada, which will restrict takeovers especially of oil sands concerns by foreign companies. The guidelines detail factors that will be used to determine whether such takeovers are of net benefit to Canada, and also tripled the threshold for the review of proposed takeovers by non-WTO SOE’s to $1 billion (Pawluch & Styzczen, 2013). This will provide opportunities for Canadian companies to enter into joint ventures with foreign investors eager to be involved in the Canadian oil industry.

In an effort to combat labour shortages, Alberta has worked with the federal government to make it easier to attract and retain skilled immigrants through changes to the Alberta Immigration Nominee Program. The recent changes include the introduction of strategic recruitment streams to attract and retain engineers, trade workers, and post-graduate workers, as well as employer-driven streams. However, changes in economic conditions

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could trigger further changes in the immigration programs as experienced after the 2008 recession where restrictions were introduced following rising unemployment.

5.4 Environmental Factors

The whole oil and gas industry value chain, from exploration to final use, affects people, animals, plants, soil, air and water (Alberta Energy, 2013). Oil and natural gas exploration, processing, and transportation have the potential to significantly impact the environment through disturbance of land and ecosystems, groundwater contamination, gas emissions, waste management, spills, excessive energy and water usage, and so forth. The above challenge the industry’s social license to operate which hinges on safety, minimum environmental impact, and maximum economic benefits (Richards, 2013).

Alberta Environment and Sustainable Resource Development (AESRD) is the ministry in charge of all aspects of the environment in the province and partners with AER in environmental management relating to oil and gas activities. It handles applications for oil and gas developments such as well pads and pipeline installations on public land through the Enhanced Approval Process (EAP). Alberta Environmental Monitoring, Evaluation and Reporting Agency (AEMERA) is a new agency operating from 2014 that is taking over the environmental monitoring functions from AESRD, and is charged with providing oversight and scientific expertise in the monitoring, evaluating, and reporting of environmental matters. It intends to make accessible to stakeholders the scientific data related to the Alberta environment.

Pipeline incidents in and out of the province, particularly leaks and ruptures, are a major source of risk for the midstream sector, and concerns surrounding these incidents are slowing down environmental approval of projects across North America (Richards, 2013). Companies in Alberta are now required to implement pipeline integrity management processes to mitigate against these risks. According to the AER (2013) 17,605 pipeline incidents were reported between 1990 and 2012 including 15,609 leaks and 880 ruptures. 54.8% of these failures were attributed to pipeline internal corrosion and 12.7% were attributed to external corrosion. This does not include data after 2009 for pipelines whose licenses were transferred to federal jurisdiction (National Energy Board or NEB) and other pipelines that had always been under the NEB license. AER also concludes that the frequency of incidents per kilometer of pipeline was on a downward trend even as pipeline infrastructure grew. This interpretation has been challenged by people such as Kheraj (2012) who points out that analysing incidents in terms of frequency in time as well as the volume and location of releases presents a more worrying trend than reported by AER.

GHG emission is a global concern that deeply involves the midstream sector. According to CAPP (2014), Canada accounts for 2% of the world’s GHG emissions with 23% of this attributed to the oil and gas industry. AESRD (2014) reports that activities in which the midstream sector is involved such as oil sands, oil and gas extraction and processing, and transportation accounted for 59% of Alberta’s GHG emissions in 2011. Alberta was only second to Saskatchewan in GHG emission per capita, at more than

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triple the national average (Environment Canada, 2012), with Alberta and British Columbia being the only Canadian jurisdictions projected to grow in this measure by 2020. Alberta’s emission reduction targets are due to be renewed in September 2014 with changes expected; currently facilities unable to meet the 12% reduction target pay a $15 per tonne fee which is deposited in a clean energy fund. Alberta is also considering opening up the current emission credits trading system to allow transactions between facilities in the province and players outside Alberta (Wood, 2014).

Carbon Capture and Storage (CCS) is a recent innovation that aims to capture carbon dioxide that would otherwise be released to the air, and stores it in geological formations 1 to 2 kilometers inside the earth (CAPP, 2014). CCS technology is also used to extract additional oil from older existing fields in a process known as Enhanced Oil Recovery( EOR); it is estimated that 1.4 billion barrels of otherwise untapped oil could be produced through this innovation (Government of Alberta, 2011).

The Alberta government has committed $2 billion to fund large scale CCS projects (Government of Alberta, 2011). Projects currently underway include a $495 million investment in the Alberta Carbon Trunk Line, a 240 kilometer pipeline to transport carbon dioxide from Alberta’s Industrial Heartland to producing fields in central Alberta. The other is a $745 million investment in the Quest project to capture carbon dioxide at Shell’s Scotford Refinery. These projects are projected to reduce GHG emissions by 2.76 million tonnes starting 2015, while providing economic benefits such as job creation and additional royalty revenue. Midstream companies are collaborating together and with the Alberta and federal governments as well as other industry players in the Alberta Saline Aquifer Project that is intended to lead to long-term large-scale commercial carbon sequestration (Hatch Ltd., 2014).

Hydraulic fracturing or “fracking” is a fast-growing midstream activity in Alberta and across North America that continues to raise significant environmental and human health concerns, leading to the activity being banned in some jurisdictions such as Quebec. This is a process that involves pumping a fluid mixture of water, sand and sometimes chemicals into rock formations such as shale, 650 to 3500 meters below ground with enough pressure to fracture the rock and allow oil and gas to be produced on the well (AER, 2014). Concerns raised include pollution and contamination of water supplies, release of gases to the atmosphere, and engendering earthquakes (Foster, 2013), in addition to excessive usage of ground water. AER places strict restrictions on fracturing operations and now requires licensees to report the amounts and sources of water and chemicals used in every fracturing job; this information will be made publicly available.

Environmental concerns have led to significant opposition of oil and gas projects such as oil sands expansion, pipeline projects, and hydraulic fracturing. It appears that opponents of the above have an edge over the industry in the public relations battle over these concerns. Richards (2013) says that this debate exists somewhere in the gap between propaganda and fact, with data that can be interpreted multiple ways. The industry is starting to fight back on what it perceives to be misinformation, misrepresentation and misunderstanding of facts by critics of these activities (Grant,

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2013) with some help from the Alberta and federal governments.

5.5 Sociocultural Factors

Socio-cultural factors facing the midstream sector result from the effects of heavy investment in expansion projects and the distribution and impact of the resultant economic benefits. These issues challenge the sector’s social license to operate requiring the sector to increase their focus on the social side of their business by building and strengthening relationships with communities and stakeholders (PHRCC, 2013; O’Rourke, Ireland & Bohay, 2013). The “social license” is the support or acceptance of the sector’s operations by the people that are affected by them (O’Rourke et al, 2013).

