This year marks the first time in Oilweek’s 59-year history that we have asked our readers to select who they believe deserves to be awarded the title Producer of the Year. Survey respondents helped us by choosing Husky Energy, which had a healthy margin over its competitors. Husky has also scored a second first: this is the only time in the history of the designation that a company has twice been selected Producer of the Year. The first time was five years ago. A comparison of its performance then and now shows a company that has navigated through rough shoals and now is sailing with sails spread under a fair wind. Husky’s performance this year outshone that of many of its peers. Total revenue grew to $12.7 billion from $10.3 billion, while total assets jumped to $17.9 billion from $15.7 billion a year earlier, and return on equity rose to 31.8 per cent. In 2002, when the company was first awarded the title, it had achieved seven per cent production growth to 325,000 barrels of oil equivalent (boe) per day. That year, its other big achievement involved its new Chinese assets. The Wenchang oilfield, it announced, was producing 20 per cent above its previously reported capacity of 50,000 barrels per day. In the second quarter of this year, Husky’s production averaged 379,100 boe per day, a hefty 10 per cent increase over its 344,000 boe per day production for the same period a year ago. Husky Energy ranks fourth on Oilweek’s 2006 Top 100 list of domestic producers. Its oil-to-gas ratio is 63:57 per cent and its drilling success rate is 98 per cent. The company’s assets straddle both sides of the globe. With producing fields in Asia and in Canada, Husky can take advantage of quickly expanding markets in both regions. As an integrated producer with extensive oilsands holdings, Husky expanded its bitumen and synthetic crude processing and marketing flexibility this year by acquiring Valero Energy’s Lima, Ohio, refinery, a move that will allow Husky to maximize the value of its upgraded products. The company is the largest owner of acreage in the Jeanne d’Arc Basin off Canada’s east coast. In 2006, it made two significant discoveries near the White Rose field, resulting in the addition of 138 million barrels of possible reserves to its account. It also recorded a major gas discovery—four to six trillion cubic feet, according to early estimates—in the South China Sea that will position it as a major gas player in a region begging for future gas supplies. To be considered for Producer of the Year, Oilweek’s four finalists—Husky Energy, Petro-Canada, Harvest Energy Trust, and Galleon Energy Inc.—were assessed on a number of criteria. Key among them, however, were three: What has the company done that is remarkable in the past year? What risks has it taken and was it successful? Has it opened new frontiers? Husky’s Sept. 12 agreement with the government of Newfoundland and Labrador on extension of the White Rose field meets all three criteria. The notoriously hard-nosed Newfoundland Premier Danny Williams lauded the deal only hours after agreeing to it with Husky president John Lau. “This is indeed, ladies and gentlemen, a significant development for the province, especially when you see oil prices closing at about US$78 [per barrel],” Williams told members of the St. John’s Board of Trade. Given prior acrimonious wrangling between Williams and oil and gas companies over production terms, Husky’s willingness to sign an agreement shows both an appetite for calculated risk and a willingness to compromise. The deal gives Newfoundland and Labrador a five per cent equity stake in the extension of the White Rose oilfield, which contains an estimated 214 million barrels. Williams could hardly contain his enthusiasm as he noted, “Based on reservoir information available today, we expect that price to be $44 million…and the total value for the government of the satellite extensions is more than $6 billion.” The White Rose field lies within the Jeanne d’Arc Basin 350 kilometres east of Newfoundland. Husky is the operator, with a 72.5 per cent interest, with the remaining 27.5 per cent held by Petro-Canada. The partners achieved first oil on budget and ahead of schedule on Nov. 12, 2005, and, in 2006, the field produced approximately 32.1 million barrels. White Rose is currently producing about 136,000 barrels per day, or 90,300 barrels per day net to Husky. Even Lau was surprised at the outcome of the negotiations. “Strangely enough, the government approved our expansion without any fighting,” he told Oilweek. Husky’s president provides an insight into his negotiating strategy when he notes, “If we had fought for the extension, you would be out three or four years. Your production would decline. And then you would have to find some way to use the SeaRose [the floating production, storage, and offloading vessel that is at the heart of the White Rose development].” The deal epitomizes Lau’s dedication to long-term planning. “We put our strategy on a very long term,” he says. “Last year, we formulated a strategy called 20/20. What I mean by 20/20 is just like your perfect eyesight—how you see what the market will be in the coming 15 years.” He points to what he calls value creation. “You look at the way we branched from the western Canadian basin to the east coast 10 years ago when no one really wanted the east coast. We branched to 