Contributed by Robert Lyman © 2019
Robert Lyman is an Ottawa energy policy consultant, former public servant and diplomat. His full bio is here.
On September 4, 2019, the CBC posted an online article written by Andrew Leach that claimed that “some politicians and industry representatives” are misrepresenting the real issues facing the oil sands sector. I have seen no public response from the real experts in the Canadian oil industry, leading me to wonder (for the thousandth time) why the industry refuses publicly to defend itself against its detractors. Failing that, and acknowledging that my knowledge is that of an outsider (like Mr. Leach), I would like to provide some factual and contextual information that calls some of his conclusions into question.
Andrew Leach argued that the Canadian oil sands are affected by four main “issues”:
- The sustained decline in global crude oil price outlooks since 2014
- Constrained market access and the related uncertainty
- The global reduction in oil investment and the shift toward short-cycle investments
- Climate change “pressures”; specifically, the alleged movement to global decarbonization
Let us examine each one of these.
Crude Oil Outlook
Leach observes, correctly, that oil sands investment is based less on what oil prices are today than on what they are expected to be over the life of the project. He notes that international oil prices declined significantly in 2015 and that the U.S. Energy Information Administration (EIA) has reduced its long-term forecast of crude oil prices in 2040 from US $230 per barrel to US $165 per barrel.
So far, so good, except that he forgot to mention a few things about crude oil markets.
One is that global crude oil demand is rising. In fact, since 2012, global crude oil demand has risen at the annual average rate of over one million barrels per day per year. This is the fastest and most sustained period of growth in history. In 2019, global oil demand is over 100 million barrels per day, its highest level in history. According to the EIA and other major sources of oil market analysis, that growth will not end any time soon, although it may slow due to global economic trends.
Second, no one knows or ever has known with any confidence where international crude oil prices are heading. This much must be obvious to anyone who has followed trends in prices since 1973. Too much is unknown on both the supply and demand sides. Since 2015, there has been a decline in global investment in upstream oil and gas. According to the International Energy Agency, actual investment declined from about US $820 billion in 2014 to about US $450 billion in 2016, before slightly increasing to about US $480 billion in 2018. Even though upstream industry costs have also declined, the reduction in prices has very much affected investment in both conventional and unconventional oil and gas exploration and development, except for oil shale development, and that mainly in the United States. The reduced investment in conventional and unconventional supply development, however, carries a risk, also noted by the IEA. The risk (or opportunity, depending on one’s perspective) is that, with continuing rapid growth in oil and natural gas demand, the world may well enter a period in the 2020’s when demand exceeds the available supply, and the imbalance causes a sharp upward spike in oil prices. Prices will almost certainly rise from today’s levels, but no one knows how far or how fast. Volatility breeds volatility.
Constrained Market Access
Andrew Leach acknowledges that lack of pipeline access has affected confidence in Canadian oil sands investments. He neglects to mention that it has also sharply reduced the returns to producers and to provincial governments. Both the Fraser Institute and the Royal Bank of Canada estimated that lack of pipeline access cost Canadian oil producers over $20 billion in 2018.
He wrote that, “It’s an open question what industry or political leaders can do to get pipeline built.” Really? Does he forget that the Trudeau government, through its political and regulatory decisions, killed the Northern Gateway Pipeline Project and the Energy East Pipeline Project and has added years of delay to the review of the Trans Mountain Expansion Project? Has he not heard of Bill C-69, that ended the longstanding independent and professional review of pipeline proposals by the National Energy Board and instituted in its place a two-part review, the first element of which will be a “review in principle” based on partisan considerations? Did he miss the statement by the Commission that recommended the changes to the NEB Act that, during the first phase review, climate policy and aboriginal “reconciliation” considerations should be preeminent? Perhaps he forgot to read the recent decision of the Federal Court of Appeal, in Raincoast Conservation Foundation v. Canada (Attorney General). Faced with claims that, among other things, the federal government had failed to consult adequately, the Government of Canada took no position for or against the motions of the project opponents, and offered no evidence, leaving Justice Stratas with no option but to conclude that the legal analysis could proceed no further. If Andrew Leach had been paying attention, he would know very well that there is much that the Trudeau government could have done to get pipelines built, and it has consistently failed to do so.
In passing, Andrew Leach casts doubt on claims that carbon prices are “at fault” in the declining investment rates in oil sands. For this, he offers as evidence that Suncor had average costs of 20 cents per barrel from “carbon policies in Alberta”, and that under the Alberta regime an oil sands plant could potentially “see revenues, not costs” from the sale of carbon credits.
