Energy and Climate Change: Will the market save us from ourselves?

This is spooky. I sat down to update myself on oil markets this morning so as to be able to write this article, CBC playing in the background. This interview with Regan Boychuk, a researcher with the Alberta Liabilities Disclosure Project came on and immediately riveted my attention. “Every company operating outside of the oil sands in Alberta, at least their Alberta operations, is insolvent. They have more financial and environmental debt than they can ever realistically expect to generate in profits", he said.

Western Canada Select, the benchmark oil for the tarsands, lost nearly 40 percent of its value on Monday, March 9, closing at only $15.73. The cost of production is in the range of $50-65

So, I wondered, what of the tarsands? With the price of oil so low, what’s happening with their profitability?  That’s when the next spooky thing happened: CBC reported online that OPEC had failed to reach an agreement with Russia to make further cuts to supply; there’s fear of an all-out price war as Saudi Arabia ramps up supply and discounts its prices. West Texas Intermediate oil prices are down to $30 bbl and falling.  That puts the prices of Canadian heavy oils down to about one-quarter of the cost of production. And this at a time when Jason Kenney, in all his wisdom, has taken the constraints off Alberta producers, putting further downward pressure on prices.

Add in the shocking impact of reaction to the Covid-19 crisis on global oil demand, and the oil industry is facing a perfect storm. Growth projections for the sector were already modest and being revised downward month by month by the International Energy Agency. While coronavirus impacts will hopefully be short-lived, escalating geopolitical tension and the climate crisis are definitely driving a global investment trend away from oil.

This puts the decision by Teck Resources Ltd. last month, to down tools on its massive tarsands project, into a little better perspective. It was not so much about the shortcomings of energy policy in Canada as it was about losing the corporate shirt. While it had the nation’s attention for walking away from the project, Teck announced the purchase of a solar energy plant. At a mere 1.05 megawatts, the plant is unlikely to calm existential fears on the part of investors; but it might signal a dawning awareness that the oil business is moribund.

And so, on to my thesis that the market might save us from ourselves: with prices tanking, a soft outlook for demand and Alberta producers insolvent or about to become so, it seems unlikely that we’ll see the kind of growth in tarsands production that gave rise to the scheme to expand the Trans Mountain pipeline in the first place. Living Oceans’ expert reports filed in the hearing process made it clear that the pipeline wasn’t needed any time soon based on the (much rosier) projections for supply back in 2016. In today’s market and with the Keystone pipeline likely to be completed, Trans Mountain is even less likely to be needed. If the market were the financier, instead of you and me, it wouldn’t even be built in this investment climate.

The only question is, does anyone in Ottawa have what it takes to respond to the writing on the wall? Or will it be easier, politically, to squander a few billion on building the white elephant in the hope of selling it to a consortium of indigenous businesspeople (and the even fonder hope of placating Alberta)?  We can only hope that the potential financiers for the potential purchasers can read the writing on the wall and are translating it for Ottawa right now.