A dire outlook for tar-sands oil, and low prices aren’t the only reason

The economic struggles of Canadian tar-sands operations have been in the news for more than a year now.

The economic struggles of Canadian tar-sands operations have been in the news for more than a year now, with falling prices and rising supplies making it increasingly difficult to turn a profit on the world’s dirtiest and most difficult source of petroleum.

But the last few days have brought a spate of reports that struck me as unusually dire in their outlook for a business that had seemed invulnerable for so long.

Perhaps you saw the headline in Tuesday’s New York Times: “Oil Sands Boom Dries Up in Alberta, Taking Thousands of Jobs With It,” on a report from Fort McMurray by Ian Austen:

At a camp for oil workers here, a collection of 16 three-story buildings that once housed 2,000 workers sits empty. A parking lot at a neighboring camp is now dotted with abandoned cars. With oil prices falling precipitously, capital-intensive projects rooted in the heavy crude mined from Alberta’s oil sands are losing money, contributing to the loss of about 35,000 energy industry jobs across the province.

Yet Alberta Highway 63, the major artery connecting Northern Alberta’s oil sands with the rest of the country, still buzzes with traffic. Tractor-trailers hauling loads that resemble rolling petrochemical plants parade past fleets of buses used to shuttle workers. Most vehicles carry “buggy whips” — bright orange pennants attached to tall spring-loaded wands — to help prevent them from being run over by the 1.6-million-pound dump trucks used in the oil sands mines …

After an extraordinary boom that attracted many of the world’s largest energy companies and about $200 billion worth of investments to oil sands development over the last 15 years, the industry is in a state of financial stasis, and navigating the decline has proved challenging. Pipeline plans that would create new export markets, including Keystone XL, have been hampered by environmental concerns and political opposition. The hazy outlook is creating turmoil in a province and a country that has become dependent on the energy business.

Austen’s piece was comparatively optimistic, noting as it did that construction continues in the oil patch because investors have sunk so many billions that abandonment isn’t an option.

But every other cost-cutting measure apparently is on the table, according to a Bloomberg article in Toronto’s Globe and Mail on Wednesday. Excerpts:

Holiday parties, child-care benefits and Fridays off are being targeted as the rout in crude prices grinds into its 16th month, workers and company representatives say …

ConocoPhillips, which is cutting 500 workers in Canada this year, removed complimentary juice and soda from fridges in Calgary and cancelled personal development benefits of as much as $1,500 a year that some workers used for sports training.

Cenovus Energy Inc. is weighing whether to end the practice of employees getting two Fridays off a month. The company already reduced its travel and training budgets and has eliminated 1,340 jobs.

Tobias Read, chief executive officer of staffing consultant Swift Worldwide Resources, said retirement and child-care benefits and social events are also being scaled back along with social events, as companies offer unpaid leave and work-share programs on top of salary reductions and job cuts.

Cutting to the credits, the Financial Post’s Claudia Cattaneo opined on Wednesday that “Canada’s days as a would-be energy super-power are over” and falling world prices provided “just the final straw, albeit a painful one.”

Like many observers of Canadian politics, she expects Stephen Harper’s Conservative Party to be punished at the polls next Monday for its steadfast backing of “oil and gas at the expense of other industries and causing a recession in the process.”

Even if the party manages to hold on to power in Monday’s national elections, she says, the political will to defend the tar sands will have been weakened considerably (the Tories have already been tossed out in Alberta).

The national will isn’t there, either. Parochial, environmental and Aboriginal groups opposed to building the infrastructure essential for oil and gas exports have drowned reasonable voices and are getting their way. The Canadian energy strategy produced by provincial premiers this summer is a measure of what politicians are willing to support: a mishmash of ideas to appease all interests, and not a single mention of the oil sands.

Frustrated investors have moved on. New technology has unlocked massive deposits of shale gas and tight oil (particularly in the United States) that are better suited to respond to increased pricing volatility than Canada’s expensive oil sands or liquefied-natural-gas projects that need everyone’s permission to get done.

“The Canadian energy business has nowhere to go,” says Terry Shaunessy, president of Shaunessy Investment Counsel, a money management firm in Calgary that has moved all its investments outside the country. “What did we learn? That energy is not a particularly scarce resource; it’s actually everywhere.”

The best outlook for Canada’s oil and gas sector, Cattaneo feels, is to survive the current contraction as “a mid-sized regional supplier dependent on the U.S.,” where “new technology has unlocked massive deposits of shale gas and tight oil that are better suited to respond to increased pricing volatility.”

Indeed, Canada’s exploitation of oil reserves previously considered uneconomic may have converted its southerly neighbor from a prime customer to a rival supplier, according to Gordon Jaremko of Natural Gas Intelligence/Shale Daily. In a piece published last Friday, he laid out the resulting impact for Canada:

On the eve of the shale revolution — in the government fiscal year of April 1, 2005, to March 31, 2006 — Alberta treasury resource revenues hit C$14.4 billion (US$11 billion). The gravy included C$8.3 billion (US$6.4 billion) in natural gas royalties alone, plus C$3.4 billion (US$2.6 billion) from gas and oil lease auctions.

