Wednesday, September 9, 2015

UPDATE-1: Alberta's new permanent reality

It's been my assertion all throughout Alberta's good times that they would be quickly coming to an end. It may have seemed hard to believe that 'oil' was somehow not as profitable as people thought. The complexities of understanding the difference between currency and real wealth and the complications introduced by ever lower energy returns on energy investment are likewise harder concepts to grasp.

It is for this reason that to this day proponents of oilsands insist that this is a cyclical problem and that before we know it the "boom times" will be back, the reality unfortunately (or fortunately depending how you look at it) is that Alberta's oil industry has now entered a permanent decline and while oil may continue to be produced it will not have the net-benefits Albertans have come to expect from them even though the bar on what would be considered acceptable net-benefits was already extremely low.

At the beginning of last year, when oil was still high and expected to go higher, I wrote a post titled "oilsands proponents have yet to describe the infinite growth endgame" in which I commented on a post by Michael Den Tandt about the trending Neil Young commentary at the time.

I of course don't really care what populist celebrities have to say about oilsands development but I do take issue with so called journalists who paint a rosy picture of "growth and prosperity" for all through oilsands development when the truth couldn't be farther from.

Now however, not even two years after Den Tandt's article on how we should be throwing everything at the oilsands to support their growth Alberta Oil Magazine has come out with an article titled "Why the Oil Sands May Never See Another New Mining Project Built" in which they effectively admit the infinite growth endgame has arrived. It should be noted that the reasoning they use is the exact same reasoning I've been talking about for the last 4 years on my blogs (and longer in terms of my thoughts which drove me to start blogging in the first place). Such as:
CAPP confirmed that in its annual forecast in June, when it reduced estimated oil sands production for 2030 to four million barrels per day. That’s down from 4.8 million barrels per day in its 2014 forecast, and 5.2 million barrels per day in the 2013 version. And according to ARC Financial’s Peter Tertzakian, that revised and reduced forecast is still too optimistic. “I think the era of big megaprojects up there is really over,” he says. “Even before the price crash there was a trend in oil and gas investing – whether it was by large corporations or individual investors – away from long-payback projects with lots of above-ground risk that were also characterized by very high capital costs.” That trend, he says, is a reflection of the fact that energy investors have more to choose from today. “The oil sands has to compete for capital with all the other types of oil projects that are out there. It has to morph into something cleaner, smaller in size and less capital intensive. It’s definitely possible to do, but the old paradigm of 4,000-man camps and long construction periods is over.”
Of course if the old paradigm of 4000 man camps is over, so is the old paradigm of the oilsands being a major source of job creation and being that their royalties are so low and require so much government support just to remain operational the silver lining in their operation was the sheer number of jobs they required. At the end of the day oilsands proponents would always cite jobs as the main reason to keep them around, they may not have provided much net-benefits to the public in general especially with how their wages distorted Alberta's economy for those who weren't rolling in oil cash but at least they provided some personal benefit to the employees in terms of fairly large (but still a drop in the bucket of what these workers should have been making) returns.

By no net-benefit for the public in general what I of course mean is that the infrastructure requirements and the services needed to support the population influx generated by the oilsands was far too expensive and was not covered by the returns the oilsands provide and as I've described many times before the benefits they appeared to provide were more so a function of 1) Alberta significantly under-funding infrastructure expansion and services for the population and 2) a business model entirely based on the rapid rise of oil prior to 2008. It is the phantom of the oil market prior to 2008 which continues to provide the basis of the "coming oil boom" today.

However, even with this significantly reduced  expectations of the production and return of oilsands projects the outlook is still far too rosy and the real turmoil for extreme energy intensive oil and gas extraction has barely begun.

Financial Sector To Cut Credit Supply Lines For Oil And Gas Industry
Oil-Sands Producers Mimic Coal Cost Cuts as Prices Spiral Lower

Of course these issues related to extreme energy production go far beyond the oilsands, deep water drilling and fracking are also largely affected. This was perhaps further highlighted when Irving oil refineries discovered it is now cheaper to refine Brent crude, which has to travel across the ocean, than it is to refine fracked crude from North Dakota.

