Where is Alberta, Canada headed?

[Jan van Eck + 7,558]

The Canadian Province of Alberta remains in a real pickle.  Its energy extraction sector is in a state of collapse, and the two big customers for its tar-sands oils, the USA and China, are taking less than the industry can supply - by a wide margin.  Some of the blame is laid at lack of pipeline capacity.  More, I think is demand destruction, and politics (in the case of China).  The new Provincial Government of Jason Kenney and the Conservatives is placing its bets and its hopes on a stimulus spending plan, which you can see here:  https://www.alberta.ca/recovery-plan.aspx

The assumption remains, however, that the oil sector will continue to be the big wealth generator - exporting crude, and upgraded crude.  I am not so sure.  The world is awash in oil, and from what I can make of it, nobody really needs the Canadian resource.  It is expensive to extract, and expensive to convert to gasoline and diesel - seemingly, a lot more expensive than US shale oil.  Alberta is attempting to stimulate other sectors, including tourism (always a big draw in the Rockies), and timber (by waiving or postponing the "stumpage fee," or timber extraction tax). You do have to give the new government credit: they are taking immediate steps to address the economic collapse of the province. 

It is my view that Alberta is missing its best bet: selling its oil into a closed, protected market, specifically, Canada itself.  As the Canadian currency continues to slide downwards, the exchange rate makes their export products, including raw oil and refined, more competitive, somewhat offsetting the issues of remoteness from markets and lack of pipe.  Now, "if" Canada created a closed market, just as they do with maple syrup, then Eastern Canada (Ontario and Quebec) would be obliged to purchase Alberta feedstock for their refineries.  Crude-by-rail would service the big Irving refinery in St. John, New Brunswick, and the eastern Maritime Provinces would presumably rely on offshore Newfoundland oil.   Yet this solution does not seem to surface within Canada itself. 

I invite readers to chime in on where they see this going. 

Edited July 2, 2020 by Jan van Eck
scrivener error

[Enthalpic + 1,496]

Kenny is a dolt; his "budgets" that looked bit better on paper at first are based on ridiculously high oil prices that won't happen. 

Alberta is probably going to suffer for a while now because of decades of mismanagement and putting way to much focus on oil.  The conservatives failed to diversify the economy when we were rolling in extra cash. 

Forestry should benefit from lower oil/gasoline/diesel prices but sadly, even in oil country, our gas is still expensive. I would welcome a new domestic refinery.

Covid screwed tourism.

We already send energy to the east via rail...  https://en.wikipedia.org/wiki/Lac-Mégantic_rail_disaster

The additional pipeline to the west coast is being built rapidly, but it won't be the magic solution that people around here think.  The "more pipeline" crap was and is right-wing propaganda.  "If only we had more pipelines!"

 

Edited July 2, 2020 by Enthalpic

[Jan van Eck + 7,558]

8 minutes ago, Enthalpic said:

We already send energy to the east via rail...  https://en.wikipedia.org/wiki/Lac-Mégantic_rail_disaster

Sorry, the source of the oil on that train was the Bakken in North Dakota.

[frankfurter + 562]

It's deja vu. Very similar occurred in 1983-5. Calgary collapsed, homes went for dollar deals, etc.  Nothing was learned from it, seems nothing will be learned now. No economic diversification. The Univ of Calgary is a romper room for the oil industry. If oil prices remain low for 2 years, Alberta will be toast. Canadians are fine people, as a whole, but they are true sheeple, sorry to say. If you ask 100 Canadians what they know of their own Constitution, you will be lucky to find 1 person who has heard of it, let alone read it. Read it: you should find Canadians have no right to property, and all rights are "subject to"; not one right is "inalienable". Thus the sheeple are serfs. A sheeple with no inalienable rights has not much of a future. This result is all by sinister design. 

