OPINION | What happens if Albertans keep praying for another oil boom, but God has none left to give?
If Calgarians are looking for an answer to that question, they could do a lot worse than look to Detroit
Another day, another divestment.
On Aug. 14, the Financial Post reported that Koch Industries (yes, that Koch Industries) was selling its collection of oilsands leases to a subsidiary of Paramount Resources for an undisclosed sum of money.
To some, like BNN's Amanda Lang, this was more bad news for an already battered energy sector.
"The symbolism of yet another multinational player abandoning Canada is very bad," she said during her daily television hit.
Never mind, for a moment, that the assets the Koch Brothers sold were of marginal quality, at best, or that Paramount is far more likely to develop them than they ever were. For many people working in the corporate head offices of any number of oil and gas companies in Calgary, this was yet another sign that the federal government was choking the life — some believe deliberately — out of the energy sector.
It's surely tempting for them to think that a new tenant at 24 Sussex will change this state of affairs.
For example, Martin Pelletier, a Calgary-based portfolio manager, suggested on Twitter that the October federal election (and presumably a victory by Andrew Scheer's Conservatives) could be the "catalyst" that finally sparks a turnaround.
But those people were probably thinking the same thing about Jason Kenney and the UCP earlier this year, and despite cutting corporate taxes and declaring war against the industry's enemies, both foreign and domestic, the energy sector has continued to bleed jobs and capital. The shares of publicly-traded companies, meanwhile, are trading at multi-year lows — far lower than where they were at before April's election.
This isn't Kenney's fault, mind you.
Instead, it's a reflection of the fact that there's nothing any Canadian politician can do to arrest the technological, economic, and environmental changes that are reshaping the oil and gas industry's future.
Indeed, those sorts of tectonic shifts are beyond the reach of even the most powerful politician in the world.
Just ask the U.S. coal industry, which pinned its hopes on Donald Trump's pledge to make it great again only to watch him flail impotently as ever-cheaper natural gas and renewables continued to eat away at their proverbial lunch. By the time he's out of office they'll be lucky if there's even a snack left for them. Politics, as ever, are no match for economics.
The same thing is true in the oil industry, where those technological changes have redefined the economic landscape and transformed a market that used to be defined by scarcity of supply into one that's practically drowning in surplus. That's put an end to the days when multinational corporations would back up the metaphorical truck in order to get their hands on some small slice of Alberta's billions of barrels of oil.
And worse still, from the perspective of the companies that own those barrels (and the provincial treasury that benefits from their sale), the growing concern about climate change and greenhouse gas emissions is chipping away at the rampant growth in demand for oil that defined the early 2000s and marking a clear path to its eventual decline.
That raises an almost existential question for Calgary.
In a city where praying for another oil boom and promising not to piss it away is practically a rite of passage, what happens if God doesn't have any more booms left to give?
Looking to Detroit
If Calgarians are looking for an answer, they could do a lot worse than asking someone who's spent the last few decades in Detroit.
In 1980, Detroit had the second-highest median income per capita for workers under 35 in the country (nearby Flint, Mich., was number one). Today, those incomes have dropped by nearly $15,000 a year. And while it probably seems strange to compare the two cities, Calgary and Detroit have more in common than it might appear.
Both are defined by one dominant industry whose economic reach extends beyond its own supply chains and into the vitality of the city's restaurants, bars, boutiques and housing market. Both have resisted efforts to diversify away from those industries and expand the scope of their economies. And while Calgary's stock in trade hasn't been disrupted in the way or to the degree that Detroit's was in the 1980s, we're all still in the early innings of a game that's yet to fully play itself out.
For Detroit, the disruptive change came in the form of increased competition from Japanese and German automakers and, somewhat ironically, a spike in the price of oil in the late 1970s. And despite increasingly desperate efforts to subsidize and support the city's auto industry, the slide continued more or less uninterrupted until it bottomed out during the 2008 recession.
For Calgary, and Alberta, the disruptive forces at work are twofold: the technology that's unlocked billions of barrels in the shales of Texas, New Mexico, and Pennsylvania, and the ever-improving economics of lower-carbon sources of energy like wind and solar. Together, they're transforming the global energy landscape — and turning what used to be a competitive advantage, Alberta's massive oil reserves, into a potential albatross.