The oil and gas industry attracts a large number of migrant workers most of whom temporarily reside in or close to communities near the project sites such as the Wood Buffalo region and cities such as Fort McMurray and Cold Lake. This has put heavy pressure on physical infrastructure such as roads, sewage and water distribution systems as well as on social services such childcare, healthcare, education, law enforcement, and so forth (Dorow & O’Shaughnessy, 2013; Best & Hoberg, 2013). It has also resulted in increase in crime rates, substance abuse, sexual diseases and car accidents (Aylward, 2006; Dorow & O’Shaughnessy, 2013; Nikiforuk, 2011). Because the shadow populations are not included in provincial census, they are not factored in in funding that is based on population count, at the same time a large amount of potential provincial taxes leave with them (Aylward, 2006; Wittmeier, 2014). According to Aylward (2006), the shadow population does not “own” the community and decreases the community’s “social cohesion” which is a qualitative measure of the community’s overall well-being.

Higher worker wages and increased demand for housing has resulted in the high cost and inadequate supply of housing. Housing prices have quadrupled in places like Fort McMurray (Nikiforuk, 2011) over the last decade and cities like Calgary and Edmonton have also experienced significant growth in housing prices and rent rates. Homelessness in Calgary is estimated to have grown by 650% since 1997, increasingly impacting the working population due to lack of affordable housing options (Persaud, McIntyre & Milaney, 2010).

The uneven distribution of economic benefits in the province has seen an increase in poverty rates as well as wage and gender gaps. According to Gibson (2012), income inequality and poverty in Alberta had been on the decline for 20 years but there has been a dramatic turnaround in the last decade. Alberta has the highest poverty gap in Canada with the top 1% being by far the wealthiest in the country while at the bottom poverty is more intense. Research by Parklands Institute (2012) revealed that women formed the vast majority of Alberta’s low-wage workforce. Women working fulltime full year earned 68% of what men earned in 2009; almost half of women earned less than $25,000 per year while 40% of men earned over $60,000. Women also benefitted significantly less in income growth during the boom years. Inequality is also evident at the top end where women make up only 8% of corporate board members in Alberta

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compared to a national average of 15% (Mah, 2012).

The well-being of employees and their families is an important factor for the midstream sector. A study by Sheppel.fgi (2009) based on Canada’s oil and gas workers’ use of employee assistance programs concluded that working conditions in the industry put significant stress on the workers and their families. Issues presented most frequently related to elder care, child care and addictions. Social programs and facilities are in short supply in the remote sites where employment opportunities are plentiful. Employees may experience stressors such as physical and social isolation, as well as crowding resulting from sharing small living quarters. Dorow and O’Shaughnessy (2013) also cite family stress and psychological well-being as issues faced by the workers.

Midstream companies are subject to Alberta Occupational Health and Safety (OH&S) regulations which set out the minimum requirements for health and safety in the workplace. Sector players invest a significant amount of time and money on safety programs; safety incidents often lead to litigation and prosecution and can attract hefty penalties in addition to resulting in financial and reputational losses. In 2013, changes to OH&S regulations allowed its officers to administer penalties and issue tickets to workers and employers caught violating the regulations. This is in addition to existing enforcement through orders to comply and court prosecution. Midstream companies in Alberta are collaborating on safety through the Alberta Gas and Oil Pipeline Operators Safety Council (AGOPOSC), an effort aimed at encouraging loss prevention and safety at home, work, and community.

In order to earn and retain the social license to operate, Alberta’s midstream sector players continue to invest in Corporate Social Responsibility (CSR) programs. CSR is linked to the notion that “companies owe duties to external stakeholders beyond those enshrined in the law” (Spence, 2011, p. 62). These are costly programs which have now become a new basis for competition. According to Macleod (2014), some midstream players such as Enbridge now have staff dedicated to CSR activities and some are listed in the Dow Jones Sustainability Index. These midstream companies have joined other Canadian businesses in forming the Canadian Business for Social Responsibility (CBSR) with a mission to “accelerate and scale corporate social and environmental sustainability” in Canada (CBSR, 2014).

5.6 Technological Factors

Innovation and technological advances have provided additional opportunities and increased the basis for competition in the midstream sector. The Alberta government states that technology is setting the stage for the next boom in the non-oil sands oil and gas industry and is working with the industry to promote innovation and research to enhance sustainable development of these energy resources. Through agencies such as Alberta Innovates Energy Solutions, Alberta Innovates Technology Futures (AITF), and C-FER the government is promoting initiatives in areas including water and environment management, energy technology for renewable and emerging resources, product development, and full scale testing and consulting.

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Alberta is emerging as a global leader in oil and gas technologies which have been developed out of necessity, especially due to the need to extract and process hydrocarbons under the most difficult conditions such as temperature extremes, permafrost and vast distances (Government of Alberta, 2014; Waddell, 2011). Some of the leading technological innovations include industrial products such as oil rig and pipeline components, environmental mitigation technologies for resource extraction and processing, air, land and water management, EOR, software for real time monitoring of oil field production, liquids injections and recovery, and so forth (PriceWaterhouseCoopers, 2013; Raheel, 2013; Freeland, 2013; Waddell, 2011). The oil and gas services and technology segment has tripled in size between 2002 and 2012 with revenues that continue to rise, reaching $3.3 billion in exports in 2012 (Government of Alberta, 2014).

One of the main impacts of technological advancement has been the ability to extract hydrocarbons form areas previously thought inaccessible; this has largely been due to advances in horizontal drilling and multistage fracturing (Cattaneo, 2011; Tait & Cryderman, 2013) in addition to EOR. Conventional drilling could only extract 25% of known oil reserves but these new methods could double recoveries (Cattaneo, 2011), reviving the fortunes of smaller players who are focusing on the more profitable light-to-medium oil production. Midstream sector operators are also strategizing on retooling old, underused sour gas plants to increase NGL productivity as a result of increased demand (Government of Alberta, 2013). New technologies in the upstream side have recently enabled the bypassing of upgraders, currently used to convert bitumen into light oil for pipeline transport; Imperial Oil’s Kearl plant began production in 2013 with no upgrader at all (Lewis, 2014).

Gas-to-liquids (GTL) conversion is a new development that could bring new opportunities for midstream players. The rationale and business model for GTL is the huge price differential between crude oil and natural gas; although the process is capital intensive, cheap and abundant natural gas could be converted to diesel, commercial-grade gasoline, naphtha, propane, and butane and could capitalize on the huge demand for diluent from the oil sands (Canadian Society for Unconventional Resources (CSUR), 2014; Lewis, 2013). The Alberta government is developing an initiative for the oil and gas industry to study if the natural gas that is currently flared and vented can be profitably converted to diesel and naphtha (CSUR, 2014). Sasol, a South African pioneer in GTL technology, has purchased land in the Alberta Industrial Heartland for potential GTL operations while a new Calgary partnership known as Solaris GTL is planning for a $1.8 billion GTL plant in the same area.

