Playing by the local rulesState-owned enterprise success in Canada’s oil and gas industry

Canada’s oil and gas industry was anything but quiet in 2012. Transaction activity over the last year alone has highlighted Canada’s reputation on the world stage and the strong interest of Asian investors.

China National Offshore Oil Corporation Limited’s $15.1b takeover of Nexen Inc. and Petronas’s $5.8b acquisition of Progress Energy Resources received considerable attention from regulators, policymakers, media and the public, particularly given the operator-controlled nature of these transactions. The debate about what qualifies as “net benefit to Canada” took center stage across the country and is set to continue as more foreign entities continue to try and succeed at setting up shop in an open market with 180 billion barrels of reserves.

Though getting the green light to transact in Canada may seem like the biggest barrier to both state-owned enterprises (SOEs) and private investors, it’s what comes after the papers are signed that determines their success.

Whether a company is entering Canada in a complete-control capacity or pursuing non-operating transactions or joint ventures, success in the Canadian oil and gas market takes a lot more than just regulatory compliance, safety, production, projects and profitability.

Smooth entry by SOEs into the country demands a broader approach. By developing a market-entry strategy, foreign entities can better demonstrate that their interests are aligned with the interests of the Canadian industry, the economy and society as a whole. Most important is their ability to define and communicate their wider non-monetary and monetary objectives.

Oil and GasMarket-entry strategy

July 2013

2 Playing by the local rules

|1. Canadian workforce development

Canada’s attractiveness to foreign investors hinges on a number of factors. Access to world-class expertise is one of the most important. Tapping into the Canadian workforce and working with local organizations to develop this talent pool can create immense opportunities for foreign companies. Collaboration can also lead to new environmental and technological advancements.

|2. Government and IOC relationships

Regulations are tight and well controlled in Canada. For SOEs to gain traction and smooth approvals of capital projects, including regulatory approvals, they need strong relationships, mutual understanding and trust — many of which are not built overnight. SOEs need to have specific experts who focus on stakeholder relationships and support. There’s

also an opportunity for foreign SOEs to collaborate with other international oil companies (IOCs) and governments on environmental partnerships through Canada's Oil Sands Innovation Alliance, Oil Sands Leadership Initiative and Oil Sands Tailings Consortium, among others. SOEs cannot sit at the sidelines — they need to play an active and contributing role.

|3. Strategic business objectives

Transparency is critical to success for SOEs. It’s also key to helping the public and government understand their energy and non-energy strategy. The challenge SOEs face is the potential public perception that their intentions are not positive for Canada. To mitigate these hurdles, SOEs must be able to clearly explain why they’ve come here, their purpose and their strategic business objectives.

|4. Community and social responsibility

Advancements and project proposals in Canada’s oil and gas industry have been met with strong opposition from environmental and First Nations groups. Maintaining a social license to operate has quickly climbed the list of risks facing the industry.

Companies must focus on demonstrating their ability to meet the highest environmental, safety and sustainable business practices to gain the necessary approval for new infrastructure. It’s important to remember that standards and regulations differ from country to country. Meeting and exceeding the standards in the country in which you are operating is crucial. In Canada, that increasingly means environmental and soclal performance that exceeds minimum standards.

Foreign entities will also have to demonstrate that industry development will be beneficial for all Canadians, both economically and

Market-entry strategy frameworkSix building blocks of an effective market-entry strategySuccess in Canada’s oil and gas industry relies on having a thorough knowledge and understanding of the following six factors. Adopting a strategy that considers and focuses on each of these factors is the key to making the most of opportunities.

3Playing by the local rules

socially. Investments in education, First Nations relations and community involvement are the new face of corporate social responsibility. It’s about giving back in more ways than just jobs and revenue to the government.

|5. Effective and transparent communications

Reputation management is critical. Building a strong public brand can greatly influence the success of any company, particularly foreign companies with little familiarity to Canadians. By better communicating the strategic direction of their operations and work they’re doing in the community, SOEs can create greater transparency, and thereby strengthen government and community relations, attract talent and improve employee retention. Companies that do not communicate effectively can risk creating an atmosphere of mystery and, as a result, anxiety among multiple stakeholders.

|6. Canadian supplier use and development

The final building block to a successful market-entry strategy is building a relationship with local suppliers. SOEs need to find the careful balance between focusing solely on the bottom line and looking for the best supplier, giving consideration to qualitative factors. Building local supplier content and capability may come at a higher price point than using suppliers in the SOE’s home country, but that’s an investment that’s often worth making in the long run. It’s not just about running a business, it’s also about managing public perception and developing relationships and trust. Leading SOEs might look to support and co-develop local suppliers who may wish to open offices in Asia and develop a global operating model, to enable them to compete at a better price point rather than always defaulting to the home country option.

4 Playing by the local rules

Adapt the frameworkUnderstand where you are and where you’re going

A. Basic (Short term)Meet legal and fiscal obligations

Meet legislation and comply with temporary foreign worker rules and regulations

People capability development Internationally competitive workforce in Canada that can be exported to other SOE locations

Transactional arm's-length relationship

Joint relationship and mutual trust

Detailed memorandum of understanding and preferred partner relations with local oil and gas companies

Basic explanation of Canadian business strategy

Explain full business strategy in terms of value chain, growth and investment plan differentiators

Explain both energy and non-energy business strategy

Philanthropy Self-sufficient sponsorship Take a lead role addressing local social issues

Basic communications externally

High-level communications strategy and plan with understanding of local communications channel

Take a lead role in local social issues and make investments that have a lasting impact

Minimum use of Canadian suppliers (remain compliant)

Supplier development including partnerships with local suppliers

Play a role in transforming and shaping supply sector; create opportunities for Canadian suppliers in Canada and abroad

B. Developing (Mid term)Maximize public profile

C. Leading (Long term)Work with government for public benefits

1. Canadian workforce development

2. Government and IOC relations

4. Community and social responsibility

3. Strategic business objectives

6. Canadian supplier use and development

SOEs must identify where they fit on the maturity model now and where they want to be in the future. The goals and, consequently, the strategies of short-, mid- and long-term investments are not the same. Understanding where your company fits on the continuum is the first step in planning and executing a successful market-entry strategy.

