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Exclusive: Ditched Bitumen Desperately Seeks True Commitment

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‘No country would find 173 billion barrels of oil in the ground and just leave them there.’

Prime Minister Justin Trudeau was firing on all “sunny ways” cylinders [1] when he gave a rousing defence [2] of exploiting Alberta’s gigantic bitumen deposits at the big CERAWeek oil and gas conference in Houston, Texas in March, 2017. His speech ignited an ovation from oil company executives, extensive coverage in Canada’s business press, and grateful praise from Alberta Premier Rachel Notley.

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The same Houston conference also applauded the tsunami of high-quality crude production from nearby shale oil formations, a Congressional decision [4] to allow essentially unrestricted U.S. oil exports after a 40-year ban, and the advent of ocean supertankers [5] capable of shipping two million barrels of refined oil in a single cargo to foreign ports.

No one apparently noticed that the second round of applause badly undercut the first. Or that Justin Trudeau did not specify who will buy all that irresistible Alberta oil for decades to come.

He has not since.

Nor has Rachel Notley.

Nor have tar sands/oil sands producers—or pipeline companies—detailed which foreign countries are committed customers. No contract volumes or prices have been disclosed.

Nevertheless, Ottawa, Edmonton, and Alberta’s major producers [6] have endorsed a plan to increase tar sands/oil sands extraction 33% by 2030, and allow a 40% rise [7] in greenhouse gas emissions by then. Virtually all that additional bitumen (1.3 million barrels per day) must be exported to foreign refiners, they claim, to garner higher prices [8] by avoiding “discounts” U.S. refiners demand to process their dirtier product.

And so tripling the capacity of the Trans Mountain pipeline to Vancouver, and building the Keystone XL to Texas tidewater, are deemed imperative.

But if those prospective foreign customers vanish, or never arrive in Fort McMurray with fat cheques and long-term purchase contracts, future Alberta producers will end up losing money on every barrel of oil sold—while expecting to somehow make that up in volume.

Alberta Oil in the Rear-View Mirror

In fact, Alberta’s three biggest targets for future tar sands/oil sands exports—China, India, and Europe—have already put that prospect in their rear-view mirror.

None of these factors is likely to eclipse current Alberta tar sands/oil sands operations, since the major “legacy” producers like Suncor, Cenovus, and Canadian Natural Resources Ltd. long ago secured the capital and bitumen deposits to supply dedicated U.S. refiners. Their production cost per barrel is low enough to remain competitive—for now.  

But they do spell doom for the planned one-third increase in tar sands/oil sands output by 2030. That’s why global oil players such as Exxon-Mobil [22], Royal Dutch Shell [23], ConocoPhillips [24], Total S.A., Statoil [25], and Marathon Oil have recently sold or written off vast Alberta properties while taking billion-dollar hits to their bottom line or asset base.

Charge of the Heavy Oil Brigade

Perversely, this flight by Big Oil players has prompted Alberta and federal politicians into an irrational fight response that defies global oil trends and any sense of fiscal discipline. Call it the Charge of the Heavy Oil Brigade, led by Prime Minister Justin Trudeau and Premier Rachel Notley.

Their claim that billions of additional barrels of bitumen will be dug up and exported through 2030 plays well in Alberta, especially with provincial and federal elections coming up in 2019. And the groundless industry boosterism is, of course, endorsed by the companies seeking to build the Keystone XL and Trans Mountain pipelines to carry much more unrefined crude to ocean ports.

Also applauding are the steel companies that would make thousands of kilometres of pipe. The banks that would finance the projects. The labourers who would weld and bolt the pipelines together, or drive the monster trucks and shovels scooping out buckets of tar (for as long as [26] those jobs still [27] exist [28]). And the engineers and production managers who might design and run operations to expand tar sands/oil sands output.

The chorus to make this happen has reached a crescendo. It is ordained with vows about “nation building” and defending provincial honour. Canada’s federal environment minister recently justified [29] exporting more of Alberta’s epochal endowment of black sludge—to fund marine spill safety and future clean energy initiatives!

