By David Yager, June 9, 2016
Entrepreneur. Consultant. Journalist. Political Activist.
Fire up the trenching equipment, the side-booms cats and the pipe mills. More Alberta crude is sure to get to tidewater by pipeline now. On June 7 Alberta supposedly regained its so-called “social license to operate” by passing into law the Alberta Climate Leadership Plan which includes carbon taxes on fuel and natural gas and subsidies for non-carbon energy. The levies will collect an additional $3 billion per year and, as Premier Notley said when it was announced last fall, show the world “Our (Alberta’s) goal is to become one of the world’s most progressive and forward-looking energy producers”.
The day before the bill passed, the four opposition parties fought against the legislation and proposed amendments all night almost until the sun came up the next morning. They then voted unanimously against the legislation. Only one minor amendment was accepted because, as the Premier would later tell the media, the legislation was well-crafted and required no further improvements. Mission accomplished, the legislature closed for the summer. Confident she was on the right side of history the Premier told a Calgary Sun columnist Albertans were worried about climate change and she delivered calling her administration, “The kind of government they voted for and have been desperate to have for many, many years.”
So hydrocarbon taxes go up, cheap electricity from coal goes out by 2030, renewables get subsidized, oilsands emissions are capped and Alberta’s energy future will be from new sources that do not exist yet. But an enlightened administration, backed by enlightened policy, will get Albertans to the promised land.
How? By raising taxes. Who knew it was that simple? And a bunch of other stuff like redistributing carbon tax funds to those in lower income brackets and picking winners in the low-carbon renewables sector. In the past governments which raised energy taxes for any reason invariably reduced demand and eventually supply. This will be different. Higher costs will impair the use of the bad stuff and government central planning will engineer, subsidize, create and ensure ample supplies of the good stuff. The total cost and much of the plan remains unknown.
The government’s propaganda machine was in high gear prior to this week’s policy vote. In a column in the Calgary Herald June 4 Minister of Environment Shannon Phillips was on the offense touting the genius of the plan and the faults of those opposed. Directly attacking prior provincial and federal governments she wrote, “…climate change denial is a dead end for Alberta. After all, past conservative governments took us down that road of denial and it got us nowhere. We were vilified internationally. Our energy products remained landlocked. And more dangerous pollution was pumped into our air”.
The NDP’s zeal to trash opponents got a little far-fetched with one line from Phillip’s column which read, “Another Wildrose (opposition party) MLA posted information from an organization that blames climate change on the sun”. The sun affects the climate? Nope. All climate change is man-made and that’s the only acceptable definition of “the science is settled”. Wow.
But if you can’t beat ‘em join ‘em, and so it was last fall when the CEOs of big oilsands producers CNRL, Cenovus, Suncor and Shell joined Notley on television and commented approvingly when the Alberta Climate Leadership Plan was announced. These are the folks who had apparently traded opposition to pipelines by several of the more vocal environmental groups for a total carbon emissions cap on the oilsands. They did not ask their colleagues. The support and commitment of the larger oilsands producers, combined with this legislation, is supposed to get Alberta and bitumen back in the anti-oil crowd’s good books thus allowing construction of pipelines.
While only Keystone XL is officially dead until there is a change in the White House, Energy East, Trans Mountain and Northern Gateway are no closer to construction than they were six months ago. At a press conference following the vote Premier Notley vowed to hit the road thus summer lobbying for pipe now she has demonstrated Alberta and its oil should be viewed differently. The most obvious target is Kinder Morgan’s Trans Mountain expansion to Burnaby. It has recently received conditional National Energy Board approval but faces intense opposition from the likes of the mayor of Vancouver who is to prepared to say just about anything to prevent construction.
But while the foregoing is allegedly intended to achieve market access, the other question is what are you going to put in the pipe if and when it is built? Wildfires and oilsands output notwithstanding, Canadian light oil and natural gas liquids is already down over 100,000 b/d from last year according to the June 7 weekly report from ARC Financial Corporation. Crude-by-rail terminals are being mothballed. There are no new major oilsands projects planned once the current construction is completed. More articles are appearing questioning whether new pipelines are even necessary given the major drop in investment in Canada.
