• 4 minutes China 2019 - Orwell was 35 years out
  • 7 minutes Wonders of US Shale: US Shale Benefits: The U.S. leads global petroleum and natural gas production with record growth in 2018
  • 11 minutes Trump will capitulate on the trade war
  • 14 minutes Glory to Hong Kong
  • 45 mins Boring! See Ya Clowns, And Have Fun In Germany
  • 24 mins Bloomberg: shale slowing. Third wave of shale coming.
  • 14 mins China's Blueprint For Global Power
  • 7 hours USA Carried Out Secret Cyber Strike On Iran In Wake Of Saudi Oil Attack
  • 8 mins ABC of Brexit, economy wise, where to find sites, links to articles ?
  • 6 hours Crazy Stories From Round The World
  • 9 hours Shale Magic: SABIC, ExxonMobil break ground on US Gulf Coast petrochemical project
  • 51 mins 5 Tweets That Change The World?
  • 4 hours the future
  • 9 hours Yesterday Angela Merkel stopped Trump technology war on China – the moral of the story is do not eavesdrop on ladies with high ethical standards
  • 6 hours Climate Protesters Blocking Roads etc...
  • 44 mins Leftists crying to make oil patch illegal friendly: 'Broken system' starves U.S. oil boom of immigrant workers: CONGRESS DO YOUR JOBS INSTEAD OF PANDERING!
Alt Text

How The California Blackouts Could Have Been Avoided

The California electricity crisis left…

Alt Text

Oil Prices Fall After Misleading Trade War Rumors

Oil prices fell significantly on…

Alt Text

A Draconian Crackdown Looms Over Natural Gas

Natural Gas is coming up…

Peter Tertzakian

Peter Tertzakian

Peter is an economist, investment strategist, author and public speaker on issues vital to the future of energy. He has clocked over 30 years of…

More Info

Premium Content

What’s The Answer To Canada’s Crude Crisis?

“The Government’s intent in the policy was to provide for the orderly development of the oil sands in such a manner as to supplement but not displace production from the conventional industry.”

- Province of Alberta, Internal Memorandum, Oil Sands Development Policy, February 1968

At first it was just pushing and shoving by big companies in the oil sands sandbox. Now the heavyweight brawl has spread across the playground, into the conventional turf, affecting bystanders that are mostly lighter-weight companies, but large in number.

Everyone is getting beaten up.

With each shove to get new oil production into glutted pipelines comes a bloody nose to price.  A barrel of the heavy stuff known as Western Canadian Select (WCS) sells for under $US 20 today. At peace, it should be fetching around $US 40, plus or minus, depending upon global markets (mostly minus these days).

A lot of people are talking about the “WCS” crisis. And that’s what it is. To our Canadian economy and to our reputation as an orderly place to do business. Yet, few are mentioning another calamity: the beaten down prices for other Canadian oil products like “Edmonton Light”. A barrel of this high-quality, conventional resource is getting less than $US 30, an insulting $US 20 plus discount to the North American market it sells into.

Canada’s oil and gas industry is much more than the hackneyed photos of dump trucks hauling bitumen into mega industrial plants in a small corner of Alberta. In-situ companies play too. Then there are hundreds of conventional companies that collectively produce 2 million barrels a day of lighter liquids have nothing to do with the oil sands, its markets nor its imagery. Related: Natural Gas Drives Saudi Geopolitical Pivot

Conventional oil and gas companies play in a much larger geography called the Western Canadian Sedimentary Basin (WCSB), an area that stretches from North East BC, through central Alberta, down to Southeast Saskatchewan and even a small corner of Manitoba. The broad region spans different plays, different processes, different markets, different cost-structures—and different levels of investment.

This year, by the time the December calendar flips, the conventional side of the business will have spent around $C 27 billion; the oil sands $C 13 billion. The industry, both in the oil sands and conventional sides, is foundational to broad-based employment across Western Canada. And now, all of it is under siege.

Which brings me back to the memo of 1968. Fifty years later, “orderly development” has turned into a market melee and not wanting to “displace production from the conventional industry” has become a prophecy. Even within the oil sands, companies are trying to displace each other.

We don’t need to get into the nuances of historical policy, nor the politics. What’s important is that under the Canadian constitution all oil and gas resources—conventional and otherwise—are owned by the citizens of their provinces, and it’s their governments’ role to be the custodian of those resources.

Complicating matters, we know, is the frustrating inability to build pipelines to take the produced resources to markets beyond the western provinces. The arbiter of that bureaucratic process is largely under federal jurisdiction, but also includes provinces outside oil producing jurisdictions. So, provinces join with companies to produce the resources while the feds and other provinces arbitrate the takeaway capacity. Everyone knows what happens when geopolitics takes over.

Right now, the Government of Alberta is faced with a difficult dilemma. Should they interfere in the price fight—oil sands and conventional—to bring order back to all corners of the playground? To ease the glut, one supply-side tool they can use is mandatory production cuts.

But that doesn’t go over well with everyone. “Let the market do its work,” is the chorus from staunch capitalists, especially those who run some of the larger companies in the oil sands that have invested in fully integrated production and refining operations. As a free marketeer, I would normally agree that government should keep its heavy elbows out of capitalist business. If this was the airline industry fighting a seat sale, we’d all say, “may the best carrier win,” for the benefit of all consumers.

Related: Natural Gas Prices Fall Below Zero In Texas

This isn’t the airline business, where companies own the airplanes. This is the oil business where the citizens of each province own the resources. The playground called the WCSB belongs to the people, who are presently seeing their resources sold for cents on the dollar with no return on investment via royalties and taxes. In a public context, the government, on behalf of the citizens, is warranted if not obliged to mediate a solution.

The fight will end eventually. Markets are working to rebalance through a combination of voluntary production cuts and gradual expansion of rail takeaway capacity. Leaving $80 million-a-day on the table acts as a tasty financial chum for arbitrageurs.

But playing nice takes too long. Time is of the essence if the winter drilling season is to be saved. If the glut doesn’t clear in the next few weeks, I expect we’ll necessarily see government intervention. The hope is that order can be brought to the playground fast enough, lest this crisis turn into a financial catastrophe. Billions are being lost in revenue, royalties and taxes. More sobering is the potential of thousands of job losses from Fort St. John, BC, through a swath down Alberta, to Estevan, Saskatchewan.

Beyond the immediate term, the bigger virtue will be to ensure this type of devastating value loss at the expense of all Canadians doesn’t happen again. Like it or not, we’re in an era where technology-driven productive capacity is able to exceed government-regulated takeaway capacity. That means renewed scrutiny on orderly development and rules of play—in the spirit of a 50-year-old memo.

By Peter Tertzakian

More Top Reads From Oilprice.com:




Download The Free Oilprice App Today

Back to homepage



Leave a comment

Leave a comment




Oilprice - The No. 1 Source for Oil & Energy News
Download on the App Store Get it on Google Play