But noise levels are no substitute for billions of dollars in new project capital put at risk. And defiance can often mask panic. The real test of whether many of those 173 billion barrels of bitumen buried under Alberta muskeg will be shipped to China, India, or Europe is not a political applause meter, but customer contracts. Actual buyers.

Center for International Marine Security

In an especially glaring omission, the report [30] Kinder Morgan used at federal hearings to justify foreign bitumen exports via the proposed Trans Mountain pipeline expansion made zero mention of the major oil conduits into China via Russia, Kazakhstan, and Myanmar. Nor did it acknowledge potential competition from U.S shale oil exports. It made scant mention of India as a bitumen importer, and acknowledged that Europe is not a viable customer due to shipping distance from Vancouver.

 

The Fossils’ Race to the Bottom

Through the haze and the spin, Kinder Morgan faces a stark reality: global oil traders or refiners willing to commit to buying billions of barrels of additional bitumen per year do not exist. For the foreseeable future, they have far better options to buy higher-quality oil at a lower price.

Virtually all the world’s faltering petro-states have gigantic oilfields that are already drilled and tapped—so they can produce for decades just to recoup production costs if they need to, or ramp up production if prices, geopolitical, or unforeseen events warrant.

Saudi Arabia has the largest high-quality oil reserves on the planet, but is fast losing market share in China, India, and Europe because rivals are now selling comparable quality oil on better terms. Those rivals [31] include Russia, Iran, Iraq, Norway, Nigeria, Kazakhstan, Libya, Algeria, Angola, other Persian Gulf suppliers, and most recently, the U.S.

Moreover, highly indebted petro-states like Saudi Arabia, Russia, Iraq, Iran, and Venezuela are so desperate for cash flows that they’re lowballing oil supply bids [32], just to keep revenues rolling in. Or building subsidized, dedicated pipelines to cut out rival suppliers. Or taking losses on shipping costs. Or taking payments [33] in weak currencies they would not touch in better times.

The recent advent of U.S. shale oil production has magnified these maladies, even for petro-states with the biggest and best oil reserves, tidewater ports, and supertanker fleets. Selling billions of barrels per year just to preserve cash flows earns only profitless prosperity. Those that are selling oil profitably, such as American shale and North Sea oil producers, are the exception.

Elsewhere, things are getting weirdly desperate. In a sign of the times, the Saudi royal family has taken to putting hapless fellow billionaires under arrest (albeit in palatial prisons), then granting their release after huge shakedown payments are made. Venezuela is flogging barrels of dirty crude (similar to that from tar sands/oil sands) while its petro-currency crumbles and the government resorts to a state-sponsored cryptocurrency gambit [34]. A dwindling pool of customers is being invited to choose its payment poison.

The extreme price war tactics confronting Alberta tar sands/oil sands producers explain the recent exodus of oil majors there. Almost overnight, countries like Saudi Arabia and Russia have become ruthless global rivals. As Notley has lamented, America has changed from Alberta’s biggest oil customer to its biggest competitor. Now, those competitors are everywhere.

The Looming End of Extreme Oil

But the biggest existential threat to the “incumbent [35]” oil and gas industry comes from new, fundamentally disruptive changes that are overthrowing the basic assumptions and business models behind fossil fuel production. One of them may well be the ascent of the electric car.

This may seem fanciful while gasoline and diesel vehicles account for 99% of global auto sales. But big changes are coming, perhaps at lightning speed.

China, France and the United Kingdom have announced [36] that new sales of gas and diesel cars will be banned as of 2040.

Germany is poised to ban future diesel car sales soon, though its powerful auto industry is digging in for a fight [37].

California, with a population comparable to Canada’s and touting itself as the world’s sixth-largest economy, has mandated [38] fuel economy and emission regulations far tighter than the U.S. norm, set EV quotas for carmakers, introduced EV purchase incentives, and instructed electric utilities to build an extensive, EV charging network across the Golden State.

Many of the major global auto manufacturers are now poised to become EV avatars. Volvo [39] will soon sell nothing but electric drive models. Volkswagen [40], the world’s biggest automaker by sales, is partially atoning for its “dieselgate” disgrace [41] by committing US$25 billion, its engineering acumen, plant retooling, and supply chain lock-ups for an impressive global array of electric cars due to appear after 2020.