Pipeline integrity is a critical area for the midstream sector. Sector players through CEPA, and the Alberta government though AITF, have formed the Canadian Pipeline Technology Collaborative to develop technologies to enhance the safety and reliability of Canadian Pipelines (AITF, 2014). The initiative has brought in other stakeholders such as CAPP, Alberta’s universities and technical institutes, manufacturers and equipment suppliers. Enbridge, TransCanada, and the Alberta government have come together in a $4 million collaborative effort to improve leak detection in oil pipelines. This research will test four advanced technologies involving vapour sensing tubes, fibre optic

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sensors, and hydrocarbon-sensing cables which together mimic the senses of smell, taste, hearing and touch (Howell, 2014). These technologies could potentially be used in the Keystone XL and Northern Gateway pipeline projects that have become very controversial mainly due to concerns related to pipeline leaks and spills.

As discussed above under environmental factors, CCS technology presents an opportunity for the midstream sector to participate in further research and development as well as implementation in the areas of transportation and processing. Some midstream firms are divesting into other areas of technology in order to spread their risks. These include fuel cell technology, automation, wireless sensors, power generation and transmission, among other areas (Enbridge, 2013; TransCanada 2014).

6 Enbridge SWOT Analysis

6.1 About Enbridge

Enbridge Inc. is a Canadian company headquartered in Calgary, Alberta. It was incorporated in 1949 as Inter Provincial Pipe Line and changed its name to Enbridge in 1998. The company is involved in transportation, distribution, storage and processing of energy products in Canada and the US, with only minimal international presence. With approximately 10,000 employees and contractors and over $57,000 million in assets in 2014, Enbridge is the biggest midstream company in Canada and one of the biggest in North America. The company has grown its assets 133% in the last five years; its 2013 revenues were $32,918 million, a 33% increase from 2012. The $494 million in 2013 earnings represented a 47% decrease from 2012 resulting from higher operating costs including fines and penalties from product spills.

Enbridge’s business involves building and operating liquid pipelines for crude oil, NGLs, and refined products; natural gas pipelines, gathering and processing facilities; a natural gas distribution system that serves residential, commercial and industrial customers in the provinces of Ontario, Quebec, New Brunswick, and parts of New York state; power transmission and generation from renewable sources such as wind, solar and geothermal; and providing services to the energy industry such as marketing, supply management, hedging programs, storage, and product exchanges. It operates a rail transport system to bridge the infrastructure gap in some regions such as Alberta, and runs a technology business which provides product development, consultancy and training to the oil and gas industry. The company has a 20.6% ownership of Enbridge Energy Partners (EEP), a partnership headquartered in Houston, Texas that performs midstream activities in the US. Enbridge also has 67.3% ownership of Enbridge Income Fund (EIF) which has pipeline and power generation assets and operations.

6.2 SWOT Factors

The purpose of this SWOT analysis was to: (1) identify the opportunities and threats facing Enbridge as a result of the situations, trends and events in the macro-environment as revealed by the DEPEST analysis, and (2) analyse Enbridge’s internal

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environment to identify the company’s strengths and weaknesses that have strategic implications in the context of the current and future conditions in the macro-environment. This approach is premised on assertions by Grant (2010), Lu (2010), Buys (2012) and several other authors that an organization’s strategies must match its strengths and weaknesses to the opportunities and threats in the operating environment in order for the strategies to be effective. This SWOT analysis leads to the assessment of Enbridge’s strategies and how they are designed to fit the external environment.

Strengths Weaknesses

Strong financial position with high revenue growth

Ability to attract commercial support for growth projects

Extensive infrastructure network in North America

Diversified portfolio

Experience and capability in successful undertaking of large projects

Capacity to direct financial resources towards research and product development

Strategic management capability

Ability to attract, develop, and retain skilled personnel

Heavy focus on the North American market

Reputational problems arising from recent pipeline incidents

Less than effective PR campaign in BC for the Northern Gateway pipeline

High operational costs leading to a trend of decreasing earnings

Aging infrastructure that adds to maintenance and operational costs

Opportunities Threats

Strong Alberta economy and increasing investments

Large oil and gas reserves in Alberta

Increasing global energy demand and NGLS demand from oil sands

Significant need for pipeline capacity in Canada

Opportunity for joint ventures with foreign SOEs

CCS infrastructure development opportunities

Increasing development of unconventional oil and gas resources

Technological advancements to improve productivity and reliability

Growth in Alberta oil and gas technology and services sector and expanding export market

Potential for early entry into GTL activities

Opportunities in emerging renewable energy and environmental solutions technologies

Aging population and workforce

Low unemployment rates and skilled labour shortage

Currency fluctuations

Discounted WCS prices

Commodity price fluctuations and unpredictability

Project cost containment in Alberta

Cost of regulatory compliance and uncertainties in regulatory environment

Inter-provincial trade barriers

Increased stakeholder scrutiny and resistance to pipeline projects

Environmental and financial effects of pipeline incidents

Social problems associated with oil and gas sector activities impacting “social license”

Increased competition due to attractive

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environment

Continued dependence on US market and limited access to overseas markets

Unforeseen events such as natural disasters and terrorist attacks

6.2.1 Strengths

Enbridge has achieved a strong financial performance with revenues that have tripled over the last five years. It is able to attract commercial support and security for its projects with $36 billion of commercially secured projects being currently developed.

Enbridge’s extensive infrastructure network gives it the advantage of flexibility and capacity to respond to changes in the market relative to the competition. For example, to reach refineries and export points in Eastern Canada from Alberta, it is able to reverse the 639 kilometer Line 9B between Sarnia, Ontario and Montreal, Quebec while TransCanada needs to build a new 4,600 KM pipeline to meet the same need. Enbridge is also able to provide connections from new oil sands and shale gas projects to its existing pipeline network. The large asset base and the size of its business also give it economies of scale advantages over its rivals.

Having been in the business for over 60 years, the company has developed significant in-house experience and capacity to undertake large infrastructure development projects. It has consistently been rated as one of Canada’s top 100 employers, increasing its ability to attract talent in a tight labour market.

The company has a demonstrated strategic management capability; it has pursued and continues to achieve success in its strategy of growing its asset base. In addition to the current diversified portfolio of liquids and gas pipelines and gas distribution, Enbridge continues to diversify its energy portfolio by growing its natural gas processing and treating facilities. At the same time, it is investing in power transmission and renewable energy generation and technology assets which have grown to $3 billion in value. It is also positioning to increase its international presence through investments in such markets as Australia, Peru, and Colombia.

Enbridge’s other strength is the ability to invest significant amounts of capital in research and development of advanced technological solutions to improve the safety, reliability and productivity of its infrastructure network. Enbridge has invested in programs that include partnerships with technology vendors, industry players, and the Alberta government in the areas of pipeline integrity and leak detection, and it has significantly grown its own pipeline integrity management capacity and capability in recent years.