The 'imploding market' has now gotten so bad for fracking that fracking companies have been throwing more and more resources into what they claim is a "more efficient" way to produce fracked crude for an already oversupplied and deflating market. This is of course not because they are still profitable but because as we've discussed before they're all inundated with "sunk costs" and essentially have no choice but to keep producing on the hope they can someday return to profitable margins. In the meantime as they're hoping for "better days" they're continuing to waste more and more non-renewable resources including fresh water even as the drought conditions in the U.S. persist. It's shocking how with survival methods like these anyone can possibly think "economic growth" is anywhere on the horizon.
Hydraulic fracturing, or fracking, is the process of pumping water, minerals and chemicals into shale rock beneath the Earth's surface to break them up and release oil and gas. It has driven America's booming production of shale oil throughout the last decade. But more recently, companies like Liberty and EOG Resources have advocated a fracking method that uses more water and minerals to break up shale at high pressure in multiple stages.
Yes, even more water, and even more minerals, for what was an already intensive process and for what? To continue oversupplying the world with oil that our economic deflationary vortex will never need? For so called "money"?

The biggest issue with projects like this isn't that they're not really that profitable, it's not even that they're not going to be profitable, The biggest issue with projects like this is the lengths those operating the current monetary paradigm are going to go to to make them seem profitable. Here are a couple examples:

Capping oil well blowouts within 24 hours too expensive, says Ottawa
The federal government says it is agreeing to an offshore drilling plan that would allow up to 21 days to bring in capping technology for a subsea well blowout, because requiring a shorter response time would be too expensive for Shell Canada Ltd.
Alberta Energy Regulator orders Nexen to suspend operations on 95 pipelines
It issued the order late Friday due to what it calls non-compliance surrounding pipeline maintenance and monitoring in its Long Lake oilsands project.
Alberta Energy Regulator spokesman Bob Curran said every oil and gas company is required to monitor, inspect and maintain records for all of their pipelines.
Nexen couldn't demonstrate that those activities have occurred on those lines, which carry several products including crude oil, natural gas, salt water, fresh water and emulsion, Curran said.
Now this last link is very interesting as perhaps for the first time maybe ever the Alberta energy regulator is doing what it's supposed to do rather than simply rubber stamp everything that comes it's way. I attribute this largely to the new Notley government and while I applaud their efforts to finally bring some sort of accountability to oilsands projects this event also shows how far off the mark the Alberta and Canadian governments have been in regards to how "safe" these projects really are.

The reality is that because these projects are so capital intensive there is no room, or cash, for the type of tightly monitored and strict safety measures we claim to have which just might explain why shortly after the regulators actions Nexen shut down the entire site (no confirmation yet as to the true reason but it fits with the problematic environment).

Now I've known for a long time how fraudulent Albertas claims to profitability and high standards of safety have been not from news articles but because being Albertan it's hard not to know someone inside the industry. I have never written about these personal stories I've been told over the years as without news articles to at least back up the situation it would probably be considered no more than hearsay at best. At this time though and with the previous links showing how our cost constraints impact our ambitious environmental and safety concerns I'd like to give an idea of some of the insider stories I've heard in regards to oilsands operations particularly in material coordination being I'm in Edmonton and most insiders I know are in this field.

What is particularly interesting about these stories is that in most cases it is employees taking shortcuts themselves in an effort to save their own ass. Perhaps one of the most repeated stories I've heard was about situations where materials for pipes would be ordered that were not of the correct thickness but due to upstream pressure and a desire for the employee to not personally take the fall for the fuckup they simply pass it on and rubber stamp the papers. In truth many of the executives sitting at the top of these companies really have no clue how chaotic the process is on the actual ground. These executives write up fancy manuals on safety and the proper handling of materials but the employees are so overworked and under such pressure to deliver they're never followed.

My point with this story is that not only are companies "officially" cutting corners such as with the Nexen pipelines not being properly monitored but "unofficially" employees are taking it upon themselves to cut corners to meet demand and not take a personal hit. These stories are not just isolated to low-level employees but also mid-level managers who when these issues are brought to their attention instruct the employees to paper over and ignore the issue passing it upstream so as not to take the performance hit. Over the years I've heard these stories enough to come to the conclusion they're more the rule, than the exception, and these were during the good times.

Whether you believe these stories or not (though I assure you they are true) at this point no longer matters as now with the worsening economic situation these holes are becoming ever more obvious along with the unprofitable nature of extreme oil production but I'm telling you them to provide a glimpse into the clusterfuck it really is and that for every story I have heard there are surely hundreds I haven't.