This may continue even if oil prices rise. People are looking at the Canadian oil industry from a global perspective and don’t like what they see. In a column in the Financial Post June 3 titled, “Why Canada will likely be the last to benefit from oil’s recent price rebound”, several observers noted Canada and Alberta’s policy changes on corporate, personal and carbon taxation were not going unnoticed around the world. Respected Calgary lawyer and corporate director John Brussa said, “Capital will return to the sector (globally), but Canada will be last. It will probably return to the U.S. first. We are not perceived as being terribly friendly towards the industry. The United States approved a number of LNG projects. We can’t even approve one. We can’t get a pipeline to tidewater. Everything seems to take so long here. Unless we send out some signals that we are a good place to invest, it’s going to be harder”.
Another junior oil company CEO said, “We are only going to have Canadian domestic capital to re-invest in the industry, and that is not enough. I think the serious money is going to go elsewhere. The political environment here is too uncertain”.
Where would the money go? The chart below shows the world’s top 10 oil producing countries as of February 2016. These countries produced 62 million barrels per day (b/d) in February of this year, nearly two-thirds of the world’s total output. Canada is number five and is highlighted in green.
While Canada and Alberta have changed their policies and views about oil production, so have several of the other nine countries. Canada was unique for years for political stability, open borders, economic opportunity and massive undeveloped reserves. Canada now has competition. The United States has demonstrated large geological opportunity through shale gas and light tight oil and is now exporting both LNG and crude oil. China, Iraq, Iran and Mexico are inviting foreign capital for oil development into their countries, some for the first time in decades. For oil service providers the five Middle Eastern countries – Saudi Arabia, Iraq, U.A.E., Iran and Kuwait – look compelling as they drill aggressively to sustain production. Many Canadian service operators are trying hard to get more gear into these markets.
Not one of the other of the world’s top ten oil producers has introduced a large emitter carbon tax like Alberta or are specifically taxing carbon fuels to subsidize and/or encourage the development of non-carbon supplies. The United States has approved the development of thousands of kilometers of new pipe while Canada studies them for years and battles. Rest assured if any of these other nine countries had large, undeveloped supplies of crude that need pipe to tidewater to monetize, pipelines would get built.
What makes carbon fuel development so compelling? It is profitable. Coal, crude oil and natural gas are high energy content fuels which can be produced and sold at prices far higher than their cost of production. They support the economy through wealth creation, jobs and gobs of taxes. Of the 10 countries listed seven are almost entirely economically dependent on oil production. In Canada oil is also most important than many understood as skyrocketing deficits in Edmonton and Ottawa are demonstrating.
Finally, WTI is again back on the right side of US$50 a barrel partially because demand is growing. In a recent speech in Toronto oil guru Daniel Yergin of IHS CERA figured oil markets have turned and global demand will grow by 5 to 6 million b/d in the next few years. This is still being driven by China and now India. Yergin figures by the end of the decade the world will be burning 100 million b/d, not 95. Canada’s nine big competitors will be drilling like crazy to maintain supplies. They will make up any shortfalls in Canadian crude output when it happens.
With world oil demand growing, Alberta and Canada’s bold financial commitments to fight climate change will have no measureable impact on total global carbon emissions until the rest of the world introduces similar policies. This isn’t denying the science behind man-made climate change. This is straight mathematics.
So as a major oil producer, Alberta and Canada are truly going it alone in the global war on carbon emissions. Premier Notley says this is what Albertans want. As people check their wallets, the value of their homes and the direction of their investment portfolios in the months and years ahead, we’ll see if this is true.
About David Yager – Yager Management Ltd.
Based in Calgary, Alberta, David Yager is a former oilfield services executive and the principle of Yager Management Ltd. Yager Management provides management consultancy services to the oilfield services industry in a number of areas including M&A, Strategic Planning, Restructuring and Marketing. He has been writing about the upstream oil and gas industry and energy policy and issues since 1979.
David Yager can be reached at Ph: 403.850.6088 Email: [email protected]