Wither the Price of Oil

U.S. crude oil production exceeded 10 million barrels per day (b/d) as of November 2017. That was the first time since 1970 that monthly U.S. production levels surpassed 10 million b/d. Steadily increasing oil and gas production in the USA has been a factor in the lowered price of oil (since about 2015). Strictly speaking, one would not view American output as over-production (they still need to import oil to meet their needs). But that level of production takes enough of a bite out of the volume of oil sold that OPEC decided to increase their production, thus lowering profits of the expensive-to-produce North American hydrocarbons.

The lowered prices have not affected the USA production, which averaged 10.93 million b/d in 2018, but is has been a gut-punch to Canadian production and particularly to our most voluminous resource, heavy oil. With the differential considered, it is difficult to imagine what world price is needed to make Alberta work again.

Here is a graph of US oil prices. Alberta did pretty well from 2000 all the way to 2015. The 2009 drop did slow things down for a year, but that was short lived as oil returned to $90 / barrel.

What price do you think we need to see Alberta’s oil and gas sector come to life again? What if the differential were not so large a gap? What if we had a market for Natural Gas, which we sell well below its world value? What factors and considerations have I not mentioned?

https://en.wikipedia.org/wiki/Petroleum_in_the_United_States#/media/File:Oil_prices_to_gas_prices_graph.png

26 thoughts on “Wither the Price of Oil”

  1. I believe in order for Alberta’s oil and gas sector to come back to life oil prices need to be stable at least at $60 for WCS. When I was working as a Power Engineer for Baytex Energy we had to decommission our cyclic steam stimulation facility because our lifting cost was about $45-$50/barrel and once the cost of WCS slipped below what it cost to produce it was just no longer economical for the company to keep the facility operating.

    When looking at other big producers costs to produce they’re typically in the high $30- low $40 per barrel to produce, so I think that minimum $60 is a good bench mark for companies to feel confident to invest in heavy oil production in Alberta and give life back to the industry.

    As far as the differential, the Government has done a decent job of late to try and reduce the differential between WTI. There’s no doubt the differential is always going to exist but as long as its kept some where within $15 I think it shows that we have the infrastructure in place to have our oil worth something on the global market.

    Natural gas being worthless is a big issue. Companies are more likely to flare it instead of treat it and sell it to market. There is a ton of gas out there so if a decent market for natural gas actually existed then that would be another great investment for our industry and something that would help get us out of this slump.

    Other factors that need to be considered are refining issues, the United States is obviously much better off in that regard. They also have an easier time getting their product to market due to their access to these refineries making it more profitable and access to pipelines makes it easier to transport their product, also making it more valuable.

  2. The question of what price we need to make Alberta’s oil and gas sector come alive again is obviously dependent on many factors, the most significant of which is arguably the differential between WTI/OPEC Basket and WCS.
    Currently, our refining infrastructure in Alberta is ill equipped to handle the volume of oil produced, with only big companies such as Suncor and Imperial having refining capability. As a result, almost all exported Canadian crude oil is bound for American refineries and sold at a discount largely because the quality of our unrefined heavy oil is poor relative to that of both the American and OPEC blends (in the fact that it has both a lower API and higher sulfur content). If we had more refining capacity in Alberta, we would be better equipped to bring a higher quality product to international markets at less of a discount.
    Another problem is getting our product to those markets. Due to the rapid increase of production coming out of the Permian Basin, pipeline infrastructure going to refineries and terminals in America (notably the Gulf Coast) are more constrained, forcing Canadian producers to find other ways of getting their product to market. Methods such as Cenovus’s deal to transport 100,000 bbls/day to the Gulf Coast by rail or Notley planning on buying up to 7000 rail cars to transport oil will help for sure, but truck and rail are more costly than pipelines. Getting significant pipeline capacity to bring our oil to the Canadian coast seems like wishful thinking at this point, but if that were to miraculously happen it would lower costs of Canadian producers and make them more competitive in the global market.
    According to the following article, it appears that several oil sands producers need oil prices of U.S crude benchmark at around $50-$60 for certain projects to break even. If Canadian refining and pipeline capacity could be increased to lower the discount, that break even price could potentially be lowered, and projects that have been shelved over the past few years may be brought back to life.
    https://www.reuters.com/article/us-canada-oilsands-economics-analysis/canadas-oil-sands-survive-but-cant-thrive-in-a-50-oil-world-idUSKBN1CN0FD

  3. I think geopolitics and nation development is incredibly overlooked when people discuss the future of oil. Will the price of oil matter if the market is stacked against us?