[Walter Faber + 48]

Behind the industries there are people who placed their hopes on tar sands and who will likely suffer massive disappointment, and this is unfortunate. On the other hand, tar sands probably are one of the most dirty ways to get oil, so trying to squeezing them out with great effort while there is still enough elsewhere (not in Canada) always seemed a weird plan.

[Enthalpic + 1,496]

6 minutes ago, Walter Faber said:

Behind the industries there are people who placed their hopes on tar sands and who will likely suffer massive disappointment, and this is unfortunate. On the other hand, tar sands probably are one of the most dirty ways to get oil, so trying to squeezing them out with great effort while there is still enough elsewhere (not in Canada) always seemed a weird plan.

Canada also has a lot of conventional oil.  We just also have a huge amount of tarsands.

Edited July 9, 2020 by Enthalpic

[Keith boyd + 178]

We were already in a state of flatline before covid. Pipelines were booked up solid and any attempt from producers to increase production resulted in pipeline space bidding wars. The government stepped in which at the time i thought was a terrible idea but it stabilized prices. Killing off the weaker SAGD players would of accomplished the same thing. 

 

Covid killed them anyway. Quite a few of the weaker  SAGD sites shut er down. Boilers offline, injection lines cold.  

Suncor cut production of conventional mining as well.

If prices dont recover then more production will come offline until prices stabilize. 

Amazing how the market accomplishes this using prices huh? 

The oil sands will not completely be lost just as shale oil will not be completely lost. All sources of oil had to cut production to some degree.

The thing is, shale oil is going to run out somewhat quickly. Like in a decade shale will be running on literal gassy fumes.

Oil sands has hundreds of years to go. And it's all ultra heavy. Give it a decade. Give it...2 decades. What a different world map of oil supply that will be. A handful of giants exporting, not much else. Canada, middle east, Venezuela. There wont be much significant sources left other then that. 

 

[Gerry Maddoux + 3,627]

Don't you think there will be a day when the oil sands are profitable?

And conventional . . . don't forget that. 

If you read many of the articles on this site you'll go buy a gun if you own any oil properties . . . this thing has been invaded by a bunch of people who are convinced we're in a fossil fuel powered heat stroke and the only way to save the planet is to kill off oil and gas. 

In reality, we're going to be using oil and gas for quite some time, unless the world population is decimated. 

I think Calgary will ride again. Offshore is almost a thing of the past. Shale will last a decade. And then is the time to be holding a lot of oil sands, but more importantly, conventional wells. 

[surrept33 + 609]

On 7/1/2020 at 10:22 PM, Enthalpic said:

Kenny is a dolt; his "budgets" that looked bit better on paper at first are based on ridiculously high oil prices that won't happen. 

Alberta is probably going to suffer for a while now because of decades of mismanagement and putting way to much focus on oil.  The conservatives failed to diversify the economy when we were rolling in extra cash. 

Forestry should benefit from lower oil/gasoline/diesel prices but sadly, even in oil country, our gas is still expensive. I would welcome a new domestic refinery.

Covid screwed tourism.

We already send energy to the east via rail...  https://en.wikipedia.org/wiki/Lac-Mégantic_rail_disaster

The additional pipeline to the west coast is being built rapidly, but it won't be the magic solution that people around here think.  The "more pipeline" crap was and is right-wing propaganda.  "If only we had more pipelines!"

 

Yeah, Alberta is a prime example of the economic theory of the Resource Curse:

https://en.wikipedia.org/wiki/Resource_curse

Of course, it's not anywhere near as bad as say, Nigeria or many middle east countries. But nowhere as good as say, the diversification that's happened in Texas. The profits from oil and other natural resources must be reinvested in other productive economic activity long term to smooth out dependence on the fluctuations of said natural resource and all of the risk that creates.

[surrept33 + 609]

56 minutes ago, Gerry Maddoux said:

Don't you think there will be a day when the oil sands are profitable?

And conventional . . . don't forget that. 