There are a few points he neglected to mention, the most important of which is that, as he noted at the start, it is long-term costs as well as prices that determine investment intentions. The carbon tax rate in Alberta is now $30 per tonne, but it will rise to $50 per tonne by 2022 under the federal backstop regime, and (contrary to Minister McKenna’s statements) is almost certainly going to rise to over $100 per tonne by 2030, assuming a continuation of present policies. Oil producers in other countries will not face those costs. Further, the potential to earn carbon credits, under the federal output-based pricing system, depends on a plant having the ability to reduce emissions intensity to lower than the rate prescribed by Environment and Climate Chance Canada; there are no guarantees that oil sands firms will benefit from such credits.
Global Investment Trends
Andrew Leach notes correctly that, as oil prices have declined, investment has shifted towards projects with shorter life cycles, and this is bad news for capital intensive and long-cycle oil sands projects.
Unfortunately, he does not add much context. That context is provided by the previously-referenced IEA World Energy Investment 2019 report. Notably, it found:
- “Energy supply spending has shifted broadly towards projects with shorter lead times, partly reflecting investor preferences for better managing capital at risk amid uncertainties over the future direction of the energy system.”
- In 2018, “a 4% rise in upstream oil and gas spending was underpinned by a higher oil price, and a shift to shorter-cycle projects and shale. Spending plans for 2019 point to a potential new wave of conventional projects; for the moment, project approvals are below the level needed to match robust demand.”
- Capital costs in upstream oil and gas are about 19% below where they were in 2010, on an inflation-adjusted basis.
- The main upstream investment trend since 2014 has been a shift in spending towards shale (tight oil and shale gas) in the United States. The signs in 2019 are that the fastest growth in upstream investment will be in conventional projects rather than in shale.
- “The oil and gas industry is increasingly relying on assets that generate cash flow more quickly but also that deplete at a more rapid pace. This could increase the possibility of market volatility.”
- Since mid-2016, the majors have enhanced their financial conditions due to a combination of higher oil prices, improvements in operational efficiency and cost reductions. In 2018, free cash flow reached almost US $90 billion, a level not seen since 2008.
Thus, while there has been a shift towards shorter-cycle investments, the oil industry is sitting on a very large cash balance available to invest once the “future direction of the energy system” becomes clearer.
Climate Policy “Pressures” and Decarbonization
Andrew Leach quotes from Shell’s 2018 Sustainability Report as though it were indicative of the intentions of the international petroleum industry. He also cites the views of the Carbon Disclosure Project, an environmental group that seeks, in effect, to bully institutional investors and shareholders in fossil fuel companies to change their investment habits.
There is no question that there is a well-funded international campaign, partly backed by influential financial institutions, to discourage investment in the oil and gas industry. Is it working? I recently wrote an article on this subject, which interested readers can see here:
The more fundamental and empirically-testable thesis is whether the world is “decarbonizing” at the rate advocated by those who claim that humans are causing catastrophic global warming. Using the data from the British Petroleum Statistical Review of World Energy 2019 and the United Nations, we know that:
- In 2018, fossil fuels (coal, oil and natural gas) constituted 84% of global primary energy demand.
- The share held by fossil fuels has declined at the rate of 1% per decade since 1990.
- Despite trillions of dollars in government subsidies and mandated ratepayer costs, renewable energy constitutes only 4% of global primary energy demand.
- Greenhouse gas (GHG) emissions from energy use rose by 3.4 billion tonnes per year from 2008 to 2018. Emissions grew by 2% in 2018, double the annual average rate of the previous decade.
- The non-OECD (i.e. developing) countries produced all of the emissions growth. By 2018, they produced 63% of the global total.
- The ten largest emitters in the world, in order, are: China, the United States, the European Union, India, Russia, Japan, South Korea, Iran, Saudi Arabia, and Canada. None of the largest emitters, except the EU, is on track to meet the emissions targets they set for themselves for 2030. This makes it highly likely that global emissions in 2030 will be well above, not below, those today.
In other words, based on current trends, the UN’s goals will not be met. There is no “global decarbonization transition” occurring, at least not in the timeframe that the advocates favour.
The “uncertainties about the future direction of the global energy system’ that are impairing investment in Canada’s oil sands are not primarily driven by market trends. They are driven by the undue political influence of decarbonization advocates, who are prepared to sacrifice economic prosperity to suit their vision of how fast the world’s energy system should change. The facts show that the energy consumers of the world are not following that vision, but it does not prevent the advocates from doing great harm to one of Canada’s most important resource industries.
It is unfortunate when Canadian journalists, and the national broadcaster, act as apologists for decarbonization advocates, rather than supporters of Canada’s economy.
 World Energy Investment 2019, International Energy Agency, Paris.
 Arend Hoekstra and Thomas Isaac, Was Canada’s Defence in Raincoast Conservation v. Canada (Attorney General) Consistent with the Purpose of the NEB Act?, Cassels Brock, September 10, 2019