By David Yager, Yager Management Ltd.
On the day of U.S. President Donald Trump’s inauguration, the official White House website was rewritten, including 361 brief words outlining the future of American Energy Policy. Titled “An America First Energy Plan”, it starts with, “The Trump Administration is committed to energy policies that lower costs for hardworking Americans and maximize the use of American resources, freeing us from dependence on foreign oil.” Canada is a foreign country. The U.S. is our largest buyer of oil and gas, and we are their largest foreign supplier. This doesn’t read well. There has been endless speculation on how awful this is going to be for a Canadian oil patch finally emerging from the economic wilderness.
However, reading the other 323 words reveals no bad news. Trump will eliminate or soften environmental protection laws, stating, “Lifting these restrictions will greatly help American workers, increasing wages by more than US$30 billion in the next seven years.” America will, as Alaska governor and Republican vice-presidential candidate Sarah Palin declared in the 2008 election, “Drill, baby, drill”.
The plan continues with, “The Trump Administration will embrace the shale oil and gas revolution to bring jobs and prosperity to millions of Americans. We must take advantage of the estimated $50 trillion in untapped shale, oil and natural gas reserves, especially those on federal lands…”
Wouldn’t it be nice if someone besides Saskatchewan Premier Brad Wall said these things?
There’s more. “Less expensive energy will be a big boost to American agriculture… boosting domestic energy production is in America’s national security interest… achieving energy independence from the OPEC cartel and any nations hostile to our interests… (and) a brighter energy future depends on energy policies that stimulate our economy, ensure our security, and protect our health”.
There have been many nervous moments surrounding Trump’s inauguration on January 20 about a Border Adjustment Tax (BAT) and the notification of the intent to revisit NAFTA. But the White House is sending strong signals that whatever new policies the U.S. enacts, they don’t appear to be directed at Canadian oil and gas.
A senior advisor to Trump met with the federal cabinet at a recent retreat in Calgary. The Calgary Herald reported January 24, “Stephen Schwarzman, a billionaire businessman who chairs Trump’s team of economic advisers…suggested that Canadian energy exports to the United States are unlikely to be hit with a new cross-border tax.” Schwarzman said, “There may be some modifications, but, basically, things should go well for Canada in terms of any discussions with the United States. Trade between the U.S. and Canada is really very much in balance and is a model for the way that trade relations should be.”
A Bloomberg story in the National Post carried the views of David McNaughton, Canadian ambassador to the United States. McNaughton said, “I don’t think Canada’s the focus at all. Their biggest concern, frankly, in terms of trade, is the deficits they have with China and Mexico. That’s what they’ve raised.”
The Trump Administration is looking positively friendly. On January 24, 2017, the White House issued an executive order to get the stalled Dakota Access pipeline finished and Keystone XL underway. It is not intuitive the U.S. would want more Canadian oil as a source of future BAT revenue instead of safe and secure energy supplies.
With the trade and tax issues becoming clearer, of greater interest should be: what does cutting the American oil industry loose through fewer regulations and obstacles mean to future Canadian exports? In the past few years, the mantra has emerged that our best customer has become our biggest competitor because the U.S. put 4 million barrels per day of new production on stream, primarily light tight shale oil (LTO). What does “drill, baby, drill” to unlock US$50 trillion worth of shale oil and gas mean for the WCSB?
Take a deep breath, examine the facts, and figure out on which side of the 49th parallel our challenges lie.
Everyone reads regularly about the unbelievable potential of American LTO. For two years we’ve been told the U.S. has replaced Saudi Arabia as the world’s “swing producer”. Every week when the U.S. active oil rig rises, another analyst predicts lower oil prices are inevitable. The legendary Permian Basin is at the top of the news, as is rig productivity. The fact new horizontal wells continue to do a bit better than the last ones due to continuous improvements in drilling speed, multi-stage completion systems, frac density, initial production rates and lower decline curves.
Considering it took a century to perfect the vertical well, that horizontals should continue to improve with technology and practice should surprise no one. This is reflected in lower finding and development costs and higher recovery rates, meaning LTO operators can do better at US$50 or less than ever before. Rising service prices, essential to get service companies on location and keep them in business, will increase costs somewhat. But the biggest gain is in equipment, technology and procedures.
But to the point of the new White House energy policy: are there actually one trillion barrels of oil to be unlocked through the bold policy initiatives of the Trump administration? Or including gas, one trillion barrels of oil equivalent. That’s what $50 trillion works out to. Is this somehow a threat to Canadian oil exports? Is this even possible?
One trillion barrels of oil is a lot. According to worldatlas.com, the proven oil reserves of the top ten oil producing countries in the world are listed in the chart below. The total is 1.4 trillion barrels.
Note the U.S. doesn’t make the list. It ranks number 11 at 36.5 billion barrels. The Energy Information Administration (EIA) figure is higher at 39.9 billion proved barrels at December 31, 2015. At US$50 a barrel, the EIA number would be worth nearly $2 trillion. That’s a lot of oil and a lot of money. But it is 960 billion barrels short of a trillion and $48 trillion short of $50 trillion.
