Oil sands bust

2/6/2013

Prime Minister Stephen Harper first dubbed Canada an “emerging energy superpower” back in 2006. He was talking, primarily, about Alberta’s oil sands. “We are a stable, reliable producer in a volatile, unpredictable world,” he said, sending a clear signal that Ottawa intended to realize the oil sands’ full economic potential, as well as the geopolitical clout that comes along with it.

It was music to Albertans’ ears. With the world’s third-largest proven crude oil reserves, some 175 billion barrels, behind Saudi Arabia and Venezuela, the province had long been aware it was sitting on a gold mine. All that was needed were global oil prices above US$80 a barrel (needed to offset the expense of separating gooey bitumen from the sandy soil) and the necessary political vision to make it all happen. Canada finally had both. Industry forecasts predicted that, over the next quarter-century, the oil sands would draw more than $364 billion in investment, create some 3.2 million “person-years” of employment and add $1.7 trillion to Canada’s GDP.

More than six years later, however, Canada’s superpower dreams are mired in a host of unexpected problems—economic, logistical and political—none of which will be easily solved. Bitumen is still being squeezed from the ground at a rate of 1.7 million barrels per day and growing. But it’s no longer clear how oil companies plan to deliver all that heavy crude, which they once estimated would reach 3.7 million barrels per day by 2021, to refineries and, ultimately, the motoring public.

Existing pipelines in the region are running near capacity and efforts to build new ones have stalled amid protests from anti-oil sands groups who are concerned about the elevated greenhouse gas emissions associated with oil sands production. TransCanada Corp.’s $7-billion Keystone XL pipeline, which would link Alberta with refineries in Texas, fell prey to U.S. President Barack Obama’s re-election bid, while Enbridge Inc.’s $6-billion Northern Gateway, needed to pump oil to a shipping terminal on the B.C. coast, faces opposition from the green lobby, dozens of First Nations groups, and is the subject of a political standoff between two provincial premiers. Some oil sands producers have resorted to shipping their crude on railcars, a decidedly 19th-century solution, while entrepreneurs are proposing fanciful plans to move it through the Arctic or build heavy refineries on the lush B.C. coast.

The battle over pipelines comes as the United States, which imports roughly 1.4 million barrels of crude oil from Alberta every day, is suddenly swamped with its own oil from unconventional sources like the Bakken shale formation in North Dakota. A recent forecast by the International Energy Agency said the U.S. is on track to become the world’s biggest oil producer by 2020, overtaking Saudi Arabia. New supplies, in turn, have depressed U.S. prices paid to oil sands producers. Meanwhile, demand from countries in Asia is soaring, but there is currently no good way to move the landlocked hydrocarbons overseas. To add insult to injury, refineries along the U.S. Gulf Coast, tantalizingly out of reach to oil sands firms, are running under capacity.

It’s shaping up to be a nightmare scenario. Global demand for oil has never been higher and yet oil sands producers are forced to sell their product on the cheap. Already some analysts estimate oil sands producers are forgoing more than $27 million a day in potential revenue, causing companies to delay proposed projects and dial back planned investments. Alberta Premier Alison Redford has even warned of a “bitumen bubble” that threatens to siphon $6 billion in tax and royalty revenue from the province’s coffers in the coming fiscal year. “We’re at a critical point right now,” says Geoff Hill, who leads consulting firm Deloitte’s oil and gas group in Calgary. He argues that if something isn’t done soon, the industry could face the unthinkable: “substantial slowdowns in the oil sands.” Other countries will rush to supply the rapidly expanding economies of China and India while the U.S. will increasingly be capable of meeting its own energy needs. Forget about being an energy superpower, Hill says. “We could end up on the outside looking in.”

The industry’s current predicament would have seemed unimaginable just a few decades ago. Back in the 1970s, Alberta was anticipating a major production boom as oil prices soared amid the global energy crisis. But the industry quickly found itself thwarted by Ottawa’s hated National Energy Program, which drove away investment. Then came the oil bust of the 1980s. Prices fell and most oil sands operations became unprofitable. By the 1990s, however, after so many long years of frustration, global oil prices began to recover. And by the turn of the century, the industry, now armed with the latest steam-assisted technologies to drill oil sands bitumen in-situ, was once again on a full boil.

Few would have guessed that a relatively common piece of infrastructure—the lowly pipeline—would threaten to derail Alberta’s oil dreams all over again.

The epicentre of the current crisis is the small town of Cushing, Okla. Cushing is a major U.S. oil storage hub and self-proclaimed “pipeline crossroads of the world.” But in recent years it has become clogged with oil flowing not only from Canada, but from shale formations in the U.S., where new techniques like hydraulic fracturing, or “fracking,” are used to coax oil from rock. The glut has led to a bizarre situation where the price of oil in the U.S., measured against the West Texas Intermediate benchmark, or WTI, is just $96 a barrel, while the price paid almost everywhere else in the world is closer to $114.

(Macleans)