No one out there needs reminding of how difficult it is to produce petroleum in Canada these days. The regulatory quagmire and relentless attacks from well-organized opponents are the most visible obstacles. Other impediments are equally frustrating, like, for example, the media’s refusal to comment on just how valuable natural gas is to BC at this very moment, and how oddly backwards it is for many to be condemning fossil fuels at the very moment they are in grave danger of not having them.
But what is hardest to take in one sense, is the relentless tide of poor information emanating from otherwise credible sources, the third-rate pseudo-analyses that flow effortlessly providing mountains of faulty reference points for petroleum’s opponents. Producers are forced to watch commentators on the national media scene pontificate on things from afar, things they clearly don’t understand very well at all.
Last week the Globe and Mail served up a heaping shovelful of such detritus. In a piece entitled “Record low Canadian crude price is a clue that oil sands’ best days are past,” the paper grunted its way through a damaging and ignorant opinion piece, adding fuel to a completely unnecessary fire.
The gist of the article is twofold: that the oil sands are a high cost source that cannot compete globally, and that climate regulations are making the oil sands deposits undevelopable. The author concludes that the oil sands’ best days are in the rear-view mirror, primarily because of the shale revolution and greenhouse gas emissions.
There isn’t time or space to wade through every confused point, but a few will suffice. To support his view of the oil sands, the author talks about oil fetching $14 per barrel, then notes “At today’s prices, no one wants to extract the heavy oil buried deep in the ground.” At $14 per barrel, no one would want to extract any barrels from the ground, anywhere on earth. We saw this several years ago, when global oil investment slowed dramatically as WTI slid below $40 per barrel.
The author points to the exodus of a handful of major oil companies as proof that the oil sands are uncompetitive. This is the same argument that climate warriors use, with a similar level of incomprehension. From the article: “Canada finds itself in the unenviable position of being the high cost producer in a world awash in oil… Many large foreign players apparently saw the future, and have already fled, unloading billions of dollars in Canadian oil sands assets.” These sentences are back to back, and the author clearly links the concepts, that the big players that left did so because it was the world’s most expensive oil.
The whole argument about “high-costs of production” is a red herring that economists drag out as if the world is a simplified text book example. The price of production is quite well understood by producers long before multi-billion dollar projects get off the drawing board; the bet is on whether prices will be sufficient to provide a decent return. In fact, low natural gas prices have helped lower the cost structure where that is a significant component. When oil prices collapsed in late 2014, the entire world saw their returns drop to insufficient levels, which is why capital investment dropped so precipitously everywhere. There are almost no fields in the world that attract capital investment at $30 or $40 per barrel. What producers had a right to expect was that they would be able to get paid competitive prices for their products.
The author wraps up his pricing section with something so asinine it hurts to repeat, but if I had to suffer then so do you: “…the oil sands, located far from consumers, is condemned to the role of price-taker in this uncertain energy market.” There is not a barrel of oil produced anywhere that is not condemned to be a price-taker, and as far as northern Alberta being a price taker because of its remote location…where would one even start analyzing that? Perhaps by pointing out Alaska, Russia, Angola, offshore Brazil, Nigeria, and such on a globe? Should the author not show some respect for the paper’s name and have a look at one periodically? Or is the reference to price-taker a mocking reference to our inability to connect oil sands production with those not-so-far-away consumers?
And one last point on the subject of ‘oil majors fleeing’: the largest sale was by Shell, who has a massive divestment program underway due to its BG acquisition. As Shell went through its portfolio to decide which to sell, what do you think their thought process was – shall we sell this because costs are higher than other fields, or shall we sell it because we can’t even get the damned product to market? If the oil sands were simply no longer economic, there would have been no bids for the properties (a phenomenon which any producer in Canada can describe in eloquent detail). As it is, one of the smartest and shrewdest operators on the planet, CNRL, stepped in and bought billions worth of oil sands properties. Perhaps the G&M reporter knows something CNRL doesn’t? Oh please please, pen a piece on that!
On to the next booby trap for the uneducated: the author claims that the world is “awash in oil” due to the US shale revolution. ‘Awash in oil’ became a famous phrase when The Economist magazine used it in 1999 (actually they used “drowning in oil,” but same intent and lack of understanding), which you may recall was immediately before the price of oil increased from $15 per barrel to well over $100. The Globe author is about 3 years behind the times, because the world can now see that the US produces about 10-12 percent of global requirements (and shale’s contribution is only a part of that). The world is in no way awash in oil. Due to global declines, the world is actually facing a massive petroleum investment shortfall that the US shale deposits have no hope of overcoming. One would think the world is ‘awash in oil’ only if they read last week’s oil storage report, where a miss in the market’s weekly estimate of global oil stocks by 0.01 percent sent market commentators into an unintelligible frenzy as they tried to explain it.
Ugh, I can’t handle it anymore. Read it yourself if you want. The point, and the problem, is this: The Globe and Mail is one of the country’s most widely read news sources. Articles like the oil sands one will float around the world effortlessly, and become part of the lexicon. The fact that the story is nonsense is irrelevant; The Globe and Mail has been around for a hundred years, and sheer inertia gives the story the big stage and credibility.
Refuting the article’s sophomoric points is not rocket science, but few will do so, and then it will be too late anyway. The damage is done. It is left to energy publications like the BOE Report to set the record straight, which is why advocacy is important. We need to speak directly to the general population to explain our industry, because if the population relies on analysis like the G&M piece, the industry will surely die a death it didn’t have to.
Should more Canadians read this article? Click here to visit the BOE Report Advocacy section to see how you can help spread the word.