Alberta
Why the oilsands’ weaknesses are turning into strengths
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.
Alberta
Fortis et Liber: Alberta’s Future in the Canadian Federation
From the C2C Journal
By Barry Cooper, professor of political science, University of Calgary
Canada’s western lands, wrote one prominent academic, became provinces “in the Roman sense” – acquired possessions that, once vanquished, were there to be exploited. Laurentian Canada regarded the hinterlands as existing primarily to serve the interests of the heartland. And the current holders of office in Ottawa often behave as if the Constitution’s federal-provincial distribution of powers is at best advisory, if it needs to be acknowledged at all. Reviewing this history, Barry Cooper places Alberta’s widely criticized Sovereignty Act in the context of the Prairie provinces’ long struggle for due constitutional recognition and the political equality of their citizens. Canada is a federation, notes Cooper. Provinces do have rights. Constitutions do mean something. And when they are no longer working, they can be changed.
Alberta
30 million contraband cigarettes valued at $25 million dollars seized in Alberta
New release from Alberta Gaming Liquor and Cannabis (AGLC)
Record setting contraband tobacco seizures result from AGLC investigations
Alberta Gaming Liquor and Cannabis (AGLC) recently concluded several investigations which netted two of the largest contraband tobacco seizures in Alberta history. The combined total of the contraband tobacco seized was 154,800 cartons of contraband cigarettes (30.7 million individual cigarettes). These seizures are a result of the work conducted by AGLC’s Tobacco Enforcement Unit with the assistance of provincial law enforcement agencies.
- In a January 2024 investigation, approximately 43,500 cartons (8.7 million individual cigarettes) were seized. This equates to $7 million in retail value with a provincial tax avoidance of $2.4 million. This included the seizure of 15,000 grams of contraband shisha.
- In April of 2024, 60 wrapped pallets were seized from a warehouse setting netting a total of 111,300 cartons of contraband cigarettes (22 million individual cigarettes) which equates to over $18 million in retail value with a provincial tax avoidance of $6.6 million.
- Criminal Charges are pending in both cases.
“These are significant contraband tobacco investigations involving individuals that are part of organized networks whose proceeds defraud Albertans millions of dollars in tax revenue. AGLC will continue to work with our partners to investigate and disrupt the individuals and organizations involved in these illegal activities as part our commitment to a strong contraband tobacco enforcement program in Alberta.”
- Gary Peck, Vice President, Regulatory Services, AGLC
“Contraband tobacco hurts law abiding businesses that follow the rules, and it costs Albertans millions each year from lost tax revenue. Our government is committed to keeping illegal tobacco off the streets and ensuring that the sale of tobacco products comply with the law.”
- Dale Nally, Minister of Service Alberta and Red Tape Reduction
Over the last nine months, AGLC’s Tobacco Enforcement unit has seized an estimated 35 million contraband cigarettes and 115,000 grams of contraband shisha from across the province. The total potential lost tax revenue is estimated to be more than $10.1 million.
Contraband tobacco:
- is any tobacco product that does not comply with federal and provincial laws related to importation, marking, manufacturing, stamping and payment of duties and taxes;
- comes from four main sources: illegal manufacturers, counterfeits, tax-exempt diversions and resale of stolen legal tobacco; and
- can be recognized by the absence of a red (Alberta) or peach/light tan (Canada) stamp bearing the “DUTY PAID CANADA DROIT ACQUITTÉ” on packages of cigarettes and cigars or pouches of tobacco.
In addition to lost revenues that may otherwise benefit Albertans, illegally manufactured products also pose public health and safety risks as they lack regulatory controls and inspections oversight.
Albertans who suspect illegal tobacco production, packaging and/or trafficking are encouraged to contact AGLC’s Tobacco Enforcement Unit at 1-800-577-2522 or Crime Stoppers at 1-800-222-TIPS (8477).
Under a Memorandum of Understanding with Alberta Treasury Board and Finance, AGLC enforces the Tobacco Tax Act and conducts criminal investigations related to the possession, distribution and trafficking of contraband tobacco products. In 2022-23, provincial revenue from tobacco taxes was approximately $522 million.
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