If you read many of the articles on this site you'll go buy a gun if you own any oil properties . . . this thing has been invaded by a bunch of people who are convinced we're in a fossil fuel powered heat stroke and the only way to save the planet is to kill off oil and gas. 

In reality, we're going to be using oil and gas for quite some time, unless the world population is decimated. 

I think Calgary will ride again. Offshore is almost a thing of the past. Shale will last a decade. And then is the time to be holding a lot of oil sands, but more importantly, conventional wells. 

I think the biggest existential problem with tar sands long term is being able to attain private financing for projects. It's going towards the way of thermal coal in terms of things many private sector financial institutions consider radioactive, considerably more so than conventional oil. Maybe the Canadian government would step in, but maybe not.

Edited July 10, 2020 by surrept33

[Hamish + 17]

On 7/9/2020 at 11:03 PM, Gerry Maddoux said:

Don't you think there will be a day when the oil sands are profitable?

And conventional . . . don't forget that. 

If you read many of the articles on this site you'll go buy a gun if you own any oil properties . . . this thing has been invaded by a bunch of people who are convinced we're in a fossil fuel powered heat stroke and the only way to save the planet is to kill off oil and gas. 

In reality, we're going to be using oil and gas for quite some time, unless the world population is decimated. 

I think Calgary will ride again. Offshore is almost a thing of the past. Shale will last a decade. And then is the time to be holding a lot of oil sands, but more importantly, conventional wells. 

As a DD in the SAGD field, and as someone that has worked with and spoken with many of the production & drilling engineers for most of the bigger SAGD operations, it's my understanding that these operations are now profitable between ~ $30-35. It will be interesting to see what their balance sheets tell us later this week. Most are obviously not drilling right now but WCS has been above 30 for a few months now....so let's see how much debt they're paying down with free cash flow (if any).

[Ward Smith + 6,615]

On 7/1/2020 at 6:59 PM, Jan van Eck said:

The Canadian Province of Alberta remains in a real pickle.  Its energy extraction sector is in a state of collapse, and the two big customers for its tar-sands oils, the USA and China, are taking less than the industry can supply - by a wide margin.  Some of the blame is laid at lack of pipeline capacity.  More, I think is demand destruction, and politics (in the case of China).  The new Provincial Government of Jason Kenney and the Conservatives is placing its bets and its hopes on a stimulus spending plan, which you can see here:  https://www.alberta.ca/recovery-plan.aspx

The assumption remains, however, that the oil sector will continue to be the big wealth generator - exporting crude, and upgraded crude.  I am not so sure.  The world is awash in oil, and from what I can make of it, nobody really needs the Canadian resource.  It is expensive to extract, and expensive to convert to gasoline and diesel - seemingly, a lot more expensive than US shale oil.  Alberta is attempting to stimulate other sectors, including tourism (always a big draw in the Rockies), and timber (by waiving or postponing the "stumpage fee," or timber extraction tax). You do have to give the new government credit: they are taking immediate steps to address the economic collapse of the province. 

It is my view that Alberta is missing its best bet: selling its oil into a closed, protected market, specifically, Canada itself.  As the Canadian currency continues to slide downwards, the exchange rate makes their export products, including raw oil and refined, more competitive, somewhat offsetting the issues of remoteness from markets and lack of pipe.  Now, "if" Canada created a closed market, just as they do with maple syrup, then Eastern Canada (Ontario and Quebec) would be obliged to purchase Alberta feedstock for their refineries.  Crude-by-rail would service the big Irving refinery in St. John, New Brunswick, and the eastern Maritime Provinces would presumably rely on offshore Newfoundland oil.   Yet this solution does not seem to surface within Canada itself. 

I invite readers to chime in on where they see this going. 

The "Eastern Canadian" refineries can't handle heavy oil. Period. They don't have delayed cokers (the cheapest solution) nor the more expensive solutions. Since delayed cokers run about $1 billion US per 25k bbls flowing capacity, it's a daunting investment. The other solutions run about 25% more. My company has a solution, about 10x cheaper than delayed coking but no one wants to be first, as is the norm in the oil industry. 

