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Alberta

Why the oilsands’ weaknesses are turning into strengths

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From the MacDonald Laurier Institute

By Heather Exner-Pirot

Global oil prices are recovering from a multi-year bust

Few industrial projects have been more maligned than Canada’s oilsands. It has been called tar sands, a carbon bomb, the “dirtiest oil on the planet.” It’s suffered through the shale revolution, the COVID-19 shutdown, and a torrent of ESG (Environmental, Social and Governance) divestment. Its grade of heavy oil has been discounted and shunned.

But despite the challenges, things are coming up roses. In almost every aspect of the sector that has looked weak in the past decade—costs, grade, carbon intensity—the oilsands are coming on strong, and poised to provide unprecedented revenue streams for Canadian public coffers.

Oilsands are known as “unconventional” oil, which is extraction from anything other than traditional, vertical wells. In northern Alberta, the expansive hydrocarbon resources are in bitumen form, a molasses-like consistency too heavy to flow on its own. It takes a lot of capital and energy to turn the oilsands’ oil into a product that can be transported, refined and used by consumers.

For this reason, the oilsands were seen in the early 2010s as an expensive form of oil, with high up-front costs and a high break-even price: up to USD$75/barrel for new oilsands mines. This made it difficult to compete with cheaper American shale, which came online at scale at the same time as the oilsands, to great chagrin in Calgary.

However, global oil prices are recovering from a multi-year bust, and new “in-situ” extraction technologies have greatly reduced oilsands recovery costs. Break-even prices now average less than USD$40/barrel, and BMO Capital Markets assessed in September that the average oilsands producers could cover their capital budgets and base dividends at USD$46/barrel. By contrast the average large U.S. producer requires USD$53.50/barrel. For new shale wells outside of Texas last year, it was $69/barrel.

Another advantage is that oilsands are low-decline, which means they have decades of inventory, or oil available to be extracted. Shale oil sites have declined as high as 50 percent in the first year. While the oilsands reap the benefits of past investments, shale producers need to continuously drill and invest in new production. (But they haven’t been of late: the U.S. oil rig count has fallen 21 percent since December 2022, largely because of new well costs.)

Another challenge for the oilsands has been its grade: “heavy” or dense, and “sour” or high in sulfur. Light, sweet crudes are easier to refine and have historically sold at a premium. The difference can be stark: at its worst in 2018, West Texas Intermediate (WTI) oil sold for USD$57 a barrel, compared to just USD$11 for heavy Western Canada Select (WCS).

But heavy oil has qualities that are desirable, even necessary for some refined products. Whereas light crude is primarily made into fuels, heavy oil is advantageous for plastics, petrochemicals, other fuels, and road surfacing: things we will still need in a post-combustion, net-zero world. Many American refineries are configured to process heavy oil. Because the U.S. produces virtually none itself, they depend on cheap Canadian sources.

Geopolitical factors are also bolstering heavy and sour oil. Recent production cuts by OPEC+, designed to lift global oil prices, have limited supply of medium and heavy sour grades, which matches the kind of oil the Biden Administration released in its big Strategic Petroleum Reserve sell-off last year. This has brought higher prices for heavy, sour oil, more good news for the oilsands.

As for the oilsands’ biggest Achilles heel, its carbon intensity, this is another weakness turning into a strength. The oilsands are geographically concentrated, with a small number of facilities producing large amounts of emissions. This makes them far easier to decarbonize than conventional oil, which needs huge fleets of rigs creating hundreds of emissions sources in order to produce comparable amounts of oil. Seizing the opportunity, the major oilsands producers are working together on one of the biggest carbon capture projects in the world, building a 400-km CO₂ pipeline that could link over 20 CCS facilities with a carbon storage hub in northeast Alberta. Small modular reactors are another option being explored to reduce emissions. It’s not easy or cheap, but it’s possible to reach net zero, which producers plan to do by 2050.

All of this is not just good news for the oilsands, but for Albertans and Canadians as well. In 2022, royalties going into public coffers from oil and gas extraction hit a record $33.8 billion; that’s more than all royalties from 2016-20 combined. The boost comes not just from higher prices but from Alberta’s strategy to charge significantly higher royalties—up to 40 percent—from oilsands facilities whose upfront development costs have been paid off and revenues are exceeding operating expenses.

A large number of facilities have already reached this threshold, and more are added each year. This flexible new paradigm of permanently higher royalties helps governments moderate the budget rollercoaster of volatile oil prices: nine times more at $55/barrel, and four and half times more at $120/barrel. Next year, when the TMX pipeline adds more than half a million barrels a day of capacity from the oilsands to new markets, the value of royalties will also increase, along with corporate taxes.