    Even if the price of oil exceeds $100/bbl and we are back in the golden age, who’s to say that Alberta’s oil will even be a hot commodity? What nation will pay $100/bbl for a product that their own nation does not have the infrastructure to refine? I don’t believe price is the issue with our economy, it’s the lack of foresight we had.

    If the global oil market is a food chain, we are almost at the bottom. We are inches away from the jaws of the US and Saudi Arabia and if we tried to introduce predatory pricing to entice customers to buy Canadian oil we still run into the issue of nations lacking the required infrastructure (thus, still costs more for them and drives them towards competitors) and now we’ve pissed off some big players in the game who already have their nose in our business.

    Sure, an increase in price will definitely see short-term effects in our province and we’ll have hiring surges and a more stimulated economy but price is unstable and it will always change. We need to position ourselves (in a global sense) as a powerhouse where fluctuations in $$/bbl doesn’t completely cripple us.

    1. I agree somewhat, but regarding refining, most countries refine the oil they need domestically, as refined products have a shelf life…

  4. In order to place a price on what oil should be for the Albertan oil/ gas industry, we should look at some of the factors that impede the prices of production here in Canada.

    For example, here in Canada, we have limited production of hydrocarbons, and what we do produce has to be shipped off to a refinery somewhere else. The methods we do have for transportation of these hydrocarbons range from trucks to trains, to pipelines. But the truck and train alternatives become expensive to transport the products, and ultimately bottleneck the production/ export of the hydrocarbons. In order to lower the cost of production, the implementation of more pipelines should happen, as this would help with the lower costs of oil.

    Another thing that makes it difficult is the marketing of our hydrocarbons. One of our large exports is heavy crude oil, and there is a relatively limited market to sell to. And since we don’t have many refineries here in Canada, we ultimately have to export to the States.

    As well, even if the oil differential was smaller, Canada is still going to need better infrastructure to combat the ever-changing prices of oil and gas. The only way we could ever hope to compete in a market where oil prices are low is if we have the means to produce those hydrocarbons for a much cheaper cost.

    If the natural gas market was better, then the price of our oil might not be as significant to us. The seasonality of North America substantially affects the natural gas market. So for the gas market window to open up for us, and a cold winter in the United States would help increase the cost of our gas. With colder temperatures, there would be a higher need for natural gas to heat people’s homes.

    Ultimately, in order to compete in a world market with low hydrocarbon prices, Canada is going to need better infrastructure in both the oil and gas sectors to compete.

  5. While I agree that prices need to be substantially higher for Alberta oil and gas to have a resurgence, I think that there are other factors besides price that are keeping Alberta/Canada in a “slump” compared to other nations. Higher prices and a smaller differential would make Canadian companies motivated to produce more hydrocarbons. However, a factor that I believe has been overlooked is that the hydrocarbons coming out of Alberta need to be upgraded/refined to a much higher degree than the hydrocarbons coming out of other OPEC nations. I personally think that Canada needs to invest in infrastructure that focuses on getting our product to the same usability as others, because even if the price for oil increases a lot, the demand for Alberta hydrocarbons will still be lower if it is less useable than other nation’s products. This idea is addressed in a link from the Financial Post, which I have added in the bottom. It talks about plans by the NDP Alberta government to help with upgrading systems for Alberta hydrocarbons.
    While doing some quick research about oil prices, I also came across this article regarding the recent government controversy in Venezuela and how the US is sanctioning them. I think it will be interesting to see how/if the price of oil is affected in the long term by the events in Venezuela, and to see how other OPEC nations react. The article is a quick read, and it really shows how big of a factor global politics is in the oil and gas industry.