That's a staggering turn of events, given that they looked until very recently like a licence to print money with no expiration date. But the fears of peak supply, which drove predictions of $200 per barrel oil and takeover offers in the oilpatch with generous premiums attached to them, have given way to the reality of peak demand. And while there's still disagreement about when demand for oil will peak, with more aggressive forecasts suggesting it could come as soon as the mid-2020s and more cautious ones pegging it closer to 2050, they all predict that demand will be plateauing in most of our lifetimes.
As Wood Mackenzie, one of the biggest energy research and consultancy firms in the world, noted in 2017, "Although oil demand grows to 2035 on aggregate, it is minimal compared with what we have seen over the past 20 years. The prospect of peak oil demand is very real."
This doesn't mean Alberta's oil and gas industry is doomed, or that it needs to start shutting in production any time soon. Ironically, the very nature of the shale plays that makes them so attractive — their ability to bring on production quickly from new wells — also creates an opening for non-shale operators.
A different kind of roller-coaster
Unlike the oilsands or conventional wells, whose production declines at a relatively gentle pace, shale wells are like a roller-coaster at an amusement park — a huge peak followed by a stomach-churning descent. Alberta can and will play a role in filling the gap they naturally create — a gap that will get much bigger as prices come down and fewer new shale wells are drilled.
"We can't try to live in the past and hope for more boom times," says Blake Shaffer, an economist with the University of Calgary and a former energy trader. "But I do believe that there's scope for continued production — and especially when you look towards Trans Mountain and the potential for either west coast or cross-Pacific shipments."
But, he says, that scope will be informed by how quickly Alberta's oil and gas companies can drive down their costs — and their GHG emissions. And they'd better do it quickly, given that we're in the midst of a(nother) seismic shift in the global auto industry that will start hitting the demand for oil soon.
"I see the electric vehicle transition being far more rapid and far more widespread than I think even optimistic forecasts are calling for right now. And that's substantial," Shaffer says.
Indeed, as Fortune noted in a recent story, "EV sales are shooting up beyond many supposed experts' wildest predictions."
And while petrochemical-driven demand is expected to continue growing, it won't be nearly enough to offset the growing impact of electric vehicles on transportation, which accounts for approximately 70 per cent of the overall appetite for oil.
"That's where the curve is going to bend," Shaffer says. "I think we're going to see it in Europe, we're going to start to see it in the Americas, and we're going to start to see that sooner than we think in China."
And Shaffer is clear: when it comes to that curve bending, it's only a matter of when, not if.
"Eventually, a transition is going to be required," Shaffer says, "and we can do it in an orderly fashion or we can do it in a forced fashion. Preparing ourselves is prudent, simply from a risk management perspective."
It's this preparation that helps explain much of the so-called "capital flight" that's happened over the last four years, as American and international oil companies sell their Alberta assets to Canadian owned and controlled companies like Suncor and Canadian Natural Resources.
Depending on oil prices and the quality of the acreage, an average shale well takes anywhere from 12 to 24 months to pay out — that is, generate revenue equivalent to its costs plus a return on the investment. An oilsands project, by comparison, can take upwards of a decade.
If you're a multinational company that's uncertain about the long-term demand picture for oil, you're going to start hedging out some of that risk.
"Just from a business point of view," Shaffer says, "you want to reduce your exposure to being locked into long-life assets that may or may not be valuable. Having more flexibility with the shorter-life assets makes a lot of sense."
This is the reality that many Calgarians have yet to fully reckon with, the one where the recent pain and suffering is being meted out by global supply and demand realities rather than the person sitting in the prime minister's office (or, as some of the more conspiratorial whisperings would have it, his former principal secretary and longtime friend.)
And while it's understandable that people want to go back to the days when the market traded on the basis of long-term scarcity rather than surplus, they're not coming back.
Neither, just as importantly, are the days when the industry was significantly more labour-intensive than it is today. Companies are replacing workers with technology everywhere they can, from the drilling rig site to the head office, and there is nothing — not a new prime minister, nor any sort of short-term geopolitical disruption in the Middle East — that can change that.
(This is the first of a two-part series examining the challenges facing Calgary's oil and gas sector. Tomorrow, Part 2: Adjusting to a new reality.)