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Why an accidental leak should send shivers up Big Oil’s spine | Jeff Rubin

Why an accidental leak should send shivers up Big Oil’s spine | Jeff Rubin.

Posted by Jeff Rubin on February 18th, 2014 under SmallerWorld

One of the largest accidental releases of oil in Alberta’s history isn’t a burst pipeline and it doesn’t involve a train of tanker cars derailing into a river. It’s also not a thing of the past. It’s been going on for about a year and it’s still happening. An estimated 12,000 barrels of bitumen and water has now risen from giant cracks in the forest floor at an underground oil sands project run by Canadian Natural Resources Ltd.

Oil leaks are a regrettable fact of life in the business, but this one might send shivers up the spine of even a veteran oilman. CNRL insists the seepage is due to the failure of four well bores that are supposed to draw oil from its Primrose project, near Cold Lake, to the processing facilities on the surface. Others, including even Alberta’s pro-industry energy regulator, aren’t so sure.

The well bores are separated by several kilometers, which calls into question why four would fail at the same time. A more frightening theory that’s gaining currency suggests CNRL may have overpressurized the underground formation causing the caprock closer to the surface to fracture, which is allowing the bitumen to seep upwards.

Primrose is a so-called in situ oil sands play, which means it uses a process that involves heating bitumen in the ground to a point where its viscosity allows it to be pumped to the surface. It doesn’t create the moonscapes and toxic tailings ponds that have become the signature features of oil sands mining projects, but it’s also not without its environmental footmarks. At Primrose, CNRL, for instance, has been ordered to pump more than 400,000 cubic meters of contaminated water from a small lake contaminated by the bitumen seepage. On a broader scale, the enormous amount of steam needed to extract bitumen from in situ plays, makes the undertaking more carbon intensive than even the mining projects that begin by stripping all traces of the original boreal forest from the landscape.

The carbon trail from in situ projects isn’t the only worry. The extraction method may also be having more of an impact on the earth itself than was previously thought. Geologists have found that injecting massive amounts of steam into bitumen deposits can actually lift the ground cover by more than a foot a month. If this upheaval fractures the caprock then that’s one less barrier left to stop the uncontrolled flow of bitumen to the surface.

The proliferation of such unconventional extraction methods, as the US experience with fracturing shale rock shows, can also have unintended seismic effects. In Oklahoma and other places, for instance, fracking has been linked to earthquake activity.

So far, the Alberta Energy Regulator has yet to deliver a final verdict on the Primrose leak, although it did recently move to limit the amount of steam that CNRL can inject into its wells. While the provincial energy regulator — led by a former EnCana executive and president of the oil industry’s lobby group — does seem to be suspicious of CNRL’s proffered explanation for the seepage, it has yet to order the company to stop injecting steam at its Primrose operations. The longer bitumen keeps seeping to the surface, though, the more pressure the regulator will face to do so.

Whether CNRL’s problems at Primrose are specific to that site or will become a more generic issue for the industry remains to be seen. But with 80 percent of the massive expansion planned for the oil sands coming from in situ production, it’s a question that investors in oil sands stocks will soon want answered.

Why turning a buck isn’t easy anymore for oil’s biggest players | Jeff Rubin

Why turning a buck isn’t easy anymore for oil’s biggest players | Jeff Rubin.

Posted by Jeff Rubin on January 27th, 2014

Judging by pump prices, Canadian drivers might think oil companies were rolling in profits that only move higher. Lately, though, the big boys in the global oil industry are finding that earning a buck isn’t as easy as it used to be.

Royal Dutch Shell, for instance, just announced that fourth quarter earnings would fall woefully short of expectations. The Anglo-Dutch energy giant warned its quarterly profits will be down 70 percent from a year earlier. Full year earnings, meanwhile, are expected to be a little more than half of what they were the previous year.