    Link to Financial Post article about upgrading:
    https://business.financialpost.com/commodities/energy/alberta-targets-1-5-billion-upgrader-to-get-more-value-from-oil

    Link to article about Venezuela sanctions:
    https://www.thestreet.com/investing/futures/oil-hits-2019-high-as-opec-output-slumps-us-sanction-on-venezuela-take-toll-14853803

    1. It is certainly true that heavy oil requires more upgrading and is more expensive to get out of the ground. A lot of heavy oil production is not profitable below $60 / bbl.

  6. I think we Would need to see a price back up around 3.0 dollars per gallon. If we could find a market to sell our gas to would see surge in our gas production and a drop in oil production due gas making more money. The main problem with moving our current natural gas is transportation. Weather that is by truck or train or pipe line all coast money to build and maintain the infrastructure to move the product.

  7. I believe if the price went back up to 90-100 dollars a barrel Alberta’s oil industry would get the life it needs to put people back to work. However, this may never happen as the differential is so large. Companies are changing the way they run things and becoming more cost efficient like CNRL. If the differential were not so large companies may not have made this shift in how they run things so more people would get hired. On the other hand a market for natural gas would definitively change the game and could help kick-start Alberta and B.C.’s economies. Another thing to consider is the vague possibility of a twinned pipeline to our west coast as this would allow Canada to get its product to market in the right quantities that our buyers like China want so we are not selling it discounted.

    1. Oh gosh, CNRL has always been cost-efficient. Here is a good question: if the USA has their refineries filled with domestic oil, would $100 oil really help or not?

  8. It is likely that a price of $100/barrel would be a great way to boost the economy and industry of oil production in Alberta. According to the graph displaying the history of prices, oil was close to this value from 2011 to 2015 and experienced slight variation during then. Prior to that period, Alberta struggled until the oil price was at $90/barrel and its economy continued to rise for a short time afterwards. This price was enough to sustain the province after it was hit by the events in 2009 and allowed it to experience a level of growth, but it would be best to see oil above this value to provide a slight buffer while continuing to strengthen the economy.

    The price of oil wouldn’t need to be as high as $100/barrel if the differential between Alberta and the United States were not as large because the production levels would be closer together and any substantial drops would allow the province to continue selling hydrocarbons while only incurring a small loss in sales due to the much larger volume it would be putting on the market.

    The results of Alberta having a market for natural gas that it chooses to sell at a price much lower than what is seen on the scale of the world depends on the province’s supply and relationships with other countries. If Alberta did have a substantial supply of natural gas, it could afford to decrease its price and would force other countries with less of it into a similar situation that it is in now with regard to oil production. However, the relationships that Alberta has with these countries might be compromised and provoke retaliatory actions in the form of trade sanctions, breaching previously made agreements for other hydrocarbon exchanges and purchases, and other responses.

    Some factors that weren’t mentioned include a volatile political climate that has emerged in the United States and how it has been communicating with other countries and economic factors like inflation and public interest in sustainable technologies.

    1. A scary thing is that even if oil is $100 it might not solve the problem, as now USA simply doesn’t need our oil to fill it’s refineries. They have their own.

  9. Alberta allowed itself to become reliant on the United States as its primary customer. Increased production in the United States also impacts our ability to sell oil because they need to buy less.

  10. It is hard to predict a healthy price for Alberta’s economy. As oil production technologies advance the production costs of oil will decrease allowing lower oil prices to remain profitable for Canadian producers. If the gap between Canadian and United States oil prices decrease it could lower the amount of oil the US will import from Canada creating an oil surplus problem lowering the price of oil again. A large issue in Alberta right now is the devastatingly low natural gas prices. Alberta currently has a natural gas surplus so the best way to increase prices would be to find a market for the excess natural gas. This would increase profits substantially for current gas wells and would encourage companies to invest in natural gas exploration again. The key to battling the currently low oil and gas prices is to deliver these products to a market and if international markets aren’t viable options perhaps Canada should invest in refining and delivering hydrocarbons to it’s own markets.

