Heavy Oil Trumped in Alberta?

The new presidency of the United States of America allowed for some cautious optimism for western Canada’s oil and gas sector. Among the most immediately asked questions was whether Keystone XL would become approved. Well, it did not take long for President Trump to take a page out of Christy Clark’s playbook and suggest that of course Keystone XL will be approved – for a “big, big chunk of the profits or even ownership rights.” Well, I suppose from the USA (and BC) point of view, that makes sense, but one has to wonder about the viability of what amounts to export taxes on Alberta crude. After all, production costs for oil in Alberta are already higher than most competitors. In Alberta we mostly exploit (1) smaller conventional oil or gas reservoirs, (2) large heavy oil reservoirs that often require steam or heat to encourage the oil to move through the rock, and (3) low permeability (tight) reservoirs that need expensive fracture completions to become productive. This is all in a fairly well regulated landscape.

President Trump, on the other hand, stands in determined opposition of environmental restrictions and seemingly plans to eviscerate the Environmental Protection Agency. If this happens USA oil and gas producers will drastically reduce production costs. Bear in mind that production costs in the USA are already lower than Canada’s: this is owing to the fact that labor is cheaper in the USA and that their infrastructure is commonly better established and in denser networks. What the heck, throw in Texas’ recent oil discoveries and we have every excuse to get a little edgy about the viability of our oily resources in the north. The question is how does Alberta stay competitive? Do we find new markets? Reduce production costs somehow? Focus on LNG to Liquid?

Tell us what you think!

Murray

5 thoughts on “Heavy Oil Trumped in Alberta?”

  1. I definitely think that Canada must secure other markets in order to survive this downturn and become competitive in the future. We cannot solely depend on our neighbour to the South as our primary customer. Prior to the election, I thought that regardless of who becomes the next president, it will be detrimental to Alberta’s oil and gas industry. Trump’s agenda of maximizing profits is equally as harmful as Clinton’s negative views on fossil fuels. Therefore, it is imperative that Canada finds new markets fast. The new Trans Mountain and Line 3 are definitely solid steps in the right direction.

    What does everyone think about cost-cutting strategies to keep Alberta competitive? Is it too little, too late?

    1. I think a big part of a geologist’s job will be working with engineers to understand how to produce resources more efficiently. You are perfectly correct in saying so.

  2. While we all know that O&G/energy production is primarily economically-driven, I think it would be interesting to look at this from a marketing point of view as well.

    With growing concerns due to climate change as well as with a growing energy transition culture, would it be possible to factor in HOW we brand Canadian O&G to stay competitive? With a cultural shift to cleaner energy and the inevitable continued reliance on conventional energy for the next century, I think it would be interesting to sell Canadian O&G as the ‘tuna can with a dolphin-safe label’ or as ‘eco-friendly certified coffee beans’ – a premium brand that comes from responsible and well-regulated systems of production. Conversely, with the de-regulation of energy and opposition of environmental restriction from Trump’s America, we can brand US energy as cheap and dirty! Again, while I understand that production costs and efficiency drive the O&G market, other factors should also be taken into account to be able to stay competitive!

  3. In no way do I condone this unfortunate and ill-timed use of Christy Clark’s playbook, and I agree that any such ‘export tax’ on TransCanada’s Keystone XL (KXL) would erode KXL’s benefit to Albertan producers (and Alberta in general). That said, rest assured that an operational KXL would almost certainly benefit Albertan producers. Whatever ‘export tax’ President Trump slaps on KXL, the absolute worst case scenario for Albertan producers is being no better or worse off than they were previously. This is because Albertan producers can simply opt for an alternative means of transportation if using KXL proves unprofitable due to any overly onerous ‘export tax’ – putting us back at the pre-KXL status quo we started from (zero net benefit). Additionally, assuming Trump’s objective is to maximize profit (revenues from any KXL ‘export tax’), it would be irrational for him to tax to an extent that impairs the viability of KXL as a means of transportation for Albertan producers. Any decrease in KXL profits and shipment volumes would inevitably have a corresponding impact on Trump’s KXL tax revenues – if nobody is using KXL to ship crude, KXL is not making any money, and Trump is not making any money either. In other words, when it comes to KXL, Trump’s interests are tied to those of Albertan producers – the only way he can maximize his KXL profits is by ensuring it is profitable for Albertan producers to ship crude through KXL. Overall, an operational KXL cannot bring any detriment to Albertan producers, and will likely be of significant benefit. On the other hand, the same cannot be said for TransCanada’s shareholders, who are certainly at risk of getting ‘Trumped’, as they say. TransCanada (TC) has already lost billions on the unresolved KXL saga (with shareholders directly eating that loss), and depending on what Trump does next, it may lose more. While TC will assumedly not agree to an unprofitable arrangement with the US government, declining to complete KXL because of Trump’s demands and losing the remaining billions of its investment is far from a favorable outcome.

  4. On the question of Alberta’s competitiveness under increasing domestic regulation in a post-Trump and post-frac world, we may very well be at risk of getting ‘Trumped’. I would think that each of the options you mentioned are both viable and unmistakeable, but it seems to me that only one of them is realistic in today’s world.