In a surprise to many observers of the Detroit Three automakers, high sales of the all-electric Chevy Bolt have prompted [42] GM to ramp up U.S. production, while the Nissan Leaf remains the world’s top-selling EV. Mercedes-Benz, BMW, Porsche, and even Jaguar are now in the rear-view mirror of all-electric pioneer Tesla. Mitsubishi, Kia, and Hyundai offer all-electric or plug-in models.

The single trend in itself is not enough to give global oil producers nightmares. The real threat is the accelerating convergence of carbon regulations and pricing, rising EV battery ranges and lower costs, the inevitable death of diesel as an auto fuel in Europe, North America, and China, and the advent of renewable-powered EVs as two-way consumers and suppliers of grid power and resilience.

Follow the Money

How credible is this forecast? Follow the money. Last year, for the first time, global investments in new renewable energy projects exceeded investments [43] in fossil fuel projects.

In most cases, these mega-billion-dollar investment bets have been placed in traditionally separate spheres (electric utilities versus oil deposits, gas fields, pipelines, and refineries). But now, those lines are vanishing. Wind parks and solar farms from Texas [44] to India [45] are now cheaper on a life-cycle basis than existing coal plants, or new natural gas plants. Last year alone, the world installed [46] nearly 100,000 megawatts of new solar power capacity. Global wind power has also been growing because it is cheaper and more reliable than the fossil competition, and has no risk of carbon penalties.

Until now, the variability of sunshine and wind has been a crippling constraint. But recent innovations and cost reductions in companion battery storage technology, helped along by EV innovations and scaled-up manufacturing, have turned that drawback into an asset. Now huge battery “farms”, built in mere months, silently store surplus power in Australia [47], Hawaii, and California [48] for the instant it is needed. Last month, Electrek identified [49] Tesla as one of the bidders on a battery system in Colorado that would be the world’s largest…at least for a little while.

Soon, fleets of idle EVs (such as taxis, airport rentals, or vehicles at car dealerships or in vast entry port yards) will replicate that model by plugging into local grids, earning income by selling reliability and stability back to utility operators. In fact, electric utilities in California and other states are even offering [50] residential customers a $10,000 bonus to buy a qualifying new EV and sign a buy-and-sell services contract.

One Slingshot. Two Goliaths. Three Stones.

These seismic shifts position the vast U.S electric grid as yet another mortal enemy of Alberta’s tar sands/oil sands, selling electrons that displace gasoline. This continental mobility market is big beyond belief, latently lucrative, and thus ripe for a hostile takeover. American cars collectively burn about 400 million gallons of gasoline each day, at a current daily pump value [51] of US$1 billion.

So as North America’s electricity grids get a radical green makeover via solar, wind, and storage, coal plant emissions and extreme oil production can both be wiped out with the same clean electrons. One slingshot. Two goliaths. Three stones.

None of this will happen without putting hundreds of billions in global investment capital at risk. Elon Musk and Tesla are a leading example of mission-driven innovation and entrepreneurship. Perhaps Musk has dared too much, too fast, and he may ultimately fail for lack of fiscal discipline and focus. But whether he wins or loses [52], he has ignited an unstoppable, accelerating convergence of electric mobility, green power, and battery technology which is now attracting billions in investment capital away from fossil fuel projects and uses.

Nowhere is the transition more obvious than in China and India, two of Alberta’s prime candidates for tar sands/oil sands exports.

Inspired in part by Musk, and facing lethal urban air pollution levels that effectively assassinate [53] their citizens [54], the leaders of both rapidly-developing countries have demanded revolutionary results in solar, wind, EV production, and advanced battery performance. The largest banks, investor pools, carmakers, and engineering companies have been both compelled and compensated to retool their countries.

The progress there is already astonishing. China leads the world in solar and wind installations [55], and solar panel exports [56]. In three short years, it has become the largest EV adopter [57] on the planet.

India is building some of the biggest, cheapest solar farms in the world, and cancelling new coal plants. Wind plants are now being built by the country’s biggest construction conglomerate, and EVs by its largest carmaker [58].