5. Effective and transparent communications

5Playing by the local rules

Ask the right questionsIdentify and address gaps and opportunities in your strategy

Ensuring success in a new country requires identifying existing and potential gaps, as well as opportunities, in your market-entry strategy. SOEs must address a number of important questions around their vision, strategy, focus and differentiation, operating model tactics and stewardship in order to meet growth and profitability targets, and to create value through their Canadian investment — measured by both themselves and the various stakeholders. Answering these questions also helps ensure your company is aligned from top to bottom in its investment objectives.

Stra

tegy

Stew

ards

hip

Visi

on

Focu

s an

d di

�ere

ntia

tion

Ope

ratin

g m

odel

tact

ics

Key questions:• What is the

benefit of being in Canada for the SOE and the country?

• What does the investment strategy in Canada look like?

• What are the specific strategic objectives?

• What are the basics to get right?

Key questions:• What is our

project focus?

• What is our corporate responsibility balance?

• Where do we stand as it relates to community investment?

• What impact can we make on the community?

Key questions:• What is our

operating model for each focus area?

• What is our communications strategy and plan?

• What are our actions and accountabilities?

• How do we organize to get things done?

Key questions:• What are the

risks and the actions neededto mitigate them?

• How do we measure and monitor our performance?

Key questions:• How is the SOE

differentiating in Canada?

• What is the long-term vision for Canada?

• What does the end state within Canada look like for Canada?

• What does the SOE want to be known for?

6 Playing by the local rules

The EY approach to strategy and operating model developmentHow we can help

We provide support in implementing an appropriate operating model strategy that aligns with your business objectives. This involves analyzing your strategy and specifications for your model assessment, analyzing your current business model, supporting the design of your target model and helping you with your transition plan.

• Analyze the corporate strategy

• Conduct shareholder interviews

• Design an enterprise-level process map and define a list of key end-to-end business processes

• Define key performance indicators

• Determine the operating model assessment

• Conduct strategic alignment workshop

• Assess current operating model

• Perform benchmark analysis with peer group

• Draft alternative operating models

• Compare and evaluate the alternative operating models against the adopted criteria

• Conduct strategic session to build consensus over the target operating model

• Describe target authority allocation between head office, branches and subsidiaries

• List business processes and functions to be outsourced or shared

• Develop flowcharts and process manuals for the target key end-to-end business processes

• Define key competencies within the target operating model

• Conduct workshop to build consensus over the target operating model blueprint

• Define key activities for the transition

• Assign responsibility for the key transition activities

• Define key stakeholders and develop communication plan

• Conduct workshop to build consensus over transition plan

• Perform training

• Conduct monthly status meetings during six-month period after project completion

Our approach

Objective: Analyze current operating model and determine target operating model

Objective: Design target operating model blueprint

Objective: Develop transition plan

Objective: Analyze the corporate strategy and determine criteria for alternative operating models assessment

1 2 3 4

Understand cost Anticipate cost Manage cost

Set up for successBuild a foundation for long-term successWhile state-owned oil and gas companies may boast the strength of immense capital, international operations, streamlined value chains (including upstream, midstream pipelines and downstream refining), and technical capabilities (including deep water offshore, heavy oil and unconventional gas), there’s always work to be done when entering a new market to achieve success and a smooth transition. And, stepping into a sophisticated market where other global companies operate raises the performance bar, ultimately making for better business performance for the organization as a whole.

By adopting strategies, focus areas, differentiators and implementation tactics to manage these issues, SOEs can improve brand and reputation in the Canadian market, enhance opportunities for industry collaboration and better attract top talent — all key elements for setting themselves up for long-term sustained success.

EY | Assurance | Tax | Transactions | Advisory

About EYEY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

EY refers to the global organization and may refer to one or more of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.

How EY’s Global Oil & Gas Center can help your businessThe oil and gas sector is constantly changing. Increasingly uncertain energy policies, geopolitical complexities, cost management and climate change all present significant challenges. EY’s Global Oil & Gas Center supports a global practice of more than 9,000 oil and gas professionals with technical experience in providing assurance, tax, transaction and advisory services across the upstream, midstream, downstream and oilfield service sub-sectors. The Center works to anticipate market trends, execute the mobility of our global resources and articulate points of view on relevant key sector issues. With our deep sector focus, we can help your organization drive down costs and compete more effectively.

© 2013 EYGM Limited. All Rights Reserved.

ey.com

EYG No. DW0280

1085331

This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice.

Learn moreTo find out how our Calgary Oil & Gas team can help your organization through its journey to growth and high performance, please visit ey.com/ca/oilandgas or contact one of the following professionals:

Lance Mortlock Partner, Advisory Services lance.mortlock@ca.ey.com +1 403 206 5277

Barry Munro Canadian Oil & Gas Leader barry.g.munro@ca.ey.com +1 403 206 5017