6.2.2 Weaknesses

One of Enbridge’s weaknesses is the heavy focus of its current operations in Canada

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and the US. This meant that the company was not well positioned to take advantage of increasing energy demand in Asia and other developing countries. This has also left it exposed to regional factors such as the discounted price of Canadian crude relative to the WTI and Brent standards, and increased opposition to pipeline projects.

The company has incurred reputational and financial losses from recent pipeline incidents that have received wide media publicity, especially the 2010 spill of 3.3 million litres of oil into Michigan’s Kalamazoo River. This has formed the basis for opposition to its projects such as the Northern Gateway and Line 9B reversal. In addition, some of its main infrastructure is aging, leading to increased maintenance and replacement costs; a good example is the 46-year old Line 3 between Edmonton, Alberta and Superior Wisconsin that is planned for replacement at a cost of $7 billion. Despite the company’s assurances, concern has been raised by stakeholders about the safety of some of its older pipelines such as the 38-year old Line 9B.

A weakness was revealed out of the company’s public relations and advertising campaign in British Columbia for the Northern Gateway project which was criticised by observers and stakeholders as being ineffective and counterproductive, with weak initial presence on the ground only strengthened at a later stage when opposition had grown strong. The company has been portrayed as being insensitive to stakeholders’ concerns and needs as a result. Any measure of success by the opposing groups is likely to embolden other groups and increase opposition to more of the midstream sector’s proposed projects.

Despite impressive revenue growth, Enbridge’s earnings have continued to drop since 2009. This can be attributed to the high cost of revenue which is has been on an increasing trend as a percentage of total revenue. The company is also increasingly relying on debt to finance its operations and projects as cash from operations has remained relatively unchanged while cash from investing activities has proceeded to decline steeply. This riskier capital structure could expose its shareholders to additional risk, although the risks are minimal under the current circumstances.

6.2.3 Opportunities

The main opportunity is the coincidence of several factors; these include the increasing global demand for energy, the huge reserves of oil and gas in Alberta coupled with the technological advancements that have allowed recovery from unconventional sources, and the significant need for pipeline and related infrastructure. This provides tremendous opportunities for Enbridge given its capacity to finance and manage large projects. The large appetite for NGLs and natural gas by the oil sands sector coupled with the continued development of liquids-rich gas plays adds to Enbridge’s opportunities to meet the increasing needs for gathering, processing, transportation and storage facilities.

Alberta’s strong economy that is dependent on the province’s oil and gas resources means that the provincial and federal governments will continue to support the development of these resources through political and direct financial support and tax

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incentives. The positive economic environment will also continue to attract investments thus providing funding for Enbridge and the midstream sector to continue their expansion projects and increase their revenues. There is also potential for joint venture opportunities with well-funded foreign SOEs interested in the Alberta market and whose entry has been restricted by the federal government.

Enbridge’s presence and capabilities puts it in a good position to exploit opportunities for infrastructure to support CCS developments as well as potential GTL projects. Opportunities also exist in the global demand for development of renewable energy solutions as well as solutions to environmental issues such as air, land, and water management. Alberta’s emergence as a leader in oil and gas services and technology and environmental solutions and growing revenues from these exports presents another opportunity. Enbridge also has the opportunity to develop innovative solutions for pipeline integrity and leak detection that could give it a differentiation advantage in the very competitive industry environment.

6.2.4 Threats

Alberta’s labour shortage and low unemployment, as well as the trend of an aging workforce means that Enbridge will face restrictions in securing skilled labour to execute its growth projects. This will add to its increasing operating costs as it tries to attract and retain capable personnel from the global talent pool.

Another threat is from commodity price fluctuations and the unpredictable nature of future prices; added to this are the currency fluctuations, especially of the US dollar, which impacts its export revenues and cost of imported inputs. Despite recent improvements, the discounted price of WCS relative to WTI and Brent not only reduces revenues but could also negatively impact future investment in Alberta. High project costs resulting from Alberta’s difficult climatic conditions, geographical nature, and labour market will prolong recovery of Enbridge’s investments in its growth projects.

The high cost of regulatory compliance in Alberta as well as uncertainties surrounding the provincial and federal regulatory environment presents another threat. Increased focus on the environmental impacts of the industry’s activities is leading to the tightening of emissions targets and increased penalties, and land and water restrictions could restrict choices for pipeline routes and facility locations.

Product leaks and spills by the industry in general not only negatively impact the environment but also hurt the industry in many ways. It leads to increased regulation and public scrutiny and has increased resistance to oil and gas development by various stakeholders as witnessed in the case of Northern Gateway and Keystone XL projects. Recovery, cleanup and restoration costs as well as penalties add financial burden to the responsible companies. The negative image is made worse by the social problems rightly or wrongly attributed to oil and gas industry activities, all of which affect the sector’s “social license” to operate.

In addition to Enbridge’s own focus on the North American market, the dependence of

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the whole Canadian industry on the US as the sole customer exposes Enbridge and the sector in general to demand and supply factors in the US as well as other economic, political, and environmental factors. Added to this is the threat from unforeseen events such as natural disasters like hurricanes in the Gulf coast and security situations such as wars and terrorist attacks.

6.3 Conclusions from SWOT Analysis

The SWOT analysis revealed that the macro-environment provides significant opportunities and threats for Enbridge. The key factor for Enbridge is that its financial strengths, the extensive reach of its infrastructure, and its strategic and project management capabilities put it in a strong position to exploit the opportunities in the environment to a great extent. These strengths can also be utilized to address some of the threats identified above. However, the company’s weaknesses such as the reliance on the North American markets, stakeholder management problems, and issues arising from pipeline incidents, will make threats such as limitations in accessing overseas markets and resistance to pipeline projects even more significant to the organization.

The key to Enbridge’s success in this context is how well it is able to anticipate and recognize the opportunities and threats listed above, and the ability to develop strategies that match its internal capabilities and resources to these macro-environmental factors. The following sections will examine and analyse the above issues in more detail.

6.4 Enbridge’s Strategic Response

6.4.1 Description of Enbridge’s Strategy

The identification and description of Enbridge’s strategy is based on the two questions proposed by Grant (2010), i.e. “Where is the firm competing?” and “How is it competing?” The question of where Enbridge is competing in terms of industry, geographic locations, products and activities is answered in subsection 6.1 above. In brief, it is a Canadian company that is involved in midstream and downstream oil and gas activities in Canada and the US with some diversified activities in power transmission and generation from renewable sources, and some investments in emerging technologies.