Your idea is good, too good, which means it will never get traction. Politicians lurch from crisis to crisis and spend their entire time in office featherbedding for when they're out of office, by doing "favors" for "lobbyists". 

 

[Jan van Eck + 7,558]

4 hours ago, Hamish said:

so let's see how much debt they're paying down with free cash flow (if any)

I would be surprised if there is any "debt pay-down" at this point unless that is being coerced by their bankers.  Canada typically has the banks doing financing under Sec. 178 of their Bank Act, which grants the lender the right to appoint a Receiver and take over actual daily operations pretty much at their whim.  If the bankers threaten the producers with Sec. 178, then it is likely that some of the producers will "blink" and make payments - but others will stare their bankers down, and say:  "Hey, what makes you think you can run this operation better than I can?"   And since the bankers by definition can not run the operation at all, much less even with mediocrity, at that point the banker will blink - unless he is a complete idiot, and there are those out there as well. 

It reminds me of the situation that Donald Trump found himself in back some decades ago, when his empire was tottering and one of his wives was busy divorcing him.  His bankers were threatening to take over his buildings that were pledged as underlying collateral for his various loans.  The bankers were assembled in a room and The Donald asked them: "What makes you think you can run these buildings better than I can?"   At the uncomfortable silence, the bankers agreed to run with The Donald.  But they did keep him on a relatively short leash, and restricted his personal pay to $25,000 a month.  And, The Donald managed to pull it off, getting the buildings all back into positive rents and increasing their value.  So, there is something to be said for experience.  I don't picture Canadian bankers having any ability to operate anything, much less some oil field, so unless they were prepared to go to liquidation and take the hit to their asset statements, better to leave existing management in place. 

Owing money to a bank does not place the banker in the command position.  If the banker pulls the plug, he is likely to lose everything.  Altogether not a pleasant prospect!

[Jan van Eck + 7,558]

1 hour ago, Ward Smith said:

My company has a solution, about 10x cheaper than delayed coking

If this is not trade-secret information, do tell us a little bit about it.  Sounds most innovative!  

[Enthalpic + 1,496]

29 minutes ago, Jan van Eck said:

I would be surprised if there is any "debt pay-down" at this point unless that is being coerced by their bankers.  Canada typically has the banks doing financing under Sec. 178 of their Bank Act, which grants the lender the right to appoint a Receiver and take over actual daily operations pretty much at their whim.  If the bankers threaten the producers with Sec. 178, then it is likely that some of the producers will "blink" and make payments - but others will stare their bankers down, and say:  "Hey, what makes you think you can run this operation better than I can?"   And since the bankers by definition can not run the operation at all, much less even with mediocrity, at that point the banker will blink - unless he is a complete idiot, and there are those out there as well. 

It reminds me of the situation that Donald Trump found himself in back some decades ago, when his empire was tottering and one of his wives was busy divorcing him.  His bankers were threatening to take over his buildings that were pledged as underlying collateral for his various loans.  The bankers were assembled in a room and The Donald asked them: "What makes you think you can run these buildings better than I can?"   At the uncomfortable silence, the bankers agreed to run with The Donald.  But they did keep him on a relatively short leash, and restricted his personal pay to $25,000 a month.  And, The Donald managed to pull it off, getting the buildings all back into positive rents and increasing their value.  So, there is something to be said for experience.  I don't picture Canadian bankers having any ability to operate anything, much less some oil field, so unless they were prepared to go to liquidation and take the hit to their asset statements, better to leave existing management in place. 

Owing money to a bank does not place the banker in the command position.  If the banker pulls the plug, he is likely to lose everything.  Altogether not a pleasant prospect!

Agreed.

 

"If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem."

- J. Paul Getty

https://en.wikipedia.org/wiki/J._Paul_Getty