Rivers: Only a fool should want to put more money into expansion of the oil sands.

Rivers 100x100By Ray Rivers

December 7th, 2018



Our American neighbours tend to see Canada as that socialist state on their northern border. We do have single-payer health care in each province and there is a national broadcaster partially funded by the federal government. But we are a lot less socialist than we used to be back when our federal government used to run a national railway, our biggest airline and our very own oil company, Petro-Canada.

Transmountain pipelineToday Canadian governments of all political persuasion agree that oil production is best left to the private sector. Except, we don’t leave it alone. Federal and provincial governments annually subsidize the oil sector by almost three and a half billion dollars – just under a hundred dollars for every man woman and child in the country. And that doesn’t include Mr. Trudeau’s recent purchase of the Trans Mountain pipeline.

Of course the governments spend tax dollars on a lot of things, like defence, education and health care, but mostly for services which are not for-profit. But business is supposed to be business, and no commodity is more market oriented than oil – just watch the daily fluctuation at the gas pumps. And note that, with annual profits into the billions, PetroCan and its partner Suncor are one of the biggest items on the Toronto Stock Exchange.

But the markets are telling us that the cost of producing oil in Alberta exceeds the value of that resource in the marketplace. Of course there is a glut of the stuff globally today and it’s now a buyers’ market. But while the best quality crude has dropped to as much as a third of its peak value of only a couple of years ago, oil sands bitumen is bottoming out at $10 a barrel.

rail tanker cars 2

Leasing rail cars – a lot of them are made in Hamilton.

And even though a new pipeline or another 7000 rail cars would help move that oil to Asian markets where the price might be better, it’s still low quality oil and some of the most expensive to produce. So neither another pipeline nor more rail cars make economic sense as an investment. If they did wouldn’t industry have already taken care of that? In fact wasn’t lack of profitability behind Kinder Morgan blackmailing the federal government into buying its old pipeline.

Mr. Trudeau had no choice, politically, you might say but to buy that last pipe dream politicians east of the Rockies sleep on. He had to be seen helping an Alberta whose premier had embraced a carbon tax, among other things. Rachel Notley is acquiring some 7000 new rail cars for the same political reason. It’s something we call corporate welfare.

There is panic in the oil patch. So Notley, acting on a proposal from the non-socialist opposition parties, is also intervening in the market by winding down oil production, hoping for a better match with market demand and improved oil prices. It is probably a political set-up, staged by her opponents, hoping she’ll pay a price at the polls come next year’s provincial election. Then the odds are against her anyway.

zero emmission car

Only zero emitting cars will be sold in B.C. after 2040.

But the odds are also against the oil sands enduring. General Motors just closed its largest assembly plant in Canada, in Oshawa, claiming it’s crossed over to building electric vehicles. And that is a common theme by auto execs everywhere as they enter the growing movement to end the reign of guzzler. Only zero emitting cars will be sold in B.C. after 2040.

Long the target of the greenies everywhere, Barclays Bank shareholders have now demanded it pull its investments out of the ‘tar sands’. The plastics industry, the other main user of petroleum, is also under attack, particularly for single uses and packaging . There is this island of waste plastic the size of France in the middle of the Pacific ocean. And even in our once pristine Great Lakes plastic residue can be found in just about every fish species.

Of course prices will go up again before they go down again, and so on. Then, there are still millions of gasoline powered cars, gas heating appliances and so on. So the petroleum industry will not disappear over night, nor forever, as has Quebec’s deadly asbestos industry. But only a fool should want to put more money into expansion of the oil sands.

And guess what? The carbon tax is not to blame for the current crisis. Though Alberta has one, which is even more progressive that the one the feds will be implementing in most of the rest of Canada early next year. But then Rachel Notley gets it – unlike her fellow premiers immediately to the east of her. Besides she’s seen how Canada’s first carbon tax has worked out for her neighbour just across the Rockies.

BC has had its carbon tax for a decade now. But it hasn’t stifling the economy as Ontario’s Mr. Ford would mislead all the people of his own province. Quite the contrary, because or in spite of its carbon tax B.C.’s economy has been growing at a rate of 3.5% for the last four years. And the federal carbon tax is modeled on the one that pioneered in Lotus Land. Imagine what it might do for Ontario’s economy Mr. Ford!

Rivers hand to faceRay Rivers writes regularly on both federal and provincial politics, applying his more than 25 years as a federal bureaucrat to his thinking.  Rivers was once a candidate for provincial office in Burlington.  He was the founder of the Burlington citizen committee on sustainability at a time when climate warming was a hotly debated subject.   Ray has a post graduate degree in economics that he earned at the University of Ottawa.  Tweet @rayzrivers



Background links:

Alberta Oil Crisis –      Canada’s Fossil Fuel Subsidies –      Buying Rail Cars

Oil Cuts –      Plastic Bags –      Pipelines?

