When green wins, a nation’s industry suffers

By Craig Fleming on 10/31/2019

Note to readers: This editorial first appeared in the November 2018 print edition of World Oil magazine. Based on Encana’s announcement, we felt that the following observations on Canada’s energy and political environment, offered by technical editor Craig Fleming, add valuable insight to current events.

Well, it has finally happened. A perfect combination of overly aggressive environmental activism, combined with fumbling by governmental authorities, has incapacitated the Canadian oil industry. “The political discourse surrounding Canada’s oil industry has morphed into a combination of schizophrenia, hypocrisy and fantasy,” said Encana founder/director and Canadian business leader Gwyn Morgan, in a Times Colonist op-ed article published earlier this year (Editor’s note: The Times Colonist is Western Canada’s oldest newspaper, published in Victoria, B.C.). “This debilitating countrywide phenomenon is clearly exemplified at both the federal and provincial levels. But it’s the recent actions of British Columbia Premier John Horgan, and his puppet-master, Green Party Leader Andrew Weaver, that earn my nomination for special recognition.”

“Horgan wins the political schizophrenia award,” continued Mr. Morgan, “for filing a court case that would allow the province to stop the export of oil from the Trans Mountain pipeline expansion, while simultaneously filing a separate court case aimed at preventing Alberta from reducing the amount of oil shipped through the existing line. Alberta Premier Rachel Notley summarized his behavior succinctly by stating: ‘They want our oil, but they don’t want our oil.’ Then, just two days after the federal government announced takeover of the project (for $3.5 billion), to counter Horgan’s ‘use every tool in the box’ vow to stop the project, his attorney general, David Eby, stated that B.C. is still entitled to the $1 billion [that] former premier Christy Clark negotiated, in return for supporting it.”

“Despite having the third-largest oil reserves in the world, Canada currently produces less than 4% of global crude supplies,” noted Mr. Morgan. “And, in contrast to the hysterical rhetoric from anti-oil sands zealots, Alberta’s oil sands produce just 0.15% of global carbon emissions. The reality is that the Canadian oil industry’s environmental record is vastly superior to [other] oil producers, [who are] benefiting from our inability to access world markets. Schizophrenia, hypocrisy and fantasy have formed a debilitating cocktail, sacrificing the livelihood of hundreds of thousands of Canadians, along with the economic prosperity and investor reputation of our nation,” concluded Mr. Morgan.

Crude benchmark drops. Despite surging oil production in recent years, Canada has been unable to build any new pipelines. Due to several factors, including significant regulatory hurdles, TransCanada’s Energy East and Eastern Mainline projects were cancelled. And the Keystone XL pipeline project has faced significant delays. In October 2018, Canadian oil prices plunged to a record low, relative to U.S. benchmarks, when the country’s crude production surpassed available pipeline capacity (Bloomberg).

Reduced demand, caused by maintenance downtime at U.S. refineries, has stranded large portions of Canadian heavy oil supply, says Deloitte’s Andrew Botterill. This, combined with increased output from Suncor’s Fort Hills mine, caused the price to drop to $20/bbl in Hardisty, Alberta, and push the price differential between WCS and WTI to its widest point on record. Specifically, Canadian heavy crude futures traded for $52/bbl below WTI, meaning that Canadian producers receive less than half of what U.S. companies receive for their product. It’s estimated that Canadian companies will lose $15.8 billion this year, alone.

And, even with the country’s producers moving a record 229,544 bpd by train in August, Canada doesn’t have enough rail capacity to alleviate the transportation bottlenecks. The country will need more pipelines and increased domestic refining capacity to clear the glut, but those are going to take years to develop. Desperate Canadian oil producers are now trucking 230,000 bbl of crude/month as far south as North Dakota, as the pipeline bottleneck reaches crisis stage.

Sanity returns? Alberta Premier Rachel Notley said her province plans to help the local energy industry by providing “value-added opportunities in Alberta,” to help ease the province’s logjam in crude pipelines and rail shipping. Alberta’s government has pledged C$1 billion to support construction of upgraders that lighten oil sands bitumen to help it flow through pipelines. The province also is providing C$500 million in royalty credits to spur construction of more plants, to turn crude into plastics, fabrics and fertilizers. Ms. Notley is also a supporter of the Trans Mountain pipeline, but it’s unclear when, or if, the pipeline will be built.

China sees opportunity. The fire-sale prices have lured China’s refiners to buy heavy Canadian crude for its bitumen, which is used to build roads and roofs. China’s demand for the material is expected to increase, as President Xi focuses on infrastructure construction to reform the world’s second-biggest economy. “The policy of boosting infrastructure investment has been bullish for bitumen,” said Li Haining, an analyst at China-based SCI99. In September, China bought 1.58 MMbbl of Canadian crude, approximately 50% more than in April. CNOOC has chartered a tanker, to load oil from Vancouver in October.

We stand on guard for thee. If Canadian authorities don’t get busy, there’s not going to be an oil industry left to stand guard over. It’s unfathomable (at least to this editor) that the lack of transportation has brought a basic industry virtually to its knees. Federal and provincial policymakers need to act fast, to get pipelines built to benefit the economy and salvage the industry. In the 2015 movie, The Big Short, a wary stock trader said “for every 1% unemployment goes up, 40,000 people die.” I don’t know if that’s true, but I do know that when green wins, people lose jobs. People lose homes. People lose retirement savings and pensions. If you don’t believe me, just ask the Canadians.

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