12 significant discovery licences. You can see the whole thing is a look-ahead-of-the-curve.” He also proudly notes Husky’s near-completion of an ethanol production plant in Minnedosa, Manitoba. “If you look at Husky’s ethanol production, we started that project five years ago. And now you can see in the market everybody’s talking about ethanol.” Robert Plexman, an analyst for CIBC World Markets who has followed Husky for the past five years, points to a number of ways that Husky’s long-term planning has paid off. In 2002, while discussing Husky’s first designation as Oilweek’s Producer of the Year, Plexman foresaw that the company would reap the benefits of a strategy that had yet to prove lucrative. “Unlike those [companies] focused on harvesting existing plays, it’s out there in the future,” he said then. At the time, despite his prediction that the company’s plans would eventually prove foresighted, Plexman rated Husky a “sector underperformer.” He explained, “We’re not saying sell Husky, but we’re saying there’s more upside in Petro-Canada and Suncor in the next 12 to 18 months. We don’t see that kind of growth for Husky.” Looking back, the fruit of Lau’s long-term planning has ripened faster than Plexman anticipated. “We’ve seen successful execution of the strategy,” he says now. “Five years ago, Husky was mostly about low-productivity gas and oil plays.” Plexman pointed to the company’s heavy oil production in the Lloydminster, Alberta, area and gas production from the assets it acquired with its purchase of Renaissance Energy in 2000, as comparatively low producing projects. “Husky is no longer producing from low-productivity wells,” he says. “They’re now [producing from] high-productivity wells. It has taken cash flows from lower return assets and invested them in higher return assets, such as White Rose and Tucker—White Rose especially, because well productivity is very high. “There had been some criticism of Husky’s ability to manage a project of this scale,” he notes. “However, they delivered it on time. They did what they said they were going to do. The execution of White Rose has been hugely impressive.” Today, Plexman rates Husky as a “sector performer” based on the total return potential of its stock compared to its peers. “Husky should outperform the average stock.” His view is seconded by Steven Paget, research analyst with Calgary brokerage FirstEnergy Capital Corp. In a recent report, Paget ranks oil and gas companies in terms of their ability to manage finding, development, and acquisition costs. “One really important criterion to look at is their cash flow recycle ratio,” he says. “If I look at Husky’s 2006 and three-year average performance versus the large cap sector, Husky had an above-average year in 2006—well above average.” The reason for its ability to outperform some members of the large cap group, he says, “could simply be because Husky is oil-levered.” On the other hand, “Husky’s [finding and development] costs are about average for the integrated group, which would put them ahead of the general group,” Paget says. The company has kept its five-year average of costs to just above US$15 per net barrel of oil equivalent. Not surprisingly, that figure jumped in 2006 to US$18.99. The reason, says Paget, is likely because “it is highly levered in the Western Canadian Sedimentary Basin,” where production costs have risen steeply. On the refining side, an indication of Lau’s long-term thinking was the company’s $1.9-billion purchase this July of the Valero refinery in Lima, Ohio. The refinery has the capacity to process 165,000 barrels per day including a limited amount of sour heavy crude. Like other heavy oil producers, Husky is better positioned to receive a higher rate of return if it is able to upgrade its crude in a refinery it owns in the United States. By doing so, it avoids the discount that non-integrated heavy oil producers incur on their raw bitumen sales to the U.S. market. To fully take advantage of its new refinery, however, Husky will need to reconfigure and expand its capacity to process bitumen to U.S. requirements—an option the company says it is considering. Even before completing the Lima acquisition, however, Husky had a strong—and pioneering—presence in the bitumen processing and marketing sector. Its Lloydminster upgrader, built in the early 1990s long before the oilsands boom, gave the company an early competitive edge over non-integrated oilsands operators, and Husky is looking to retain that edge—a front-end engineering and design proposal to expand the 82,000-barrel-per-day facility should be completed by the end of this year. On the international front, Lau points to the Wenchang development as another example of planning ahead. Located in the western Pearl River Mouth Basin about 400 kilometres southwest of Hong Kong, the field commenced production of 35-degree-API sweet crude in 2002. Remaining proved reserves are estimated at some 13.3 million barrels, and in 2006, production averaged about 12,100 barrels of oil per day. The discovery of four to six trillion cubic feet of natural gas in Husky’s South China Sea asset, Lau says, “is one of the biggest discoveries ever in the region,” a success that was made possible in part by Husky’s ability to transfer what it learned about deepwater exploration at White Rose to its South China Sea operations. As for upcoming