The news hasn’t been much cheerier for Shell’s fellow Big Oil stalwarts. Exxon, the world’s largest publicly traded oil company, saw profits fall by more than 50 percent in the second quarter to their lowest level in more than three years. Chevron and Total, likewise, are warning the market to expect lower earnings when fourth quarter results are released.

What makes such poor performance especially disconcerting to investors is that it’s taking place within the context of historically high oil prices. The price of Brent crude has been trading in the triple digit range for three years running, while WTI hasn’t been far off. But even with the aid of high oil prices, the supermajors haven’t offered investors any returns to write home about. Since 2009, the share prices of the world’s top five publicly traded oil and gas companies have posted less than a fifth of the gains of the Dow Jones Industrial Average.

The reason for such stagnant market performance comes down to the cost of both discovering new oil reserves and getting it out of the ground. According to the International Energy Agency’s 2013 World Energy Outlook, global exploration spending has increased by 180 percent since 2000, while global oil supplies have risen by only 14 percent. That’s a pretty low batting average.

Shell’s quest for new reserves has seen it pump billions into money-devouring plays such as its Athabasca Oil Sands Project in northern Alberta and the Kashagan oilfield, a deeply troubled project in Kazakhstan. It’s even tried deep water drilling in the high Arctic. That attempt ended when the stormy waters of the Chukchi Sea crippled its Kulluk drilling platform, forcing the company to pull up stakes.

Investors can’t simply count on ever rising oil prices to justify Shell’s lavish spending on quixotic drilling adventures around the world. Prices are no longer soaring ahead like they were prior to the last recession, when heady global economic growth was pushing energy prices to record highs.

Costs, however, are another matter. As exploration spending spirals higher, investors are seeing more reasons to lighten up on oil stocks. Wherever oil producers go in the world these days, they’re running into costs that are reaching all-time highs. Shell’s costs to find and develop oil fields, for instance, have tripled since 2003. What’s worse, when the company does notch a significant discovery, such as Kashagan, production seems to be delayed, whether due to the tricky nature of the geology, politics, or both.

Shell ramped up capital spending last year by 50 percent to a staggering $44 billion. Oil analysts are basically unanimous now in saying the company needs to rein in spending if it hopes to provide better returns to shareholders.

Big Oil is discovering that blindly chasing production growth through developing ever more costly reserves isn’t contributing to the bottom line. Maybe that’s a message Canada’s oil sands producers need to be listening to as well.

The future looks bleak for Ontario’s manufacturing sector | Jeff Rubin

The future looks bleak for Ontario’s manufacturing sector | Jeff Rubin.

What’s happened to Canada’s manufacturing sector? Kellogg’s recent decision to close its plant in London ripped another 500 factory jobs away from Ontario. That follows Heinz’s move to shutter its plant in Leamington, which is near Windsor. The 100-year-old plant, and its 740 employees, was the largest employer in the area. The announcement from Heinz comes on the heels of plant closures by Caterpillar, CCL Industries, and Novartis. Added up, and Ontario, home to what’s left of Canada’s industrial heartland, has shed 33,000 manufacturing jobs in the last year.

While the recent plant closures have grabbed headlines, it’s only a fraction of the jobs lost over the last decade. Once the top employer in Ontario, the manufacturing sector is now a shadow of its former self.

Since 2002, Ontario’s manufacturing sector has shrunk by nearly 30 percent—or more than 300,000 jobs. The story is similar when you look at real manufacturing output, which is down almost 20 percent over the same time.

Look back to the 1990s, or indeed most of the post-war period, and manufacturing could be counted on as an engine of economic growth for the province. Today, the opposite is true. The shrinking sector is a drag on growth and part of the reason Ontario’s economy has been a laggard versus other provinces over the last decade.

It’s unfamiliar territory for Ontario, historically the principle cheque writer of equalization payments to the poorer provinces in the Confederation. Not so anymore. The income-per-capita in what was once Canada’s most affluent province is now well below the national average. Ontario’s economic standing among other province’s, similarly, is also on the decline. The province’s share of Canadian GDP is down by roughly 5 percentage points in the past ten years.

