The Canadian oil and natural gas market

Since the start of the first energy crisis, in 1973, North America has experienced a boom in investment in oil and natural gas drilling, with activities initially peaking in the period from 2004 to 2006. The fact that small and medium-sized companies drive the oil and gas business is nothing unusual in North America. These companies account for about 70% of the entire market, while the big multinational petroleum companies deal primarily with very risky exploratory projects, such as offshore wells, which offer them greater than average opportunities for returns in relation to the high investment costs.

General information on the oil business in Canada
In 2008, 68% of all oil and 80% of all gas produced in Canada came from the province of Alberta. The country's oil production figure for that year was more than three million barrels per day. Canada's most important export partner is the United States, the destination for 99% of the country's oil exports. This makes Canada the main supplier of U.S. oil imports. Ninety percent of U.S. gas imports also come from Canada.

After Alberta, Saskatchewan is the second biggest oil-producing province, accounting for about 20% of production totals. The province's more than 18,000 wells produce about 400,000 barrels of oil per day. Estimates put the remaining oil reserves available in this province at 1.2 billion barrels.

After the record year 2007, when oil and gas wells valued at CAD 49.7 billion were bought in Canada, the figure fell to CAD 17.5 billion in 2008. This development marked a return to the excellent levels seen in previous years, when the figure ranged from CAD 16.6 billion in 2004 to CAD 26.3 billion in 2006.

With this in mind, it can be assumed that productive oil and gas wells will be offered for sale as a basic principle in the future as well.

Current situation regarding purchases of oil and gas wells

1. Fewer competing prospective buyers
In the past, the main buyers of productive oil and gas wells were oil and gas trust funds. These oil trusts received considerable tax advantages. Investors enjoyed largely tax-exempt distributions. As a result, the trusts attracted substantial amounts of new capital each year and were able to use that capital to purchase oil and gas wells.A change in tax laws in October 2006 largely eliminated the tax advantages for oil trust funds, which are now on an equal footing with other oil and gas companies. The flow of capital dried up, and instead of buying wells themselves, the oil trust funds reversed course, increasingly selling oil and gas wells to generate capital for their distributions.In short, now that the Canadian oil trust funds have to pay taxes on their income like all other companies, they no longer represent the main competition for those wishing to buy productive wells - a fact that may favorably affect prices.

2. Producers have to sell
Drilling activity in Alberta declined after a new royalty system was introduced at the end of 2007. Effective as of 2011, there are plans to adjust the royalty system in Alberta again. For small and mid-sized oil companies, the higher costs mean lower annual net income. In addition, small and mid-sized oil companies hardly have any access to the private capital market at this time, which means they lack the opportunity to raise money for their original exploration business - finding new oil and gas wells. For these companies, the sale of part or all of their oil and gas production operations has now become a true alternative.This is another factor indicating that it will continue to be possible to buy productive wells in Alberta at attractive purchase prices.