    1. I don’t know… We probably produce too much for our own market. We should be a net exporter. Would be good to have an LNG plant on the coast.

  11. I definitely think that the price would have to go back up to at least $100 a barrel but that wouldn’t solve the main problem of getting the resource to market. Canada needs to begin to build infrastructure to make a real step forward on establishing ourselves as a solid net exporter of Alberta’s oil. Since Alberta is land locked so multiple refineries along the coast and pipelines (among other modes of transit such as train) would need to be implemented in order to move the oil to other countries around the world, which in turn would allow Canada to become self sufficient stopping any reliance on countries which have much less clean and ethical practices. The addition of getting our oil to market and cutting out the import of oils I think would help Canada now and in the future.

    1. So true. I really think we will see a pipeline. And I think it will be at a time when oil is recovering. We do need Canadians to understand that ethical oil is good oil… and that is what we sell.

  12. The question of what price we need for our petroleum economy to grow really centres on what the minimum price is that we need for activity to remain in a stable or growth phase. This question can be answered from a few angles; sufficient export capacity is an absolute must, the regions we export product to have an effect, geopolitics have an effect, the stable growth of the Russian oil and gas industry has an effect, and yes, the growth of US fracking has an effect as well. There are really two classes of effects on Albertan industry: competitive effects and restrictive effects.

    Restrictive effects are things that our industry and governments should be able to minimize, and centre almost exclusively on export capacity in pipelines, and the regions we are able to export to through these pipelines. As a country, a province, and an industry (as we all have a stake in its success), we should do the utmost to expand export capacity, because without this expansion in export capacity, we would need significant price rises to make crude-by-rail shipment truly economically viable in the long term, which is far less likely to occur. Industry planning in Alberta needs to start aiming further in the future, aiming for export capacity increases that far outpace current or near-term production increases, because social license frustratingly seems to be continuously dwindling for pipeline projects, so pipeline projects may become effectively impossible soon. The alignment of these pipelines to Canadian coastlines, as well, would allow for reduction of the differential between WCS and WTI, as Canadian oil could increasingly dodge the rising competition from fracking oil in US refineries. This issue is one that can be solved from multiple angles at once, as the LNG project to be completed soon (hopefully, if the courts and the company can find agreement) in BC will help out with natural gas prices, as China and East Asia in general has higher natural gas demand and prices than much of the world (and transitions away from thermal coal electricity in the near- to medium-term will only amplify them), so a coastal port and gas pipeline will certainly help. Natural Gas is an interesting issue in Alberta, as I believe we are unique in that our regulations heavily restrict the flaring that occurs in other oil economies, thereby artificially depressing domestic prices because uneconomic gas is more often produced here (rather than being vented or flared).

    When it comes to competitive effects, the game is much more dynamic. The tight oil boom in the US has certainly changed the market completely, as net importer has become net exporter. The growth of the Russian industry, as well, cannot be ignored, as they have seen a return to Soviet-era levels of production (almost 12M bbl/d) and they seem well-poised to benefit from expanded exploration in the arctic as well as climate change continues to affect arctic sea ice. Extra-capitalist effects like the current Venezuelan economic and political collapse and sanctions, Iran sanctions, and OPEC and Russian market manipulation all have a massive effect on our oil prices too, especially when heavy oil is involved. Venezuela’s reserves are the world’s largest, but the potential of the development of their industry continues to be shockingly low, simply because of disastrous economic policies. This continued drop of production – now hurtling downwards near 1M bbl/d – shows no signs of changing while Venezuela retains national control over their oil industry, as those nationalizing policies are what got them there in the first place. This situation actually continues to benefit Alberta massively, as Albertan oil competes with Venezuelan oil in US refineries (until this week, when the sanctions fell into place). In much the same way, US sanctions of Iran continue to prop up our prices to a certain degree as well. Also, it is clear that OPEC and Russia continue to manipulate the global market to their benefit, actions that, when they are restrictive, assist our industry as well.