It’s not a coincidence that manufacturing employment in Ontario peaked in 2002, just as a free falling Canadian dollar was plunging to nearly 60 cents against the U.S. greenback. Backed by that exchange rate, everyone from auto assemblers to food processors enjoyed a commanding cost advantage over competing plants south of the border.

Since then, the Canadian dollar has soared along with the rising price of oil. While the loonie has long moved to the rhythms of commodity prices, in the last decade it’s danced in lock step with oil prices, which have marched from $20 a barrel to the triple-digit range. These days the loonie is trading more than 50 percent higher than it was during the last peak in manufacturing employment in Ontario.

In the context of exchange-adjusted labour costs rising by more than 50 percent, there’s really no mystery behind why so many manufacturing plants are closing in Ontario. Offsetting such a dramatic swing in exchange-adjusted wage costs would take a boom in productivity that, frankly, just isn’t in the cards.

What’s worse, productivity in the manufacturing sector is actually languishing. In theory, a higher Canadian dollar should make it easier for plants to import machinery and equipment that will enhance productivity. The theory, however, assumes that plants will continue to run. In practice, a soaring loonie is spurring international manufacturers to look for greener pastures elsewhere. Instead of spending money in Canada to improve factory productivity, decisions are being made in the opposite direction, which is resulting in disinvestment.

The numbers speak for themselves. In the last decade, the manufacturing sector’s share of business investment is down by nearly half, falling from 14 percent to as little as 8 percent. Without capital spending on new plants and equipment, productivity growth is going nowhere. That, in turn, only exacerbates the competitive disadvantage that a high Canadian dollar puts on wage costs.

Where to from here? With the loonie trading in the 95-cent range against the greenback, who’s choosing to invest in boosting the productivity of an uncompetitive manufacturing sector?

 

Unconventional oil not delivering promised U.S. energy security — Transition Voice

Unconventional oil not delivering promised U.S. energy security — Transition Voice. (source)

oil tanker

Critics of TransCanada’s Keystone XL project often argue that Canada should reap the full benefits of its natural resources, rather than exporting its petroleum riches south of the border. Head to the U.S. and, ironically, you can hear the same discussion. Much of America’s new found oil wealth is being shipped abroad, which is worrying Americans who figured they had a Made-in-the-USA solution to the country’s energy needs.

Since 1975, U.S. federal law has banned raw crude from being exported in the interests of national energy security. The legislation, however, doesn’t cover refined products, such as gasoline or diesel. American refineries are free to export as much refined product as they can sell. And these days that’s a lot.

Refineries in the U.S. are shipping record amounts of gasoline around the world, exporting the fruits of the country’s shale revolution to some of the same countries that not long ago were relied upon for crude supply. Tankers full of gasoline and diesel fuel — made from shale oil pulled out of places such as North Dakota and Texas — are being shipped to the Middle East, South America (including Venezuela), Nigeria, and the rest of West Africa.

Added up, the U.S. shipped a record 3.2 million barrels a day of gasoline, diesel, and other refined products in September, according to the U.S. Energy Information Administration. That number is nearly 65 percent more than the U.S. was shipping in 2010, before the shale revolution took off in earnest. Three years ago, the U.S. was a net importer of gasoline and other refined petroleum products. Today, it’s a net exporter.

It’s easy to see why. Refiners in the U.S. are enjoying the double-barreled advantage of soaring home-grown oil supply and domestic gasoline demand that continues to limp along with the country’s tepid economic growth. The ban on crude exports, originally adopted following the OPEC-inspired energy shock, has effectively turned into a subsidy for U.S. refiners. The millions of barrels of oil being pulled out of new shale plays has nowhere to go.