In terms of how Enbridge is competing, its declared and observed model of competing is through growth and diversification of its asset bases, customer base, markets, and product lines. Its primary strategy involves leveraging its vast and strategically located network of pipelines and facilities to provide more connections, additional flexibility and access to more markets for producers located in high potential areas such as Western Canada, the Bakken region in US and Canada and the US Gulf Coast, and access to more sources of supply for refineries and exporters throughout North America. It has implemented market access programs such as Gulf Coast, Eastern, Western and oil sands access programs to provide more options to its customers. In addition to strengthening its core business, Enbridge is also diversifying through entry into new

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fields via acquisitions and also through investments in partnerships, joint ventures, and subsidiaries with companies such as EEP, EIF, and Tidal Energy Marketing. This diversifies the company’s sources of revenue and helps to manage its risks.

The services that Enbridge provides are quite standard across the midstream sector and the options for differentiating itself from the competition are limited. Its main competitive advantage is its reliable and well-established customer base, and its “wide economic moat” which is described by Morrison (2012) as a reflection of the difficulty a competitor would have in setting up new infrastructure and the ease with which existing infrastructure can be expanded. The sector currently has heavy focus on integrity, safety, and reliability of its systems, at present this is more a point of parity but is likely to be a differentiator in the near future, and Enbridge is investing significantly in integrity management and development of advanced technological solutions in order to turn this into a competitive advantage. Enbridge is also focusing on efficiency and execution excellence in project management and operations in order to reduce costs and improve the speed of response to the specific demand of its customers.

In terms of Porter’s competitive strategies, Enbridge’s strategy is leaning more towards differentiation than low cost leadership, although what differentiates it from the competition will likely provide lower cost options for its customers. Under the Miles and Snow strategy topology, Enbridge can be said to be pursuing an Analyzer strategy. According to Daft and Armstrong (2012), the Analyzer strategy involves maintaining a stable business with an efficiency strategy designed to keep current customers while at the same time innovating in the periphery by developing products targeted towards new, more dynamic environments with growth potential. However, some of the ways in which Enbridge is pursuing new opportunities and growth within its core business bear the characteristics of a Prospector strategy which involves aggressively seeking out new opportunities and being oriented towards growth and risk taking.

Other aspects of Enbridge’s strategy include its goal of providing superior returns to its shareholders; it has paid dividends every year since 1952 with dividend payments growing every year since 1995, and its stock price has more than doubled in the last five years (Morrison, 2012). It is also pursuing a range of CSR activities in order to earn its social license by supporting communities directly and through its Volunteers in Partnership programs and the energy4everyone foundation.

6.4.2 Strategic Fit

Strategic fit is identified by Grant (2010) and Lu (2010) as a fundamental principle of strategic management in which a firm’s successful strategy requires it to match its internal strengths and weaknesses to the opportunities and threats in the external environment. Ideally, such a strategy should “take advantage of strengths, minimize weaknesses, exploit opportunities, and neutralize threats” (Lu, 2010, p. 1320). It is evidently clear from Enbridge’s strategies and tactics that it gives strong consideration to establishing a strategic fit between its internal environment and the microenvironment in Alberta and beyond.

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Enbridge uses its strong financial position and ability to generate commercial support as well as its extensive infrastructure network and capabilities in strategic and project management to take advantage of the extensive resources reserves in Alberta, increasing global energy demand, and the need for transport capacity. Its strategic imperatives in asset growth, exploiting the wide economic moat it possesses, execution excellence, and the market access programs are designed to match the above strengths to the opportunities in the external environment. To exploit opportunities in the development of unconventional sources, Enbridge made strategic investments in Alliance and Vector pipelines which are well positioned in the liquids-rich natural gas plays in the Bakken region and the Motney and Duvernay plays in Alberta and British Columbia. In addition, it is also increasing development of fractionation, gathering and processing facilities.

To take advantage of opportunities in CCS and oil and gas technology and services, Enbridge utilizes its financial strengths and capacity to direct resources to research and development activities as well as the strengths of its diversified portfolio. It is part of the Acquistore project which is developing CCS solutions for storing liquid carbon dioxide deep underground in brine and sandstone water formations. It formed a network of scientists and business people known as Pathfinders Group to screen technology ideas gathered globally before turning them over to Enbridge businesses to grow and develop. The Enbridge Technology subsidiary is positioned to provide services and develop products for the global oil and gas industry. The above strengths are utilized to exploit opportunities in emerging renewable energy and environmental solutions technologies; the company’s strategy has been to increase its investments in clean energy technologies since 2000. In addition to developing solar, wind, and geothermal power generation assets, Enbridge has made strategic investments in a number of projects and companies involved in alternative technology fields.

To counter the threat of labour shortage in Alberta, Enbridge has leveraged its appeal as a top 100 Canadian employer and the ability to attract skilled people by making it a strategic imperative to expand recruitment efforts beyond the traditional geographic and industry reaches in addition to efforts to develop and retain highly capable people.

Commodity prices and currency fluctuations also present a threat to the company which has responded strategically by developing a business model where commodity prices have a reduced impact on revenues, in addition to diversifying its sources of income. Tactically, the company has employed a hedging program that also involves the use of financial derivative instruments to counter currency and interest rate fluctuations.

Increased stakeholder scrutiny, resistance to pipeline projects, and the effects of pipeline incidents have exposed the company’s weaknesses in stakeholder management, its aging infrastructure, as well as increasing operational costs. Opposition to new pipeline projects has been partially countered by exploiting existing infrastructure through building of new pipelines on existing right-of-way and modifying existing infrastructure, thus avoiding the requirement for substantive regulatory approval. The company has increased investments in integrity management and development of technological solutions; it has put in place an Operational Risk

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Management program to prioritize the risks related to the safety and reliability of its systems as well as the protection of employees, the public and the environment. Its CSR program is designed to build a positive image of the company and is complemented by various public relations and stakeholder communication initiatives such as the Canadian and US Public Awareness programs.

To counter increased competition, the company’s strategies utilize its extensive infrastructure, financial and strategic management strengths, and innovation to develop and sustain competitive advantages as described in section 6.4.1 above. It also seeks to strengthen its relationships with customers by providing them with a much wider range of options than the competition.

A weakness of the company has been its heavy focus on Canada and the US markets, which is compounded by the Canadian oil and gas industry’s reliance on the US market. Enbridge’s Eastern and Western market access programs as well as the plans to increase its presence in international markets are strategic responses to neutralize that threat. It has recently exploited its strengths and influence to become the first company to gain US approval to re-export Canadian oil; Enbridge’s Tidal Energy Marketing subsidiary was awarded a license for re-exporting Canadian oil through Texas ports (Gebrekidan & Williams, 2013).