For the current 2015-2016 fiscal term the treasury take is forecast to be down from the 2005-2006 peak by 75% to C$3.6 billion (US$2.8 billion). Gas royalties have all but vanished by shrinking to C$392 million (US$302 million). Lease auctions, a barometer of industry intentions, have also shriveled to C$157 million (US$121 million). Growing oilsands plants, recognized as high-cost producers by royalties that apply only to after-expenses profits, will not offset the losses.

An unnamed Canadian oil executive/investor quoted in The Times piece predicted that higher prices won’t be enough to shore up the Alberta operations for a future that’s likely to feature stricter environmental controls and demands for larger royalty payments on production.

“There’s never been a time when I’ve been less optimistic,” he said. “The general public doesn’t know how bad it is. It just hasn’t hit yet.”

He did, however, acknowledge that environmentalists had won the debate on Keystone XL as well as various other pipeline plans. “I don’t know how the issue got away, but it’s obvious now that it did,” he said.

Comments (6)

  1. Submitted by Ray Schoch on 10/15/2015 - 10:35 am.

    Maybe it’s time

    …for our near northern neighbors to demonstrate a kind of creativity that Americans have so far failed to do, and that’s devise working, creative solutions to the problem(s) of energy development and use. Tesla and the Chevy Volt notwithstanding, we’re still pretty much addicted to the automobile and its internal combustion engine, as exemplified by continued reliance on auto-dependent patterns of development for both residential and commercial use. As an old street racer, I hate to see the well-tuned gasoline engine pass from the scene, but that seems to be what’s coming over the horizon. Much the same could be said of coal, which we have in abundance, but which pollutes in ways and scale similar to oil. Energy extraction industries in general ought to be – and some of them are – investing in alternatives so that they can hit the ground running when the tipping point for energy sources finally gets here. Given who’s likely to be running the show, we should expect the same sort of price-gouging in alternative energy sources that we’ve experienced with oil, gas and coal.

  2. Submitted by Neal Rovick on 10/15/2015 - 10:48 am.

    It all depends on how deep the puddle of oil is under Saudi Arabia and how long their government is happy borrowing money to run their country.

  3. Submitted by Fred Marx on 10/15/2015 - 12:40 pm.

    Nicely done piece; context

    Cool-headed reasoning (and reporting) has been largely missing from the Tar Sands/KXL discussion. TS oil is highly cost-inefficient compared to other extraction methods. It’s harder and much more expensive to transport by any method, especially pipeline. It’s costlier to refine due to its innate impurities coupled with added emollients to make transport possible.

    All of this to say that Tar Sands oil doesn’t work as a business model if market prices aren’t high enough. And none of this touches the environmental factors inherent with the process.

    Which brings me to a point which, I think, has been entirely forgotten. The KXL “issue” began as expressions of concern by decidedly Republican Nebraskan landowners to their Republican Governor who conveyed same to the EPA and White House. Their concern was for the risk of a pipeline breach to the shallow aquifer supplying water to cattle and crops.

    Immediately, the issue was appropriated by the left/environmentalists and many Democrats. This, of course, caused the right/capitalists/Fox News to take the opposing view. Roles thusly assigned, it has been an entirely political football since. American oil export law, environmental stewardship, and simple logic be damned, it’s been all-politics since 2008.

    Glad to see the whole thing collapse even if at the hands of the heartless world economy.

    • Submitted by Bill Willy on 10/15/2015 - 03:45 pm.

      Good point

      This issue SHOULD be way more bi-partisan than it has been (and remains), and this aspect of it — financial cratering — ought to be the aspect that begins to pry “conservatives” off the “Drill baby, drill!” bandwagon… As many people have been saying for a long time, underneath it all, the modern-day equivalent of the whale oil industry is a losing economic proposition. And what could be a more “conservative” issue (or motivation) than that?

      No idea if that will manifest itself widely, but if it did we MIGHT find ourselves surprised to find the “crazy environmentalist” proponents of “renewable, sustainable resource utilization” on one end of the spectrum in agreement and cahoots with those adverse to losing big chunks of (their) money on losing propositions on the other.

  4. Submitted by Jeffrey McIntyre on 10/16/2015 - 06:31 am.

    On the bright side

    What a wonderful landscape they will be leaving behind….

  5. Submitted by Robert Moffitt on 10/16/2015 - 09:44 am.

    Take a good look, Minnesotans

    This is where your gasoline, diesel fuel and jet fuel is coming from. All the more reason to keep building up the infrastructure and use of non-petroleum transportation fuels.

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