    Enterprising Albertans have consistently succeeded in reducing production costs in the past, and I have no doubt we will continue to drive them down in the future through tenacity and resourcefulness. While the USA may have better infrastructure and cheaper labor, we have the advantage of a weaker dollar (it is known that when oil prices drop, the Canadian dollar depreciates as well). When combined with a strong domestic oilfield services industry and a skilled domestic labor force, a weak dollar gives us a significant discount on our costs while we still get paid in US dollars. This provides a strong boost to revenues (e.g. US$50/bbl WTI = C$67/bbl at $0.75 USD/CAD). Further, Canadian oil & gas assets are relatively inexpensive, as a result of both the weaker Canadian dollar, and the much hotter land market in the USA. For example, attractive and producing Williston Basin land in southeast Saskatchewan goes for about $5,000- $9,000/acre (e.g. Spartan – ARC Resources Nov. 2016), while land in the red-hot Permian Basin in Texas costs in the range of $40,000- $60,000/acre (see recent deals such as Exxon or WPX Energy).

    On the other hand, it appears accessing new markets through new infrastructure and LNG capabilities may be out of reach. Appeals for increased market access (beyond reliance on our closest competitor – the USA), and discussion around the pronounced and numerous benefits of said market access, seem to fall on deaf ears. Projects are either derailed by zealous activism (i.e. environmental special interest groups and aboriginal bands) often citing “social license” (see linked article at bottom of post), or by extensive, ambiguous, and often unworkable governmental regulation and project approval processes.

    The conditional approval of a project after extensive review by the appropriate regulatory body (e.g. the NEB’s 2013 approval of Enbridge’s Northern Gateway pipeline with 209 conditions after Enbridge’s 8-year consultation with affected Aboriginal groups and diligent compliance with all regulatory procedures and standards) seems to hold no water. Projects are consistently delayed or put on old indefinitely as a result of subsequent decisions coming from various levels of government to reverse or suspend prior approvals (e.g. the 2016 ruling by the Federal Court of Appeal to overturn the NEB’s 2013 approval of Enbridge’s Northern Gateway based on the failure of the federal government to adequately consult Aboriginal groups, even while Enbridge itself was recognized to have been highly effective in its consultation).

    Proper regulatory process and oversight appears to have been abandoned; as despite the existence of an official regulatory body (NEB) and a rigorous approval process, the authority to make decisions on project approval seems to be held solely by Prime Minister Justin Trudeau – who appears to determine which projects get approved or rejected at his own discretion regardless of previous decisions by the NEB. I may be underinformed on the subject, but it seems strange to me that the NEB’s approval of a project (i.e. Northern Gateway) can be overturned by a federal court several years later based on the federal government’s failure to adequately complete due diligence, and then somehow the subsequent post-ruling final decision on the project is made by the same federal government (Prime Minister Trudeau rejecting Northern Gateway in November). Lastly, even after a project such as the Trans Mountain pipeline gets officially “approved” at the highest level of government (by Prime Minister Trudeau himself), it remains uncertain if it will actually get built, in the face of uncompromising on-the-ground activist resistance.

    While Canada has outstanding environmental, safety, and corporate responsibility standards in my view, the efficient and proper application of these standards is also important. If the regulatory system is inconsistent, ambiguous, and cumbersome, these standards may not be properly and rigorously applied. Regulatory delays and uncertainty impair the ability of companies to meet regulatory standards and construct projects, while causing billions of dollars in additional regulatory costs and lost investment. Inconsistent decision-making and unclear boundaries between governmental bodies inhibits the effectiveness and accountability of the regulatory system; resulting in inability to apply regulatory standards in a rigorous and consistent manner, a loss of trust in the regulatory system, and substantial, often indefinite delays. This means billions in regulatory/legal costs and the prevention of the construction of invaluable projects that are in compliance with all regulatory standards, thereby unnecessarily causing the loss of tax revenue, the loss of potential investment, reduced competitiveness of Alberta and Canada, and the loss of Canadian economic prosperity overall.

    All-in-all, I believe an overhaul of the Canadian regulatory system with respect to energy infrastructure projects is crucial, and is the primary means through which we can improve our competitiveness while continuing to be world leaders in environmental citizenship. A consistent, transparent, rigorous, and impartial system is needed to ensure equitable and optimal outcomes for all stakeholders (Aboriginal groups, other landowners, the environment, employees, investors, and affected citizens in general). Coordination between governmental bodies is necessary to streamline the process, ensure consistent decision-making, improve transparency, and improve accountability (for all parties involved). Improving the transparency and consistency of the regulatory process and its requirements would facilitate both effective compliance with regulatory standards, and the expeditious approval and construction of projects. This would save billions of dollars in regulatory/legal/oversight costs alone, while establishing an environment suitable for investment and allowing for the construction of vital energy infrastructure. These much-needed energy infrastructure projects (pipelines to tidewater, LNG capabilities) would in turn greatly improve the competitiveness and prosperity of Alberta and Canada by allowing us to maximize the value of the resources we are already producing, and reduce our one-sided reliance on our greatest competitor – the USA.

    http://www.newswire.ca/news-releases/dissecting-social-licence—groundbreaking-new-analysis-takes-deepest-look-ever-at-whether-our-regulatory-systems-are-working-579952541.html

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