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.
Indigenous-owned LNG projects in jeopardy with proposed emissions cap, leaders warn
Indigenous leaders meet with Japan’s ambassador to Canada Kanji Yamanouchi. Photo courtesy Energy for a Secure Future
From the Canadian Energy Centre
By Cody Ciona
‘It’s like we’re finally at the table and we’re having to fight to keep our seat at the table’
A proposed cap on oil and gas emissions will threaten opportunities for Indigenous communities to bring cleaner alternatives to coal to international markets, Indigenous leaders warned during a recent webinar.
Karen Ogen, CEO of the First Nations LNG Alliance, fears Indigenous-led projects like Cedar LNG and Ksi Lisims LNG are threatened by the cap, which is essentially a cap on production.
“If we’re going to help China and India get off of coal and help reduce their greenhouse gas emissions, it makes common sense for us to be selling our LNG to Asia and to other countries. To put a cap on, it would just stop us from doing that,” Ogen said.
“It’s like we’re finally at the table and we’re having to fight to keep our seat at the table.”
Indigenous communities across Canada have increasingly become involved in oil and gas projects to secure economic prosperity and reduce on-reserve poverty.
Since 2022, more than 75 First Nations and Metis communities have entered ownership agreements across western Canada. Among those are key projects like the Coastal GasLink pipeline and the joint investment of 23 communities to obtain a 12 per cent ownership stake in several oil sands pipelines.
The planned federal emissions cap will stall progress toward economic reconciliation, Ogen said.
“Our leaders did not accept this and fought hard to have rights and titles recognized,” she said.
“These rights were won through persistence and determination. It’s been a long journey, but we are finally at the table with more control over our destiny.”
Chris Sankey, CEO of Blackfish Enterprises and a former elected councillor for the Lax Kw’alaams Band in B.C., said the proposed emissions cap could stifle Indigenous communities pushing for poverty reduction.
“We’re working hard to try to get our people out of poverty. All [the emissions cap is] doing is pushing them further into debt and further into poverty,” he said.
“When oil and gas is doing well, our people do well.”
Together, the Trans Mountain Pipeline Expansion, LNG Canada project and Coastal GasLink pipeline have spent more than $10 billion in contracts with Indigenous and local businesses
Indigenous employment in the oil and gas industry has also increased by more than 20 per cent since 2014.
For Stephen Buffalo, CEO of the Indian Resource Council, an emissions cap feels like a step in the wrong direction after years of action to become true economic partners is finally making headway.
“Being a participant in the natural resource sector and making true partnerships, has been beneficial for First Nations,” he said.
“So, when you see a government trying to attack this industry in that regard, it is very disheartening.”
Taxpayers Federation hoping for personal tax relief in Alberta budget
From the Canadian Taxpayers Federation
Albertans need income tax relief now
Author: Kris Sims
The Canadian Taxpayers Federation is calling on the Alberta government to stick to its promise of cutting its income tax in tomorrow’s provincial budget.
“Cutting the provincial income tax was a huge campaign promise from the UCP and it needs to happen right away,” said Kris Sims, CTF Alberta Director. “Finance Minister Nate Horner should announce this income tax cut in the budget tomorrow.”
The provincial budget will be presented Feb. 29.
During the 2023, election the UCP promised to create a lower income tax bracket for the first $59,000 of earnings, charging eight per cent instead of the current 10 per cent.
The UCP said that move would save Albertans earning $60,000 or more about $760 per year.
The Alberta government currently charges workers who make under $142,292 per year a 10 per cent income tax rate.
By comparison, British Columbia charges an income tax of five per cent on the first $45,654 of earnings and seven per cent up to $91,310.
In B.C., a worker earning $100,000 pays about $5,857 in provincial income tax.
In Alberta that same worker pays about $7,424 in provincial income tax.
“Taxpayers need to see a balanced budget, spending restraint and our promised lower income taxes in this budget,” said Sims.
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