7 Analysis of Results

7.1 Key Macro-environmental Factors Impacting the Midstream Sector

Analysis of the demographic factors reveals that labour shortages resulting from low population growth, increasingly aging population, low unemployment, and competition from other jurisdictions and industries will continue to negatively impact the Alberta midstream sector. Labour shortages increase the cost and duration of projects and reduce incentives for investment in the province. A major challenge for the industry will be how to attract, develop and retain skilled labour. The sector, through industry associations like CEPA, CAPP, PSAC and PHRCC needs to continue working with the federal and provincial governments by offering practical and innovative suggestions for improving immigration of skilled labour. In addition, focus on developing the existing resources within Alberta and Canada would be more beneficial. Groups that are currently under-represented in the sector such as women, visible minorities and members of Aboriginal communities have a great potential to ease skilled labour shortages but the sector needs to identify and remove the existing barriers that are impacting these groups and invest more in their development with a longer term vision.

Economic factors such as increasing supply and demand for energy products, huge reserves of oil and gas in Alberta and a healthy economy that continues to attract investment provide a very strong basis for the midstream sector to continue developing. However, the key challenges are political and environmental factors that are restricting the sector’s ability to expand the infrastructure that is needed to link the suppliers of energy products to the overseas markets experiencing increasing demand, and also to

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diversify from its dependence on the US market. Limited access to markets will continue to negatively affect the prices of Alberta’s oil and gas resources and discourage investment in developing the province’s resources while allowing competing jurisdictions such as Brazil, Australia, Russia, OPEC members, and the US to stay ahead in developing the exploiting global energy demand opportunities and locking in some key markets.

As seen in the case of Enbridge, effects from commodity price and currency fluctuations can be reduced through hedging programs; the taxation and royalty environments in Alberta appear to have improved and stabilized with no imminent threats of major changes, therefore leaving market access as the single biggest economic challenge facing the sector. The sector has increased the use of alternative transport particularly rail, however it is recognized that rail transport is less safe, more costly, and more damaging to the environment in terms of GHG emissions than pipeline transport. In addition, companies such as Enbridge and TransCanada are adding to and modifying their existing infrastructure to increase access to Eastern Canada and US Gulf Coast refining and export facilities, with Enbridge making a breakthrough in acquiring a license to re-export Canadian oil through US ports. In response to the increasing regional supply and low price of natural gas, the sector is moving towards LNG processing and exports. However, a major threat is from Australia which is well ahead in terms of developing LNG production and transport capacity and could lock in key customers in China and India by being first to market (PriceWaterhouseCoopers, 2014).

On the political front, the key challenges facing the sector as indicated above are the national and provincial politics that mainly impact decisions on regulatory approval for new infrastructure projects. As realized by Enbridge, economic benefits alone are no longer the single major driving force for justifying oil and gas projects. Opposition to pipeline projects mainly manifests as concerns for the environmental impacts, however ideological and moral grounds have also been cited as contributing factors especially in the context of such pipelines being seen as “enablers” of oil sands expansion. In addition, political leadership in Canada, US and Canadian provinces appear to factor in political calculations when deciding whether to support or oppose such projects, making the situation more complex. Oil and gas companies are wary of being seen to be overtly supporting any particular side in the political divides in these jurisdictions; however industry associations such as CAPP and CEPA have been strong advocates of the industry’s interests. In addition, a report by Nelson (2012) provides an example of how industry players try to increase their political influence through engagement of public relations advisors such as Hill+Knowlton whose staffers have strong and sometimes direct political connections at provincial and national levels. The results of this research indicate that political factors will continue to challenge the midstream sector and are the most difficult for the sector to counter.

Environmental factors by themselves and by their heavy influence on the political and economic challenges faced by the midstream sector are arguably the most critical to the sector in the current period. The global attention on the dangers of climate change where GHG emissions are considered a contributing cause has led to increased government regulation and added restrictions and responsibilities to the sector’s

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activities. Product leaks and spills and other industrial incidents that damage the environment and threaten public safety have placed additional burdens on the sector and attract wide media and public scrutiny. These are in addition to environmental and health concerns of normal industry activities such as hydraulic fracturing and oil sands activities. Environmental factors call for significant financial commitments to meet regulatory requirements, implement risk management programs, and to address any incidents that occur. The industry is forced to expend some resources in convincing and educating its stakeholders about the safety and reliability of its operations, however it faces serious threats in this regard from opposing groups that do not necessarily play by the same rules with the sector when it comes to interpreting data and expressing facts and opinions. Evidence suggests that the opposing groups are having more success than the industry in swaying the opinions of the public in some Canadian and the US jurisdictions.

Sociocultural factors, despite negatively affecting the sector’s social license to operate, can be said to present the weakest threat among the other macro-environmental factors only because feasible solutions can be identified, although it will require significant commitment of resources by the sector and the federal, provincial, and municipal governments to implement. Rather than pursue individual CSR programs, oil and gas industry players will have more impact if they pooled a larger portion of the resources they commit to CSR efforts and worked with governments to identify and address the more serious social problems and promote more equitable distribution of the benefits from Alberta’s energy resources. Evidently, such a proposal would lead to complexities on the basis of sharing of burdens and responsibilities between individual sector players and the different levels of government, and will test the willingness of some parties to participate; however it is feasible that analysis of the resulting positive impact of such a combined effort and the potential to create a more positive image of the sector among affected communities can lead to its realization.

Technological factors are generally having a positive impact on the sector’s activities by improving efficiency and making possible access to more resources, and will play an increasingly significant part in addressing environmental and safety concerns arising from the sector’s activities. The sector can generate more benefits by partnering in research and development efforts as well as sharing knowledge across the sector where the benefits of such efforts outweigh those of short-lived competitive advantage gained by individual firms. Examples can be drawn from Canada’s Oil Sands Innovative Alliance which promotes a collaborative approach where members share experience and intellectual property where potential environmental benefits are great. This minimizes duplication while accelerating performance (PriceWaterhouseCoopers, 2013).

7.2 Strategic Implications

As described in section 6.4, Enbridge’s strategy has been designed as a very close fit for the macro-environment and could explain the company’s success in Alberta and North America. It is evident that Enbridge performs macro-environmental analysis as presented in its 2013 Annual statement under the topic named “An Energy

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Transformation”, where it captured a number of the major factors revealed by this research.

Grant (2010) points out that a firm’s effectiveness in responding to external change, which can create new opportunities for profit and new business, depends on the firm’s ability to anticipate changes as well as the speed of its response. This exposes both strengths and weaknesses in Enbridge’s response to some of the macro-environmental changes. Due to its capabilities and proximity to key markets and sources of supply in North America, Enbridge has been able to anticipate and exploit opportunities in energy demand and supply changes and other trends in the region. However, the opposite is true both in the case of Enbridge and the Alberta midstream sector as a whole in the case of changes in the global energy environment; because of its heavy focus in North America with US being the dominant customer, Enbridge has not been able to respond with similar speed to the changes in the global energy demand, and possibly did not anticipate these changes early enough, and may have underestimated the growing opposition in the region to pipeline projects.