In Canada, the dynamics of North America’s oil market led to what’s not so affectionately known as the bitumen bubble. A glut of oil in the U.S. Midwest caused bitumen from Alberta’s oil sands to trade as much as $50 a barrel below the going rate in the rest of the world. The price of benchmark U.S. crude, similarly, is trading at a discount to world prices of anywhere from $10 to $25 a barrel.

With that kind of price advantage on feedstock, U.S. refiners have rarely had it so good. European refineries, in contrast, are taking it on the chin. Not only are they paying world prices for oil, but their traditional business of exporting surplus gasoline to the U.S. is shrinking and they’re rapidly seeing their product get displaced in other markets, such as Africa, by cheaper gasoline from the U.S.

American motorists may well be wondering when they’ll share in the boom times from the shale revolution. Despite record gains in domestic oil production, U.S. drivers are still paying more than $3.30 a gallon to fill up. U.S. oil production is up by 2 million barrels a day since 2011, so why aren’t pump prices falling to two bucks a gallon? The answer, of course, is all that U.S.-made gasoline now being burned offshore.

Shipping hundreds of thousands of barrels a day around the continent by rail comes with clear worries for public safety, as well as the environment, that are already being realized. The logic behind the continued expansion of oil-by-rail is tested even further given how much of that rail traffic ends up at coastal refineries that process the crude into gasoline for drivers in the Middle East, Venezuela and Nigeria.

The political cover of North American energy security is allowing Big Oil to frack and drill as fast as it can. Isn’t it worth asking who’s really benefiting from the shale revolution?

– Jeff Rubin, Jeff Rubin’s Smaller World

 

Jeff Rubin: Boom Times Aren’t Coming Back, But That’s Not Necessarily Bad (Q&A)

Jeff Rubin: Boom Times Aren’t Coming Back, But That’s Not Necessarily Bad (Q&A). (FULL ARTICLE)

Key takeaways:

-We must prepare for a long period of harder times
-Canada will be a water superpower
-Oil sands won’t boom like the industry predicts
-Anti-Keystone movement has backfired

As recently as 13 years ago, a barrel of oil cost $20, or even less. Today, global crude prices are hovering around the $100 mark. We may be getting used to higher prices at the pump, but the world economy isn’t, says economist Jeff Rubin — and the result is a permanent shift down in economic growth.

Rubin was the chief economist at CIBC World Markets for close to two decades, but had to part ways with his employer when he started writing about how rising energy costs are going to put make our worlds a lot smaller.

Rubin’s argument is controversial: He says we aren’t so much in the midst of a sluggish recovery as we are in the middle of a new reality — one where we will have to get used to a lower standard of living….

 

Jeff Rubin: Boom Times Aren’t Coming Back, But That’s Not Necessarily Bad (Q&A)

Jeff Rubin: Boom Times Aren’t Coming Back, But That’s Not Necessarily Bad (Q&A). (FULL ARTICLE)

Key takeaways:

-We must prepare for a long period of harder times
-Canada will be a water superpower
-Oil sands won’t boom like the industry predicts
-Anti-Keystone movement has backfired

As recently as 13 years ago, a barrel of oil cost $20, or even less. Today, global crude prices are hovering around the $100 mark. We may be getting used to higher prices at the pump, but the world economy isn’t, says economist Jeff Rubin — and the result is a permanent shift down in economic growth.

Rubin was the chief economist at CIBC World Markets for close to two decades, but had to part ways with his employer when he started writing about how rising energy costs are going to put make our worlds a lot smaller.

Rubin’s argument is controversial: He says we aren’t so much in the midst of a sluggish recovery as we are in the middle of a new reality — one where we will have to get used to a lower standard of living.

Rubin’s latest book, The End of Growth, recently came out in an updated paperback edition. HuffPost Canada talked to him about what it will mean to live in a world of high energy prices, his reasons for believing Canada will become a “water superpower,” and why the end of growth might not necessarily be a bad thing.

What do you mean when you talk about the end of growth?…

 

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