Investing in Oil: My Bias for Canadian Oil Producers

The recent events in the Middle East and North Africa clearly justify my shameless bias towards Canadian oil producers. Yes oil is a global resource when it comes to supply and demand so why concentrate only on domestic producers when there’s so much exploration and production going on all over world?

Looking back at the top 15 oil exporters list I fail to see why I should invest my money anywhere else really. Canada has the 2nd largest reserves after Saudi Arabia. I have no currency risk to worry about and the country enjoys political stability unlike faraway lands with questionable regimes. This is investing in an international commodity using my own currency, in my own economy and with preferential tax treatment in some cases (dividends, FT financing etc.). Is this a false sense of security or just an overdose of loyalty? It’s neither in my opinion, it’s simply common sense and I will tell you why by looking at the top 15 oil exporters one by one.

Saudi Arabia, Iran, UAE, Kuwait, Iraq and Qatar have already been covered in my last post. How about we take a look at the remaining members of the list?

top oil exporters 2009

Nigeria is a member of OPEC with several producing fields at constant risk due to civil strife, religious tensions and border disputes. Production disruptions are frequent due to militant attacks on company installations and foreign workers. I’m not interested.

Angola is oil rich with reserves estimated at 13 billion barrels. Its current production more than doubled in less than a decade. However, this is a country that is building up from scratch after decades of civil war with limited civil and political liberty. The autocratic but popular leader of 30 years has been working hard to bring his nation into the 21st century. He even pledged to reduce corruption after his re-election in 2008 which is funny since Angola is at the bottom of the list of the index of perception of corruption for 2010. While some investors might consider the odds not too bad when they weigh the risk/reward, I have no reason to do that knowing what opportunities I have in my backyard.

Algeria had its fair share of rioting recently over food prices and high unemployment. One wonders where all the oil money goes in this country as 20% of those who are under 30 (75% of the population) are unemployed. The government has delivered a bunch of promises for improving living conditions and creating jobs. But the protestors don’t believe a word wanting to see action instead. Will social unrest get out of hand? Will the government keep its words? You know what, I prefer worrying about a couple of ducks landing in a tar sands pond instead.

Venezuela is a “no no” for me as I do not trust Hugo Chavez. Would I want to risk waking up one day holding worthless shares of a company that just got nationalized? I’ll pass.

Libya is currently on fire. When and how will the revolution end? Will it succeed and at what cost? A fragile world economic recovery is on the line right now due to soaring oil prices. Libyan crude production is slowly going offline as international companies evacuate their personnel. I just hope this scenario ends as quickly as possible before another black swan event in the region pushes crude to $200. Even if the revolution succeeds, it will take this nation several decades to establish a democracy that comes close to Western standards.

Kazakhstan emerged as an independent state in 1991 from the breakdown of the Soviet Union. Kazakh President Nazarbayev has been in power since then which is why I would not consider this country for my investments.  Even though the ethnically diverse country has been stable and prospered under his reign, the strengthening of democratic institutions is paramount to the security of foreign investments. The president recently refused to have his term extended longer until 2020 which is a positive move. This nation needs free and fair elections for a couple of mandates to prove that its stability is growing deeper roots.

Russia is plagued by rampant corruption, just Google “Russia corruption” and you will get thousands of articles. I would never invest in oil companies operating in a country of palm greasers where your fortunes might turn upside down in a fortnight because a new government cancelled your exploration licenses for a law that suddenly came into being? This article says it all.

Norway cannot be charged with dictatorships or with political instability so this one is pure home bias. We have such a diversity of hydrocarbon plays in North America there’s no need to look elsewhere really.

For our US readers, you simply replace “Canada” with the “USA” in my top paragraph and you get to enjoy the same benefits for investing in your own domestic producers. There are numerous emerging oil plays across the USA like the Niobrara shale so there’s no shortage of opportunities let alone many Canadian companies are cross listed on US exchanges.

Finally, one can still invest profitably in international plays by buying Canadian listed companies operating abroad. You get to keep your tax treatment if dividends are involved and forget about the currency risks at the same time. Make sure you pick your plays in regions with very little political risks like the North Sea plays or the emerging Australian basin plays.

Do you invest seeking riches in faraway lands? Do you agree with my reasoning?