The failing expectations on oil are bad, but could be contained, the larger issue which is really what I've been concerned about all of these years are the domino effect it's going to have in everyone and everything that's built up an expectation of hyper-inflated growth with no end.

Alberta's new NDP government, which is largely following the path I forecast it would in regards to debt, infrastructure, and oil production is (I believe) in good faith and with well intentions trying to fill in the gaps and holes Alberta's 40 year dynasty of oil insiders acting like politicians has left us in their efforts to fool the Albertan population into believing the oilsands were just as if not more profitable than conventional oil. However I also believe the NDP is doing this either in preparation for, or hope that, the mega growth Alberta has experienced in the past will one day return. Preparation because to properly service the population we're anticipating we'll have we need to prepare and invest ahead of time. Hope, because if this expected population does not materialize we will have greatly expanded our infrastructure for no one, and it's probably likely that without the oil production this infrastructure was built for, and the returns we expect it'll give us, it will be a great burden on the remaining population of Alberta to pay for especially with central banks near running the course on the temporary positive benefits continually lowering interest rates have provided. Simply: Alberta started these initiatives too late and it will likely be the NDP that takes the "blame" for such issues though Alberta's path was largely set in stone years ago long before they ever came to power.

This domino effect could easily ripple through the province, such as in Edmonton where sky-cranes tower over the downtown core building new high rises and the new arena which all assume that at the end of the construction there will be an infusion of ever growing capital and ever richer people to pay the premium prices for tickets, office, and apartment space and keep the property bubble blowing. If Alberta Oil Magazine, and myself, are correct no new mega projects means the influx of population Alberta has experienced in the past is over and done with never to return, in fact Alberta's population may greatly decrease as the Canadian economic propaganda about how strong our economy is has moved back to eastern and central Canada and the great predictions of exports and a U.S. recovery. This will of course leave the investors funding these developments holding the empty bag (or office tower as it were) creating further damage to Alberta's already overheated and overpriced property market.


Alberta and it's oil industry may be adjusting expectations but at too slow a rate to really grasp our current condition. We continue to underestimate the associated costs of extreme energy production and also continue to base our expectations of such production on market conditions that are nearly a decade in the past. The global deflationary event we are experiencing derives from how expensive energy has become in the post-peak oil environment and yes while the market price of these resources is currently low which reflects the oversupply and depressed demand this oversupply is far from proof the good days will be back again being most of it is being produced at a loss or at cost within the North American realm. The more oil we drill today the less there will be to drill tomorrow when we're going to really need it and sooner or later with such a highly leveraged economy something has got to give. Whether good and/or bad, it's an omen.


Great piece out of Zero Hedge: 'Inside Ground Zero Of Canada's Recession'.

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Richard Fantin is a self-taught software developer who has mostly throughout his career focused on financial applications and high frequency trading. He currently works for CenturyLink

Nazayh Zanidean is a Project Coordinator for a mid-sized construction contractor in Calgary, Alberta. He enjoys writing as a hobby on topics that include foreign policy, international human rights, security and systemic media bias.


  1. This reminds me, Richard, of a remark Joe Oliver once let slip in insisting that Canada needed to get bitumen to "tidewater" as quickly as possible. Oliver, perhaps rashly, opined that this pipeline/supertanker project needed to get up and running very soon or else we faced the prospect of Athabasca bitumen becoming a "stranded asset."

    That mentality was given effect in the Herculean efforts of the Harper government to strip Canada of its environmental, marine navigation and fisheries protections right up to and including the wholesale corruption of the National Energy Board and its transformation into an eco-kangaroo tribunal.

  2. Even if they had gotten it to tidewater nothing would have changed, bitumen isn't oil and the idea we can sell it at the market price of oil is an unabashed lie.

    The tidewater argument was really nothing more than a continuation of the "next big thing argument" which Alberta had been engaging in, first regarding the price of oil. "We need $40" "Now we need $70" "Now we need $90" "Now we need $100" "Now we need $120" "Of shit oil raising infinitly is impossible.. err.. we need tidewater!". Why now? Because oil price peaked, and then declined and the "next big thing" of $150 / barrel just isn't affordable or sustainable, and subsequently isn't believable.