    To sum it up, in the long term we as Albertans, Canadians, and participants in the oil and gas industry should aim to control the variables we can. Factors like war, regional instability (re: the lawless land of Libya) and geopolitics are out of Canada’s control and have some of the largest effects on industry. As a result, maximizing our competitiveness through pipeline construction, enhancing refining where applicable, and establishment of responsible yet dependable regulations on expansion of our industry gives us the best shot at competing in a wildly variable world.

  13. An increase in pricing is a quick and unstable fix to the problem the Canadian Oil and Gas industry faces within Canada. As prices fluctuate daily, there should be more concern given to the overall stability of the producing region. Recognizably, Canada is by comparison to other countries very stable; however, the country as a whole could do with improvements. With regards to the state of the Oil and Gas industry, I believe a great deal of the issues faced stem from the fact that as a nation Canada lacks unity in support for the development and production of hydrocarbons. A lot can be addressed in terms of the global geopolitics influence on our own economy, however, the internal geopolitics of Canada seem to drive a great deal of obstacles for a thriving Oil and Gas industry. Taking the TransMountain pipeline for example, the amount of conflict it raised and continues to raise between Alberta and BC is a massive obstacle. The initial delay on the finalization and construction of the TransMountain let the world know that major inter-provincial projects can/will present obstacles that major companies are not willing to gamble on deterring future development. Regardless of the price on oil, no one in their right mind would invest heavily into an area where consistent instability in project approval is prevalent. This is not to say that proper analysis of projects should be thrown out the window with businesses left to run rampant as they please. A healthy level of democratic discourse and accountability is necessary to ensure environmentally sound practices. However, the scales have been tipped in such a way that development has been stagnated. As noted by JP in the two articles sent to the class:
    https://theprovince.com/news/politics/keith-gerein-extreme-ideas-may-be-albertas-only-answer-in-an-energy-fight-lacking-common-sense/wcm/2291b4fb-1b72-4741-a51b-50f8a9921001
    and
    https://boereport.com/2019/02/05/a-demand-for-a-level-playing-field-ban-all-oil-tankers-from-canadian-waters-or-abandon-bill-c-48/?fbclid=IwAR26K-NHAtxt1hRranUFT2KzFOINDi10ysj9G8KbbBh5rmzfm-8hWxkY8IE

    These outline an outright and frankly outlandish hypocrisy at play within the different levels of government in Canada. This makes it especially hard for larger companies (Imperial, Husky, etc.) as they must juggle both east and west geopolitics within the same country. Building further upon the obstacles faced by companies operating in Canada are these following articles:

    https://nationalpost.com/news/whistler-wants-money-from-energy-companies
    and
    https://www.theglobeandmail.com/canada/british-columbia/article-city-of-victoria-recommends-class-action-lawsuit-against-the-oil-and/
    Understandably, there is opposition to fossil fuels in the name of the environment, yet there is a lack of meaningful solutions. Many continue to blame the suppliers of fossil fuels yet won’t address their own consumption of said fuels. By means of natural gas development, environmental and economic goals could be attained by the replacement of electricity generation via natural gas rather than coal. This would reduce the level of emissions while also creating an internal market for a portion of our hydrocarbon production. Unfortunately, provinces are lacking cooperation with one another, and portions of the public are turning their backs on one of the driving forces of for the high-standard of living Canadians are fortunate to have. It is interesting to note, that LNG development which holds greater benefit to residents of BC has received strong backing and little backlash from government or the public.
    https://www.cbc.ca/news/canada/british-columbia/kitimat-lng-canada-1.4845831
    The benefit of increased market access via LNG projects will likely bring a spark of life to the O&G industry, but for how long I am unsure. Looking at companies today, many have since learned to adapt and continue to drill profitable wells even in the current price climate. The assurance of sustainability for increased prices and reduction of the differential requires an improved public and governmental support of the industry. To accomplish the development of pipeline capacity and market access provincial and federal cooperation will be necessary.

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