Gas looks the same. The EIA reports proved gas reserves at December 31, 2015 at 388.8 trillion cubic feet (tcf). Say gas sells for US$3.50 per thousand cubic feet (mcf), which is the current price. If all of this were extracted and sold, the total value is $1.4 trillion, a pile of money. But it’s about $48.6 trillion below the new president’s estimate.
Add them both up compared to the White House’s new stated energy opportunity and it’s about $45 trillion below the stated potential. That’s a whack of hydrocarbons that must move from “maybe” to “probable” to “proven,” which is fine. Based on technology and price and all the variables that accompany the upstream petroleum industry, you never know. What has already happened in the U.S. was thought impossible at the turn of the century. Higher prices will certainly help.
To give you an idea of what an oilfield that can truly shape global markets or a country looks like, consider the Ghawar deposit in Saudi Arabia. Discovered in 1951, this single field was estimated to have recoverable reserves of 72 to 100 billion barrels, greater than the remaining reserves of the bottom three of world’s top ten countries ranked by proven crude reserves. This field has been chugging along at 5 million barrels per day for decades. Infield drilling, horizontal drilling and secondary recovery have helped prove Ghawar is not unlike the Permian Basin, except it is more prolific. The Saudis estimated in 2008 half was still available for production.
This is not to say North American fields are without promise. In November, the United States Geological Survey (USGS) estimated the Wolfcamp shale in the Midland portion of the Permian Basin could potentially hold 20 billion barrels of oil, 6 tcf of gas and 1.6 billion barrels of natural gas liquids. If it is all there, that’s a 50 per cent bump in U.S.-proven reserves. A statement reads, “This estimate is for continuous (unconventional) oil and consists of undiscovered, technically recoverable resources.” In 2012, the USGS published another report indicating the fields in the Permian basin could have 2.7 billion more recoverable barrels than previously thought. It is a massive deposit. There is for sure opportunity.
But back on planet earth, EIA statistics report for the four weeks ended January 13, 2017, U.S. oil imports average 8.3 million barrels per day. While this is down significantly from prior years, thanks to the LTO miracle, net imports were 7.5 million barrels per day in the U.S. now that the country exports oil of certain grades to specific markets. Canada exports about 3.5 million barrels per day to the U.S., accounting for 42 per cent of American imports.
But even under Trump’s new regime and exciting new plays like Wolfcamp, is there a set of circumstances under which Canadian oil will no longer be required?
Never. Review the foregoing. Never. Without one or two Ghawars secretly concealed from U.S. explorationists for the past century or longer, the idea a Trump-fueled investment boom in some of the most expensive oil in the world will displace all — or even a meaningful portion — of U.S. imports anytime soon is fantasy. It will take massive drilling, federal lands included, to make a significant dent in imports. And judging by the wording of the White House energy statement and recent announcements, if America does reduce oil imports from Canada, it will be last to lose market share.
From a reserve and production perspective, for the U.S. to become everything President Trump figures it should or could be, it will require much more than reversing Barack Obama’s environmental protection legislation; it will take a geological miracle. So long as we don’t do anything really stupid, Canada will be able to sell the U.S. all the oil this country can produce for the foreseeable future.
But the key words are “really stupid.” The last issue regarding Canada/U.S. energy relations, which has yet to be properly addressed, is economic competitiveness. This may be the greatest damage the Trump administration will inflict on the Canadian oil patch. With the exception of lower service and labour prices since crude collapsed, operating costs in Canada have only been rising for some time. This include regulations, transportation and most recently, corporate tax increases, carbon taxes and an oilsands emissions cap. These costs are rising because of government policy, not geology.
If Trump delivers on streamlined regulations and increased opportunities (including access to restricted federal lands) while Canada continues in the opposite direction, capital will migrate to jurisdictions with the simplest rules and highest rate of return. When it comes to Alberta this is already underway. The destinations for many larger Canadian operators has been U.S. basins such as the Permian, Marcellus and Bakken. Capital formerly destined for oilsands is going elsewhere.
Even the weather makes it cheaper to operate in the U.S., where the extreme cycles of winter followed by spring break-up affect activity and investment doesn’t exist. Long-term planning and year-round operations are simpler and less expensive for Americans. Canadian efforts on climate change through carbon taxes are meant to ensure spring break-up always follows an historically cold winter. It is unlikely anybody considered the oil patch would be more profitable in Canada if we could just level off the temperature fluctuations.
When Donald Trump talks about a new “America First” energy strategy, Canada must remember the U.S. deals with multiple suppliers. Canada shares with the U.S. the longest unguarded border in the world. The Keystone XL announcement indicates that, for Trump, Canada is the bottom of the list of oil and gas importers that are an issue.
But for our oil and gas industry not to be affected by the Trump presidency, we must remain economically competitive. In terms of energy policy, trade, fiscal regime and operating environment, the greatest threat to Canada’s oil and gas industry comes from Canada, not the U.S.
Originally published on Oilprice.com.