China and India are now poised to leapfrog North America and Europe in arriving at, and surviving in, a carbon-constrained future. All without a single additional barrel of bitumen. Like Alberta’s most famous hockey hero, Wayne Gretzky, their game plan is not to chase the puck where it is—but to move to where it’s going to be.

Paul McKay is an award-winning investigative reporter and author. His reports have appeared in the Ottawa Citizen, Globe and Mail, Toronto Star, and Vancouver Sun. He can be reached at: paul@paulmckay.com [59].

14 Comments (Open | Close)

14 Comments To "Exclusive: Ditched Bitumen Desperately Seeks True Commitment"

#1 Comment By Pam FitzGerald On April 2, 2018 @ 9:40 AM

Excellent analysis, Paul! Explains the clock-watching and panic in Ottawa and Edmonton. Thanks and best wishes.

#2 Comment By Reynold On April 2, 2018 @ 12:01 PM

The cynical thing to do may be to let them build the bloody pipeline and then lose their money. Of course, they’d trample on indigenous rights and degrade the environment in the process. They’d happily frack ever corner of Alberta and B.C. to get condensate with which to dilute the tar.

#3 Comment By Jamie On April 2, 2018 @ 9:40 PM

Yes, but in their submissions to the NEB, KM wants to use the current customers of their existing pipeline that carries refined products to Vancouver to pay for the cost of building the new one. I sympathsize with the idea of “let them fail”, but the consumers of BC will end up picking up the costs.

#4 Comment By bruce jackson On April 17, 2018 @ 2:23 PM

And on such condensate pay absolutely no royalties on this oil which is the easiest to refine into gasoline and diesel fuel.

#5 Comment By René Ebacher On April 2, 2018 @ 2:57 PM

Most market analysts agree that the oil carried by the TransMountain pipeline expansion will go to refineries located on the U.S. west coast. The oil tankers that can access the Kinder Morgan terminal are not big enough to make it profitable shipping oil to Asia.
Alberta oil producers keep complaining about the lack of pipeline capacity to ship their crude out of Alberta. If this is such a big problem, how can they explain why TransCanada has so much difficulty to secure oil supply commitments for its Keystone XL project. It has managed to get a 500,000 barrels/day supply commitment for 20 years for a pipeline that is expected to carry 830,000 barrels/day. TransCanada says that it is enough to secure the project but it still waiting for more supply commitments.
If those two pipeline are built, it means that the tar sands industry will be able to expand for at least the next twenty years, unless the demand of oil goes down. We are on the demand side; so it is up to us to act if we want to stop the development of the Alberta tar sands. If we ask for oil, the oil producers will be happy to provide it.

#6 Comment By Gilles Fecteau On April 2, 2018 @ 3:14 PM

Missing from this article is the cleanup cost for the tailing ponds. With the market for bitumen collapsing, we (the taxpayers) will be left with the cleanup. The money set aside by the industry for the cleanup would cover less than 10% of the cost.

#7 Comment By petr kratoska On April 15, 2018 @ 7:29 PM

not to mention the 115,000 plus abandoned oil and gas wells which according to CD Howe will cost 8.6billion.
Sure there’s an industry cleanup funded but probably the recent bankruptcy of Sequoia (800 abandoned wells) will bankrupt it.

#8 Comment By Errol Povah On April 3, 2018 @ 1:17 AM

Excellent article, Paul; I will highly recommend it to my almost 200 (and increasing rapidly) ‘fellow arrestees’ at the Kinder Morgan gates on Burnaby Mountain over the last couple of weeks, as well as the millions of other Burnaby/British Columbia/Canada/Global citizens who oppose the pipeline.

For many of us, I think we just ‘know’, intuitively — in our hearts, minds and souls — that the Kinder Morgan Trans Mountain pipeline expansion is wrong…and, in many cases, are ready, willing and able to put our lives on the line fighting it. That said, it’s awesome to have such an eloquent and powerful article — just bursting at the seams (no pun intended) with irrefutable facts and figures — as back-up.