Research by McGrath (2012) on companies that have achieved significant long-term growth revealed some characteristics shared by these growth outliers; Enbridge’s strategy and activities exhibit some of these characteristics. One characteristic is that these companies are “rapid adapters” who moved earlier than competitors, making small initial investments followed by more substantial ones or exit, as the opportunity warrants. A good example is Enbridge’s recent success in getting the first and only license from the US government so far to re-export Canadian oil through US ports (Gebrekidan & Williams, 2013). Initially, it will re-export less than 1.5% of its shipments to the US, but that volume is anticipated to grow as the opportunity develops. Other examples include Enbridge’s investment in emerging and alternative technologies. The above could give Enbridge first-mover advantages that will be costly for the competition to imitate. The other characteristics of growth outliers include central management of resource allocation and decision-making on major strategic challenges, they are also “champions of stability” who have a reliable customer base and use industry evolution to enter new businesses and leave old ones. Enbridge also exhibits these characteristics which have contributed to its ability to grow its business at a fast rate.

In order to exploit growth opportunities in the current environment, the course of action for assessing growth opportunities presented by Kottler and Keller (2012) would be effective for firms in the Alberta midstream sector. First is to employ a market-penetration strategy to gain more market share with the current products in the current markets, next is a market-development strategy to find or develop new markets for existing products followed by a product-development strategy which involves developing new products of potential interest in the current market. Finally, a diversification strategy is considered, which involves developing new products for new markets including products related to the current ones and products that have no relation to the firm’s current technology or markets. Enbridge’s actions in expanding its asset base exhibit both a market-penetration and market-development strategy. Its moves to enter new markets and invest in new technologies exhibit both product-development and diversification strategies.

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Part of Enbridge’s success is also attributed to its diversification strategy through which it can gain competitive advantages resulting from economies of scale and economies of scope (Grant, 2010). Grant indicates that some of the most important sources of value realized from diversification are derived from the ability to utilize common strategic management, general management, control systems and resource allocation capabilities and resources across the different businesses. This appears to be true in the case of Enbridge where the above resources and capabilities are applied across its diversified businesses such as liquid pipeline, gas pipeline and processing, and gas distribution and possibly in the newly acquired product lines such as power generation and distribution. The idea behind the recent diversification into new areas would be what Kottler and Keller (2012) refer to as a “concentric strategy” which is seeking new products that have technological and marketing synergies with existing products though targeting a different customer group.

In summary, for a midstream company to achieve success in Alberta and beyond, it must remain very aware of its macro- and micro-environments, it must constantly assess its resources and capabilities and develop and strengthen them as necessary, it must develop strategies that will match its resources and capabilities to the macro-environment, and it must be able to anticipate changes in the macro-environment through early warning systems and be able to move with speed to take advantage of any potential opportunities or neutralize any threats. Enbridge has shown that success can be achieved through mastering these practices. Its strategy can be said to be quite effective in meeting its strategic objectives of expanding its asset base as well as increasing its revenue and shareholder return in terms of earnings per common share (EPS). Its revenue has grown over 300% in the last five years and it continues to meet its EPS growth rate target of 10% to 12% per year. However, it is still several steps behind in the quest to provide access to overseas markets and has work to do, as does the rest of the oil and gas industry, to convince many stakeholders about the safety and reliability of its operations, and to effectively counter opposition to expansion projects.

8 Recommendations

1. This research has revealed the importance of stakeholder management for midstream companies in order to earn the “social license” to operate. A recommendation for the sector members is to carefully assess and strengthen their boundary spanning roles, particularly those that deal with stakeholders in the communities in which the firms operate. Daft & Armstrong (2012) define boundary spanning roles as those linking the organization with key elements in the external environment which involves detecting and bringing in information about environmental changes and also disseminating information into the environment that present the company in favourable light, thus influencing the stakeholders’ perceptions of the organization.

Encana Corporation is an example of a midstream company that has a comprehensive boundary-scanning setup that starts at the top with Vice-Presidents of Stakeholder Relations in each of its Canada and US divisions. Their roles include

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portfolios in community relations and Aboriginal relations which are embedded into the business in order to play their part in the company’s operations and projects. The company has also ensured that most of its field locations have a dedicated community relations representative who lives and works in the community (Encana, 2012).

Sector members can also benefit from advice from O’Rourke et al (2013) who recommend involving local community stakeholders, leaders, and emergency services in order to increase awareness of the company’s activities that protect their interests. A good example is the case of Kinder Morgan’s Trans Mountain Pipeline where the company runs regular emergency response simulations involving local emergency services, First Nations communities, and relevant government ministries and regulators.

2. Section 3.2 provides the opinions of various authors on the necessity, frequency and intensity of environmental scanning and analysis. Maier et al (1997) and Daft and Armstrong (2012) point out that the above depended on the level of dependency of the organization on the environment for survival as well as the magnitude and frequency of change, and the level of strategic uncertainty in the macro-environment. Based on the results of this research, it is clear that the macro-environment under which the midstream sector operates in Alberta experiences important and frequent changes that can impact the sector members’ survival and which require them to formulate fitting strategic responses. It is therefore highly recommended that sector members perform regular assessment of their external and internal environments and strategic options. This should be done at least annually as part of their strategic planning process and whenever there is a significant change in the environment or within the company.

To further strengthen environmental analysis, sector members should consider the application of appropriate quantitative analysis tools to the DEPEST analysis; one such model is presented by Yuksel (2012) who uses AHP (Analytical Hierarchy Process), ANP (Analytic Network Process) and DEMATEL (Decision Making Trial and Evaluation Laboratory) techniques to determine the relative importance and dependencies of DEPEST factors and sub-factors. Similar quantitative techniques are also applicable to the SWOT analysis as described by Lu (2010) who also proposes a method for identifying heuristic rules that could be quite useful to planners in formulating strategic options.

3. Labour shortage in Alberta was identified as a key threat to the midstream sector. Beveridge and Hopkins (2011) recommended developing a human capital resourcing plan after determining long-term needs and resourcing options; this plan should be aligned to business strategy. This would be achieved through strategic workforce planning, which is a long-term plan that integrates recruitment, retention, and succession planning to meet long-term business objectives, and starts with a comprehensive skills assessment. University of Alberta (2012) and PHRCC (2013) recommendations are to increase the workforce participation of the Aboriginal society, a fifth of whom reside in Alberta. The key to this would be for the government and private sector to invest in increasing literacy in this society as well

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as providing incentives, training and development to increase their involvement in the workforce.

With the aging of the Alberta population, the private sector needs to transform its human resource practices to increase the recruitment, development, and retention of mature workers by such means as re-designing functions, establishing flexible work arrangements, and assignment of mature workers as mentors (University of Alberta, 2012). Dychtwald, Erickson and Morison (2004) point out that human resource practices are often explicitly or implicitly biased against older workers and recommend creating a culture that honors experience and offers flexible work, and introducing flexible retirement in order to attract and retain older workers.

