Edmonton Journal: January 2019: “The carbon levy has become a political punching bag for politicians and journalists that want to win votes and sell newspapers. This is very unfortunate as the levy — which has been in place for almost two years now — hasn’t damaged the economy or cost jobs.” Joshua Buck
Buck arrives at these conclusions by considering economic
data for 2017, what they found was that in 2017 key economic indicators, including
gross domestic product (GDP), weekly earnings, and the unemployment rate. What they
found was that in 2017 Alberta grew at a rate of 4.9 per cent, wages were up, and
unemployment was down. Conclusion? The carbon levy did not hinder Alberta’s
am inclined to agree with this view. What about you?
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?
The wine embargo is on. The rhetoric flies. Fingers point to the provincial NDP and the federal Liberals. Fair enough. That is what they agreed to when the formed a government. Interestingly, though, the lack of pipeline capacity can clearly be traced to the Provincial Conservatives under Ralph Klein’s leadership.
Let’s go back in time. I first started working in the McMurray area and on it’s Geology in about 1998. At that time, industry in the area was comparably modest. Suncor and Syncrude were the only big players in the area, with normally producing approximately 180,000 bbl/day of crude oil. At that time, licenses were already approved to double the output of both operations (Syncrude North Mine and Suncor Millenium projects). Also approved in the late nineties was CNRL Horizon, Suncor Aurora, Shell Muskeg and early in the 2000s what would become Esso Fort Hills. By the year 2000, approvals were in place to increase the area’s production by 10 fold!
Anyone involved back then will remember that McMurray heavy oil was below the radar of most environmental groups. There was very little controversy regarding the heavy oil, in fact, until the initiation of all of these projects (practically simultaneously) led to a hyperactive period of large-scale development throughout the McMurray area. One has to wonder why the Klein Tories failed to identify the need for a pipeline when they were approving these projects? And, it is my opinion that a pipeline project in 2003 would have passed without any of the controversy that has occurred today.
The long and short? The government has an important role to play in predicting infrastructure needs. And the Tories were simply too blinded by the money of the super projects to simply recognize what was right in front of them. What fools.
The article circles around the idea that when enough electric vehicles (EV) displace gasoline-powered vehicles, an oil glut will hammer the oil and gas industry and the “Big Crash” will occur. They used 2 million barrels oil displacement by EV (similar in size to historically recent gluts) as a threshold. Bloomberg’s model is presented in their chart below.
In short, if EV adaptation continues at the rate shown (and it has) the offset in oil demand will be significant enough to put downward pressure on oil prices by 2023 / 2024. This is oversimplified thinking. Firstly, this has to assume, then, that we have reached peak-oil demand. What factors suggest that is entirely wrong? For starters a notable drop in oil discoveries in 2017 will mean that production of oil gas is likely to start slipping 10 years from now. Secondly, total energy demand will continue to increase as economies modernize globally with oil and gas likely to be positioned as the majority energy source for at least the next 40 years (almost all the think tanks agree on this). So, when does oil demand actually peak? That is difficult to forecast, but that moment is more like 15 years from now, and maybe as far off as 40 years from now. So, give me a break.
Which leads me to my EV rant. If EV are not burning gasoline, then what resources are being used when people hop in their Tesla? Well, in 2016, natural gas was the largest energy source for electricity generated in the United States. Natural gas was the source of about 34%. Coal was the second-largest energy source for U.S. electricity generation in 2016—about 30%. Canada is a little different, hydro power produces close to 60% of Canada’s electrical production, followed by fossil fuels at 28% and nuclear at 12%. By my reckoning, EV still burn hydrocarbons, and in Canada contribute to something I loath, the giving up of river valleys to artificial lakes for “free” hydro power. I agree with fighting climate change, but the real solutions are greater efficiencies in energy use and carbon capture. Let’s not kid ourselves about solutions that do not solve anything.
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?
It only took two years for Alberta’s technology-leading oil and gas industry to go from representing the backbone of Alberta’s economy to being a “sunset industry”. Perceptions are a funny thing. Two pivotal changes brought on this malaise. First, horizontal drilling and fracing (i.e. fracking or fracting) technologies enabled a very large increase in USA oil production. Secondly, OPEC flexed its production biceps and reminded world economies that it is they who dictate the price of oil (for now).
I am the first to admit that the economic upside-down cake in Alberta gives me pause. But, I do have to ask, is oil and gas really a sunset industry? Many Canadians seem to think that hydrocarbon energies from the Earth represent a practically Neanderthal technology that will readily and soon be replaced. However, if the past tells us anything, it is that this is an unrealistic statement. I was a teenager in Alberta in the eighties. Back then Alberta’s oil and gas economy had fallen on rough times, having been staggered by the National Energy Program that was coupled to lower world prices for crude oil. I was taught that oil and gas were never going to recover in Alberta because we were out of economically recoverable resources. I was heartily discouraged by Alberta geologists from even choosing Geology as a career!
All that changed as Alberta’s heavy oil deposits became economic. For nearly 20 years, from 1995 to 2013, Alberta’s resources became again the backbone of its economy and an important contributor to Canada’s economy. Now it is about 20 months into a serious downturn and one can watch as an entire province (or country!) jumps off of the ship. I think it is crazy.
Consider this. Alberta still owns the largest exploitable volume of oil in the world. Yes, it is heavy oil, but OPEC’s reserves are shrinking at a far faster rate than Alberta’s. The day when it is Alberta that holds the cards is only decades away. What are the wild cards in that deck? One would think that it is how far technology can advance alternative energies such that they rival the economic position of oil, and I suppose that if civilization is waning and there are no growing economies for the next 20 years, everyone is in trouble.
Let me know what you think. Is Canadian Oil and Gas finished?