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Jason Kenney’s election victory speech played to the hurt feelings of Albertans. He said Alberta is captive to the U.S. market because foreign interests have landlocked Alberta oil. He said investment that has fled Canada is “fueling an unprecedented oil boom south of the border.” “In other words,” Kenney said, “we’ve been had.”
Albertans have been had. But it isn’t by special interests outside this country. It’s by Canadian politicians of all stripes who continue to sell a myth, a myth that the reason the oilsands have stopped seeing major new investment is that we don’t have enough pipelines.
What is odd about this myth is that most major players, no matter their stance on whether pipelines projects should proceed or not, want the public to believe it. Whether it’s Alberta’s incoming new premier Kenney, Prime Minister Justin Trudeau, the Canadian Association of Petroleum Producers (CAPP) or environmental activists 350.org, all tell you that a lack of pipelines is holding back oilsands investment. The truth is that is not what is holding oilsands investment back.
No. It’s that other thing Kenney mentioned: an unprecedented oil boom south of the border. Fracked U.S. oil is attracting the capital. And that is because it is a much better resource to exploit. A review of investment trends in oilsands and fracked oil so far this century explains this.
Bitumen from the oilsands is difficult to produce and process and yields a lot of low value product. On top of that, moving bitumen through pipelines requires expensive light gasoline blended in. Projects to produce bitumen require a huge amount of capital with a long payback and are located a long way from markets in an expensive place to build things with a brutal environment in the winter. Not exactly the ideal crude oil deposit to exploit.
But the thing about the oilsands is that they are massive and we know where they are. In the 2000s the world was thought to be running out of conventional crude and this was reflected in the price of crude as it ramped up from $20 at the start of this century to over $100. It made sense to turn to the oilsands. Investment doubled from $13 billion in 2000 to over $25 billion per year by 2005 and grew from there, until it didn’t.
Oilsands investment declined from a peak of $34 billion in 2014 to $11 billion estimated in 2018. What then stopped the boom?
Fracking unlocked natural gas and oil
Something big started happening in the United States in mid 2011. Fracking techniques that had recently unlocked natural gas deposits were widely applied in areas of known light crude reserves that conventional techniques couldn’t tap. As a result areas like the Bakken in North Dakota and the Permian Basin in Texas saw steep increases in production due to the use of fracking technology.
U.S. crude oil production in July 2011 was 5.6 million barrels per day (MBD). By January 2015 it was 9.3 MBD. By October of last year production was up to 12 MBD and counting.
From 2011 the increase in U.S. oil production has been four times the Canadian growth in the same period. While investment in the oilsands has been dropping off investment in U.S. oil production has continued growing. The United States in now the largest oil producer in the world.
It isn’t lack of pipelines holding back the oilsands; it’s the fact that it isn’t as attractive to invest in oilsands as in U.S. fracked oil. If industry had known how to frack for oil back in the year 2000 that big surge in oilsands investment never would have happened.
Since 2013 no major new oilsands project received a Final Investment Decision (FID) until late last year when Imperial Oil announced it was moving forward with its $2.5 billion Aspen project. That is a pittance relative to a $20 billion investment a few years ago in Imperial Oil’s Athabasca oilsands operation at Kearl Lake, Alta.
Why have no new projects moved forward during that time? Discounts on diluted bitumen were decent from 2014 through 2017 because there was pipeline capacity. Pipelines such as Enbridge Line 3 were expected to be coming; delays weren’t known then. So why no investments announced?
Because industry would rather spend money on quick payout, high quality oil closer to major markets. Can you blame them?
Canadian oil shouldn’t be sold at fire sale prices
Kenney said a lot of other things playing to the crowd. What is true is Alberta and Canada need more pipeline for the production coming from the oilsands investment whose growth has wound down. We shouldn’t be selling at fire sale prices.
But we don’t need all the pipelines under consideration. The combination of Enbridge Line 3, Trans Mountain Expansion and Keystone XL adds close to two million barrels per day (MBD) in pipeline capacity, almost twice as much as CAPP’s forecasted growth in production by 2030. That’s a forecast where industry assumes pipelines are available.
On top of those pipeline projects, Enbridge has identified other opportunities using existing lines of up to another half million barrels per day. So it will be solved. It’s taking time but pipelines do encroach on other people’s property and bring risks, so they need to be considered carefully, frustrating as that is to producers and governments.
More pipelines than required is a waste of capital, an inefficient drag on a struggling industry. That’s because pipeline owners don’t take the risk; pipelines have regulated returns and the new lines have contracts where the oil producers commit to paying for a pipeline whether or not they have crude to ship.
Canadians, especially Albertans, are being played. A good example is Kenney’s crusade for Energy East, a pipeline from Alberta to New Brunswick via Quebec. The economics don’t exist. And the Quebec government doesn’t want it. There isn’t enough new crude to fill such a large line and the refinery hardware in Eastern Canada for diluted bitumen is close to non-existent. Still, Kenney and his base love the idea. Economic reality is not a problem for them.
The oilsands golden years lasted about a decade, and they will never come back. While we need a couple of pipeline projects to proceed to get reasonable prices for our oil, all the shouting is just a distraction. It is time to position the Canadian oil sector for slow growth and environmental sense. That’s what real leaders who care about the future would focus on.