Writing on the Wall for Energy Production
The oil sands were supposed to be the key to a prosperous economic future for Canada. How quickly things change!
Just a few years ago, Alberta’s oil sands were the great hope for Canada’s economic future. A 2013 report from the National Energy Board projected that oil sands production would more than double from about two million barrels a day in 2010 to five million by 2035. Projections from the Canadian Association of Petroleum Producers and the Alberta Energy Regulator were 15 per cent higher, or almost six million barrels daily.
Our heavy oil was going to be the key to making North America self-sufficient in energy. The report concluded that Canadian energy production would “grow substantially” in the future, with oil sands production making up the majority of the increase.
Specifically, the NEB forecast that between 2012 and 2022, the average annual production growth rate for in situ oil sands projects would be 8 per cent. For bitumen mining projects it would be 6 per cent. After that, the growth rate would start to tail off.
There was just one slight flaw in the projections. They were based on the assumption oil would be selling for US$110 a barrel by 2035, in 2012 dollars. At a 2 per cent inflation rate, that would work out to a price of about $173 a barrel in 2035 dollars. Not many people would predict that today.
We’re living in a new era – one veteran analyst described it to me as the first truly free market in oil since the start of the Second World War. During the immediate post-war years, the so-called “Seven Sisters” dominated the oil market. These seven giant energy firms, which included Gulf, what is now BP, Texaco, Shell, and three Standard Oil companies, formed an effective global cartel that set prices and controlled supply until the early 1970s.
It was succeeded in power and influence by the Organization of Petroleum Exporting Countries (OPEC), a consortium of 13 sovereign states led by Saudi Arabia. OPEC’s mission statement is “to coordinate and unify the petroleum policies of its member countries and ensure the stabilization of oil markets, in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers, and a fair return on capital for those investing in the petroleum industry.”
It was able to achieve those objectives for a long time by setting production targets for members. But as production grew from non-OPEC members like Great Britain, Norway, Russia, Canada, and the U.S., the cartel’s ability to control prices and supply eroded. In the fall of 2014, it effectively abdicated its role as price setter, opening up the free-for-all we are now experiencing.
In theory, the OPEC countries could try to reassert pricing power by voluntarily limiting production. But there appears to be no political will to do so at present and the rise of the shale oil industry in the U.S. has complicated that scenario. Some shale production is now being shut down as unprofitable. But if OPEC cut output and prices rose, the shale producers would be back in business.
Against this backdrop, it is difficult to envisage a resurrection for an oil sands growth scenario any time soon. Of course, unexpected events could change that view, such as a major war in the Middle East that resulted in the widespread destruction of oil facilities. But as of right now, things look bleak for Alberta’s once great hope.
One of Canada’s largest companies has seen the writing on the wall and has announced a major shift in priorities. Al Monaco, CEO of pipeline giant Enbridge Inc., said that the firm will no longer primarily look to the oil sands for future growth potential but instead will increase its focus on natural gas and renewable energy with investments of $1 billion annually.