Of course, the oilsands still face headwinds from Ottawa, none bigger than a proposal to reduce oil and gas emissions by 42 percent (from 2019 levels) by 2030. Although the oil and gas sector has invested heavily in emissions reductions, and greenhouse gas intensity per barrel fell 20 percent between 2009 and 2020, there is no way to meet the new target without cutting production. S&P Global estimates that 1.3 million barrels of daily output will need to be slashed, which would be an existential threat to the sector. Fortunately, the political tide in Canada is turning in such a way that the oilsands could hang on long enough to see friendlier policies.

Finally, the oilsands remain unloved by investors, although the tide has been turning with higher prices. Their enterprise multiple (EV/DACF), a standard valuation formula, is on average 5.8x as of September and was even lower in 2022. This is much lower than the S&P 500, which has averaged between 11 to 16x in the last few years. In Calgary this has been called the Ottawa penalty box: the only logical explanation for their low valuation seems to be the lack of confidence investors associate with the Canadian energy policy landscape. At any rate, oilsands companies are currently free cashflow machines and are rewarding the shareholders they do have with share buybacks.

After nearly a decade on their back foot, the oilsands have reason for optimism. Lots of people still love to hate them, but they’re starting to rack up some wins.

Heather Exner-Pirot is the director of energy, natural resources and environment at the Macdonald-Laurier Institute.

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Alberta

Energy sector will fuel Alberta economy and Canada’s exports for many years to come

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From the Fraser Institute

By Jock Finlayson

By any measure, Alberta is an energy powerhouse—within Canada, but also on a global scale. In 2023, it produced 85 per cent of Canada’s oil and three-fifths of the country’s natural gas. Most of Canada’s oil reserves are in Alberta, along with a majority of natural gas reserves. Alberta is the beating heart of the Canadian energy economy. And energy, in turn, accounts for one-quarter of Canada’s international exports.

Consider some key facts about the province’s energy landscape, as noted in the Alberta Energy Regulator’s (AER) 2023 annual report. Oil and natural gas production continued to rise (on a volume basis) in 2023, on the heels of steady increases over the preceding half decade. However, the dollar value of Alberta’s oil and gas production fell in 2023, as the surging prices recorded in 2022 following Russia’s invasion of Ukraine retreated. Capital spending in the province’s energy sector reached $30 billion in 2023, making it the leading driver of private-sector investment. And completion of the Trans Mountain pipeline expansion project has opened new offshore export avenues for Canada’s oil industry and should boost Alberta’s energy production and exports going forward.

In a world striving to address climate change, Alberta’s hydrocarbon-heavy energy sector faces challenges. At some point, the world may start to consume less oil and, later, less natural gas (in absolute terms). But such “peak” consumption hasn’t arrived yet, nor does it appear imminent. While the demand for certain refined petroleum products is trending down in some advanced economies, particularly in Europe, we should take a broader global perspective when assessing energy demand and supply trends.

Looking at the worldwide picture, Goldman Sachs’ 2024 global energy forecast predicts that “oil usage will increase through 2034” thanks to strong demand in emerging markets and growing production of petrochemicals that depend on oil as the principal feedstock. Global demand for natural gas (including LNG) will also continue to increase, particularly since natural gas is the least carbon-intensive fossil fuel and more of it is being traded in the form of liquefied natural gas (LNG).

Against this backdrop, there are reasons to be optimistic about the prospects for Alberta’s energy sector, particularly if the federal government dials back some of the economically destructive energy and climate policies adopted by the last government. According to the AER’s “base case” forecast, overall energy output will expand over the next 10 years. Oilsands output is projected to grow modestly; natural gas production will also rise, in part due to greater demand for Alberta’s upstream gas from LNG operators in British Columbia.

The AER’s forecast also points to a positive trajectory for capital spending across the province’s energy sector. The agency sees annual investment rising from almost $30 billion to $40 billion by 2033. Most of this takes place in the oil and gas industry, but “emerging” energy resources and projects aimed at climate mitigation are expected to represent a bigger slice of energy-related capital spending going forward.

Like many other oil and gas producing jurisdictions, Alberta must navigate the bumpy journey to a lower-carbon future. But the world is set to remain dependent on fossil fuels for decades to come. This suggests the energy sector will continue to underpin not only the Alberta economy but also Canada’s export portfolio for the foreseeable future.

Jock Finlayson

Senior Fellow, Fraser Institute
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Alberta

Owner sells gas for 80 cents per litre to show Albertans how low prices ‘could’ be

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Undoubtedly some of the motorists driving past The Whistle Stop Cafe at Mirror on Tuesday morning thought it was an April Fools prank.  It wasn’t.

Chris Scott, owner of the gas station at The Whistle Stop Cafe offered a one day promotion on April 1st. Scott sold 8000 litres of regular gasoline for $0.80/ litre.

The promotion was funded by Scott and the Alberta Prosperity Project.  In this video posted to his social media, Chris Scott explains why they did it.

www.albertaprosperityproject.com

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