I do hope it’s okay for us ‘front line activists’ to quote select parts of your article, as we drive the last few nails into the coffin of the Kinder Morgan pipeline.

Again, thank you!

Errol E. Povah
Second Officer
Sea Shepherd Conservation Society

#9 Comment By Mitchell Beer On April 3, 2018 @ 2:29 PM

Errol, please feel free to use this material as you see fit! And I hope you also spotted the first in Paul’s investigative series, here: [5]

– Mitchell

#10 Comment By Brock Nanson On April 3, 2018 @ 1:17 AM

If Tony Seba’s predictions are close to correct, oil will drop to an average price of around $25/bbl in 2021. Right around the time the K-M pipeline is supposed to be ready to flow, if all goes to plan. How do they think tar sands gunk can be saleable in a $25/bbl market? Talk about a stranded asset. See [60] and if you’re in a hurry, skip to around 52:30…

#11 Comment By David Huntley On April 3, 2018 @ 1:23 AM

Since February 2017 all of the crude oil tankers loading at the Kinder Morgan dock in Burnaby have gone to the USA. None have gone to Asia. (I have been keeping track using the VesselFinder and MarineTraffic web sites.)

#12 Comment By ingamarie On April 3, 2018 @ 1:09 PM

If this analysis is at all accurate, stopping the pipeline becomes good economics. Just try to imagine how they will try to use it when bitumen is no longer marketable. Relieving Canada of its water wealth comes to mind……….since exporting valuables seems to be the only road to profits big operators can imagine.

Better to do the patriotic thing….and not build it in the first place.

#13 Comment By Ricardo2000 On October 23, 2018 @ 11:58 AM

The price for WCS is lower than any other crude because no one wants to buy it. As of Oct 23, 2018 WTI sells for $67.20 per barrel. Canadian Crude Index is at $26.70/barrel, and Western Canada Select (WCS) sells for $17.40 per barrel. At these prices every Western Canadian oil producer is taking huge losses on every barrel.

Tar Sands Crude is the worst crude to bring to market because:

it takes massive quantities of natural gas and water to separate crude from the sand. Current estimates suggest that our production uses 1 barrel of crude to produce 4 to 8 barrels of crude. The Saudi’s produce 70 barrels of $80 to $120 crude for each 1950’s $2 barrel of input energy;

  it is the worst crude to make a profit because the natural gas condensates used to liquify the crude are worth three times as much as the crude;

  it needs Shell’s Scotford upgrader facility just to make it approach normal heavy crude values;

it needs two pipelines and massive shipping to get to market – one pipeline to get the diluted crude to tidewater, and another pipeline to pump the diluent back to the wellhead for reuse;

it is the most dangerous to move by rail because the diluent used to liquify the crude is explosive;

it is the worst crude for pollution because it produces huge amounts of CO2, petroleum coke contaminated with heavy metals including mercury, polluted water, devastated boreal forest, and catastrophic environmental damage when it spills at sea. No one believes that Alberta or the oil companies will pay for any damage, or to reclaim the devastation around Fort Mac.

Exxon/Mobil Canadian subsidiary Esso now values its Kearl tar sands operation as WORTHLESS for SEC and accounting purposes. Other majors (Statoil, Shell, Marathon Oil) have left Fort Mac and won’t return as there are many other places that produce oil of much higher quality, for much lower cost. 

So in what business fantasy world does increasing the supply of a despised, poor-quality crude, in a market flooded with much higher quality product, result in increased demand, and higher prices? 

The Calgary oil industry, after quacking for 80 years about the nobility of free enterprise, and the utility of the market, now hope the government, and the rest of the Canada, will shout ‘Mommy’s coming’. This is hysterically funny, and contemptibly hypocritical, but not a rational basis for energy investment or economic development.

#14 Pingback By Here’s Where America’s Imported Oil Comes from: Venezuela Is Currently the 4th-Largest | Uprootedpalestinians's Blog On February 14, 2019 @ 10:03 PM

[…] investing in those companies. The environmental site “The Energy Mix” headlined in April 2018, “Ditched Bitumen Desperately Seeks True Commitment” and reported that fewer and fewer investors were continuing to trust the industry’s reported […]