Barclays –      BC Zero Emissions

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6 comments to Rivers: Only a fool should want to put more money into expansion of the oil sands.

  • Ray Rivers

    Fran- thanks for the video – I watched it and was impressed at how this company has been integrating renewable forms of energy into its operations to enable cleaner fossil fuel production. But the take away point is that it is up to us to shift our consumption patterns away from fossil fuels – and that is happening with electric vehicles, for example.

  • Fran - Burlington

    perhaps there are many perspectives to consider

  • Ray Rivers

    Joe – Thanks for all that background. It is very helpful for this discussion which we need to have sooner than later.

  • Alide Camilleri

    Like what you are saying. Doug Ford is obsessed with carbon tax without understanding the benefits arising out of a clean environment. Our Mini-Me Trump is just as “s….d” as his counterpart south of the border.

  • Hans

    The true cost of tar sands oil is actually much higher when the $130 billion liability for tailing ponds (more like small lakes) cleanup and land restoration is taken into account. Instead of subsidizing this profitable industry, governments should be forcing it to contribute enough so that they don’t leave an environmental disaster when the oil era comes to an end.

  • joe gaetan

    The price a producer receives for a barrel of oil depends on the type of oil, where it’s produced, and where it is purchased. Lighter oils generally receive higher prices than heavier oils, because they are easier (and cheaper) to process in refineries.

    Where oil is produced geographically also matters, because it needs to be transported from
    its point of production to a refinery. This impacts the price received for the oil.
    “Brent” oil —is a global benchmark used by oil markets. Its name refers to oil fields in the European North Sea, where it originates. Oils produced in the Middle East, Africa and Europe, all trade in relation to Brent oil. Because it has easy access to coastal ports (e.g., extensive pipelines to the coast), Brent oil can move easily to customers around the world. (Brent oil is even imported by some refineries in the U.S. and Canada.)

    Because it is inexpensive to move oil in large tankers the price is fairly similar anywhere tankers can load or unload. As a light, sweet oil that can be widely transported, Brent oil currently receives some of the highest prices.

    “West Texas Intermediate” (WTI) oil is another benchmark used by oil markets, representing oil produced in the U.S. It is based on oil at a large tank and pipeline hub in Cushing, Oklahoma.
    Like Brent oil, WTI is priced as a light oil, but it doesn’t have the same global reach. One reason is that, with few exceptions, the U.S. prohibits the export of crude oil. Another reason is that WTI supplies are produced in landlocked areas, and nowadays need to be transported to the coast, where most refineries are located.

    Because of growth in U.S. oil production, there’s a glut of oil supply in the U.S. midwest. So WTI now trades at a price “discount” to Brent oil.

    Brent and WTI set the stage for prices that Alberta producers receive for their oil products.

    An important benchmark price in Canada is known as Western Canada Select (WCS). WCS rep-resents a stream of conventional heavy (high viscosity) oil mixed with some blends of bitumen and diluents. Since the oil in WCS is much heavier than WTI (which is a light oil),
    and further away from main markets, WCS is priced at a further discount to WTI.

    Other oil streams produced from the oil sands are also priced at a discount to WTI or WCS. Much of the oil produced from the oil sands is delivered to market in various blends of bitumen and diluents (which are used to help the bitumen flow in the pipeline). These blends
    are com-monly called “dilbit”.

    Since the share of bitumen it contains is higher, dilbit is generally heavier than WCS, and so dil-bit is priced at a discount to WCS.

    To break down prices further, the theoretical price of bitumen is determined once you deduct the
    transportation costs. (This includes the diluent cost used to make the bitumen flow in the pipeline and the pipeline cost.) The resulting price is known as the “bitumen netback”. Producers’ revenues and royalties are based on the “bitumen netback” price.

    What does this mean for the royalty framework?
    Royalties are what Albertans (as owners) get as the value of its resources when they are produced and sold. The amount of value depends on the price Alberta receives for its resources, and what it costs to produce and transport them.

    The lower the prices Alberta receives for its resources, the less value there is. And the prices received for Alberta oil products are lower than the “Brent” and “WTI” prices.

    To some extent, these price discounts are unavoidable. The oil Alberta produces is simply of a
    lower quality than Brent or WTI, and is located further away from customers.

    But it’s also important to note that price discounts are impacted by Alberta’s access to markets. The easier it is to move our oil to refineries around the world, the less the price discounts will be.

    Source: Excerpted from Alberta Energy

    One last thing when our federal government has effectively stopped oil sand production, let’s remember that In 2018-19, equalization payments will be about $19 billion. Sixty-two per cent goes to Quebec, and Alberta taxpayers will contribute about $3 billion. This amount is actually only a portion of the approximately $20 billion of net federal transfers out of Alberta in 2018.