oilsands production, Husky’s Tucker oilsands project is expected to produce 30,000 barrels per day by the end of 2008. This steam assisted gravity drainage project has completed its initial warm-up and production is imminent. Although Lau keeps a lower profile than some industry leaders, his opinion is valued amongst his peers both here and in China. Not only has he served on the Canadian Association of Petroleum Producers’ board of governors, but he has also been appointed a guest professor and honourary director of the Potential Gas Appraisal Centre at the University of Petroleum in Beijing. Lau is not afraid to take a stand that would be hotly disputed by other industry leaders. He believes that the Canadian federal government should take a more active role in important decisions in the oil and gas industry. This includes helping to clear the way for construction of the Gateway Pipeline. Earlier this year, Yiwu Song, a vice-president of China National Petroleum Corp. (CNPC), announced at an oilsands conference that his company was pulling back from its participation in the project. The $4-billion, 1,150-kilometre pipeline would transport 400,000 barrels per day of heavy crude from Alberta to the port of Kitimat, British Columbia, and would open the door to Asia for Canadian oilsands producers. Tankers would ship the crude from there to China and other parts of Asia. CNPC had indicated that it would take a 40 per cent interest in the pipeline, and Song’s abrupt statement that it would not set back Enbridge Inc.’s construction plans by several years. Lau indicates that Song’s announcement came as a disappointment. “I think the Gateway Project is a very important project for the Canadian oil and gas business,” he says. “Definitely, we have to look at it. China is a growing economic country. If you look at the growth in China, it will be huge. If you don’t have a Gateway Project and are not able to ship some of the crude away from Canada, your production will be trapped. You will continue to be subject to supply and demand in the U.S.” Lau adds vehemently, “It should be Canadian government policy. You should have some idea whether you would continue to supply to one buyer or you would like to create another opening. An additional export outlet would be really beneficial.” Lau remains skeptical, however, that Song expressed CNPC’s true intentions. “I don’t think China has made the statement they are not involved in Gateway Pipeline,” he says. “I think it was one manager who made that statement. I don’t think it is really cancelled.” Still, Lau believes that Stephen Harper’s government should heed Song’s message. One way it could play a more constructive role would be in resolving disputes with First Nations communities along the pipeline right-of-way. The Gateway Project is not the only area of the energy industry where Lau would like to see Harper’s administration take a more active role. The industry now, he believes, is being allowed to move ahead rudderless by the federal government. “Energy is crucial to the income of Canada,” he says. “We should build a long-term project and long-term movement for the country. We should have a general blueprint. “I think the government should take more leadership. I’d really like the government to put a lot more focus on the energy policy. It hasn’t done so in a long time. And secondly, they need to understand the [industry’s] requirements for infrastructure. “ Such criticisms notwithstanding, Lau maintains he would rather be leading an energy company in this country than in China. “Canada is still a better place to do business because it’s a democratic nation.” Since Lau was handed leadership of Husky in 1993, two years after the company was acquired by Hong Kong industrialist Li Ka-shing, he has molded the company increasingly to his distinctive leadership style. He acknowledges that he is seen as an authoritarian figure. “Everyone says Husky’s CEO is hands-on. But a CEO needs to know what his employees are doing,” he protests. With a laugh, he adds, “However, you don’t need to stick your hand in the cookie jar and check everything in there.” Lau studied economics and commerce in Australia, graduating with bachelor’s degrees in both from the University of Queensland. Before moving to Canada, he served in various executive roles with the Cheung Kong (Holdings) Ltd. and Hutchison Whampoa Ltd. Group of Companies. It was there that he came under the influence of Li, one of the most famous businessmen in the world, who sent him to Canada as vice-president of Husky in 1992. Known as “Superman” by his admirers in Hong Kong, Li Ka-shing has exerted a firm but invisible role in Lau’s decision-making. During our interview, Lau told a story which illustrated his relationship with the chairman. Not long into his tenure as president, Lau met with his boss in Hong Kong. The chairman told Lau how he wished the company to be run and how much he expected to see it grow. As they said goodbye, the chairman gave Lau a small envelope. It contained a message that made Lau tremble, and its effects have remained etched in his mind to this day. What the note said Lau made us promise not to reveal. He did say, however, that the story will be featured in the opening chapter of his memoirs. Suffice it to say, Lau’s memoirs will make good reading.
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