Other groups whose increased participation in the midstream sector would help address labour shortages are women and immigrants, who face barriers in securing potentially well-paying jobs in the midstream sector under the continued use of traditional recruitment practices. Lifestyle, location, education/training requirements, and work culture are some of the barriers leading to under-representation of these groups (Government of Alberta, 2007). The recommendation is for deliberate efforts by the government and private sectors to support the recruitment, training and development of the workforce from these groups and to address their unique needs.

4. While companies continue to contribute towards alleviation of society’s problems through their CSR initiatives, social problems such as the poverty gap, lack of affordable housing, and inadequate physical infrastructure and social services cannot be resolved effectively though these individual efforts or even by government action alone. Collaborative efforts between businesses, NGO’s and government are the only way these issues can be effectively addressed. ABC Carbon (2014) advises that companies must accept that they must collaborate with competitors, NGO’s and government in order to achieve sustainable and enduring results in addressing issues such as the above. Peloza and Falkenberg (2009) recommend multi-party collaboration to tackle the above meta-problems where the parties cooperate and combine resources such as expertise and funds to address complex problems through multiple approaches.

In Alberta, the recommendation is for oil and gas industry members to agree to contribute a uniform percentage of their revenues or profits and provide other resources and expertise towards a collaborative effort with the Alberta government and NGO’s to tackle the social problems identified in this research. The Alberta government should provide tax incentives such as deductibility for the above contributions, in addition to facilitating and helping execute the programs that will be developed. Recognition by the industry that tackling these problems can lead to economic gains in the long-term should inspire them to support this recommendation. In addition, these efforts will help counter some of the negative perceptions about the industry while at the same time providing a forum for interacting with society in a setting that perceives the industry to be advancing the interests of society rather than its own.

5. The Alberta government is increasing its efforts to diversify its economy to lessen the effects of the “boom and bust” cycles that characterize its over-reliance on oil

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and gas resources. The government is seeking to encourage higher value-added activity and industrial diversification in order to encourage broad-based growth to drive sustainable long-term growth. Midstream companies would benefit greatly from aligning some of their strategies to this economic diversification trend as they too face similar threats from their reliance on oil and gas resources.

Of the key non-energy sectors that the government is seeking to strengthen such as forestry, agriculture, manufacturing and so forth, advanced technology areas such as clean energy solutions, environmental sustenance solutions, information and communication technology, and nanotechnology are more likely to create synergies with current products and markets for the midstream sector. However, midstream companies should be aware of the potential negative effects of diversification; the literature reviewed for this research offered differing conclusions on the relationship between diversification and company performance, an observation highlighted by Grant (2010) who observes that diversification beyond a certain threshold appears to be associated with low profitability.

9 Conclusion

This research identified and analysed the most important macro-environmental factors impacting the midstream sector in Alberta as well as the opportunities and threats they represent. The key opportunities arose from the increasing global demand for energy amid abundant supplies of these resources in Alberta, with technological advancements helping to significantly increase extraction from conventional and unconventional sources. The main threats include labour shortages resulting from demographic trends, challenges in accessing overseas markets amid growing opposition to new oil and gas transport infrastructure projects, politics mainly in external jurisdictions that impact the midstream sector, and environmental effects from the activities of the oil and gas industry.

Using the case of Enbridge, the research also identified strategic responses and capabilities that have been applied successfully in this environment. Fundamental to sector members’ successful strategic response is a thorough understanding of the macro-environment and the opportunities and threats it presents followed by analysis of firm’s internal strengths and weaknesses, and then designing a strategy that fully exploits those opportunities and counters the threats.

It became evident from this research that the historical focus and reliance on the US market by the Alberta oil and gas industry has resulted in some negative effects for the midstream sector, including the inability to quickly respond to, and take advantage of, new opportunities elsewhere. Diversification in terms of markets, products, and means of transporting products was identified as an important strategic response that sector players will continue to use to alleviate these negative effects. The research also identified several other factors that the midstream sector needs to find solutions to in the immediate future, these include the threats to its social license to operate, managing the integrity of its infrastructure to detect and prevent product spills, and finding solutions to the environmental issues attributed to its activities.

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This research shows the importance of macro-environmental analysis and the critical part it plays in the formulation of a successful strategy. The DEPEST and SWOT frameworks utilized have proven to be very useful in this analysis, however an improvement for these qualitative analysis frameworks to make them more useful in analysis would be the addition of quantitative analysis tools that can be used for prioritizing and analysing linkages and dependencies between the various factors.

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11 Appendix I: The Alberta Midstream Oil and Gas Sector

11.1 Main Sector Players

Company Market Cap

($M) No. of Full Time

Employees Sales ($M) Assets ($M)

Enbridge Inc. 38,535 7,828 32,537 53,118

TransCanada Corp. 33,809 4,869 9,086 50,829

Encana Corp. 14,000 4,193 6,095 18,383

Talisman Energy 12,750 3,087 5,080 20,236

Pembina Pipeline Corp.

11,578 758 5,051 8,803

Inter Pipeline 7,488 755 1,300 6,993

Keyera Corp. 5,163 748 3,142 2,920

MEG Energy Corp. 7,020 550 1,398 8,467

Gibson Energy 3,325 2,350 6,352 2,972

Kinder Morgan Energy

24,846 * 10,685 11,467 41,985

Plains All American Pipeline LP (through Plains Midstream Canada subsidiary)

17,473* 4,700 41,057 20,276

Spectra Energy 23,755* 5,600 5,300 35,535

*US Dollars

This data was collected on January 8 and 9, 2014 from the following sources:

http://www.theglobeandmail.com/globe-investor/

http://ca.finance.yahoo.com/

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11.2 Main Activities

Building and operating liquids pipelines (diluted bitumen, crude oil, refined products, NGLs, and LPG) and natural gas pipelines.

Owning and operating terminals for liquids and natural gas storage, pipeline connectivity, and import/export.

Providing truck, rail, and barge transport for petroleum products to bridge infrastructure gaps.

Production, transportation, marketing and distribution of natural gas, oil, and NGLs.

Gathering natural gas from producer wells and transporting to gathering pipelines for delivery to processing plants.

NGL extraction and fractionation, as well as processing into saleable products such propane, butane, and condensate.

Bulk liquid storage facilities for petroleum, petrochemical, and alternative fuels.

Marketing: providing strategic links between producers and consumers of petroleum products.

Power generation: excess power is fed back to the provincial grid.

Environmental services such as oil and gas waste processing, waste oil recovery, custom treating, carbon capture facilities and services, and so forth.

Developing and offering of technology products and services including training and consulting.

Divesting into other industries such as power production and transmission, solar and wind power generation, and so forth.