Tuesday, 22 December 2015

Ms. Wynne: Painting wasteful policies with a green brush won’t fool Ontarians

By: Christine Van Geyn, Director, Canada Taxpayers Federation

Article originally published on Dec 21, 2015 by the Globe and Mail and can be accessed here: http://www.theglobeandmail.com/globe-debate/ms-wynne-painting-wasteful-policies-with-a-green-brush-wont-fool-ontarians/article27865553/ 

In the card game Euchre, the trump card is one you hold back and use to win if nothing else works. Kathleen Wynne seems to have found her trump card, and it is green.
Whenever she is cornered with clear facts of a failed policy, she throws down her green trump card and claims the moral high ground over her critics.
Take for example, the recent scathing report from the Auditor-General that found the Ontario government’s Green Energy Act policies have cost consumers $9.2-billion more for electricity than they would have paid under previous programs. Consumers have been paying far above market rates because of 20-year contracts for wind and solar energy. Specifically, Ms. Wynne has forced them to pay three and a half times the average U.S. market price for solar, and double for wind.
Instead of thanking the Auditor-General and committing to fix the problem, Ms. Wynne rushed to defend this policy. In fact, she has said she is “happy” to defend the extra billions of dollars consumers must pay, because green energy is worth the expense. Former premier Dalton McGuinty even wrote an op-ed piece after the release of the Auditor-General’s report in which he said “being clean and green comes with a cost.”
But this misses the point.
We do not want green at any price. The Auditor-General was not criticizing green energy itself. Nothing about wind or solar power is inherently wasteful. The Auditor-General’s point was that the particular energy the government contracted to buy was overpriced. That was why she compared the amount paid in Ontario to the price in other jurisdictions. If we are buying green, we should still get it at a competitive market price.
Ms. Wynne used her green trump card again when she came under fire over winter road maintenance contracts. The Auditor-General found in her 2015 Special Report on Winter Highway Maintenance that the government accepted the lowest bid for the road service, even though the contractor did not have sufficient equipment. The government spent millions on new plows and sanders as a result.
While the issue was clearly one of waste – why hire a contractor who did not own the equipment – Ms. Wynne deflected to climate change. She responded to the criticism by stating “we are seeing the effects of climate change across this country […] It is very important to have the right equipment.”
Of course it is important to have the right equipment, but who pays for that equipment and who owns it at the end of the day is the issue. Ms. Wynne somehow turned the issue of a flawed procurement process into a debate about global warming.
The green trump card even works in the most tenuous of circumstances. Take the use that Glen Murray, Minister of the Environment and Climate Change, made of “an unprecedented drought” as the explanation for the destabilization of Syria. In this government’s view, the “root cause” of the displacement of millions of Syrians is climate change. Not Islamic State, not Bashar al-Assad’s barrel bombs. It is really about global warming. Talk about co-opting a tragedy in the name of your own political agenda.
And of course, green policy is used to justify policies designed to bring revenue to Ms. Wynne’s government, which faces debt levels approaching $300-billion and spends $11.3-billion a year on debt interest.
The cap-and-trade system for reducing emissions of greenhouse gases is a revenue plan couched in green language. It is a complex scheme that involves the government creating financial products called “carbon credits” that it then forces industries to buy and trade. Of course it requires the establishment of an enormous bureaucracy. The plan is projected to raise $2-billion in revenue for the government each year.
Likewise, the recently announced high occupancy toll lanes are a method of squeezing revenue out of Ontario drivers. Ms. Wynne threw down her green trump card and claimed moral authority over her critics by saying this revenue tool is really about the environment.
But Ms. Wynne should be wary. A trump card is a powerful tool, but in Euchre you can use it only once. The Premier has played it multiple times. If she keeps playing her trump, she will find that it will stop working. And eventually Ontarians will see these policies for the waste and cash-grabbing they truly are.

Friday, 18 December 2015

When the wind blows

Article was originally published in a special report called "Climate Change" done by The Economist in their November 28th - December 4th print edition. 

This article can also be found online here: http://www.economist.com/news/special-report/21678955-renewable-power-good-more-renewable-power-not-always-better-when-wind-blows 

And the entire report can be found here: http://www.economist.com/climatechange

Renewable power is good. More renewable power is not always better. 

On a breezy, sunny day in north-east Germany it seems as though the world is running on renewable energy. Near Altentreptow 50-odd giant wind turbines, the tallest 200 metres high, spin above a potato field, making a gentle swishing sound. The hum from the base of each turbine is the sound of electricity being generated, much of it bound for Berlin. The view from the wind farm, across flat fields, is of another wind farm.

Sadly, this is not how the world’s power is generated. In truth, the view from Altentreptow does not even properly reflect how Germany’s power is generated. The battle to drive carbon dioxide out of the world energy system, which accounts for about two-thirds of human greenhouse-gas emissions, has seen some heartening and visible advances. But clean energy is still being soundly thrashed by the dirty sort.

Even as the wind turbines and solar panels began to spread across the fields of Europe, an ancient black fuel was making a comeback (see chart). In 2000 the world’s coal-fired power stations were capable of producing 1,132 gigawatts of electricity between them, according to Enerdata, a Paris-based research firm. By 2014 so many new power stations had been built that they could put out 1,980 gigawatts. Coal, which is about twice as polluting as natural gas, now supplies 41% of the world’s electricity and 30% of its overall energy needs.

The biggest single cause of the fossil-fuel boom is China, which is examined in the next article. But rich Western countries are more culpable than they think. They have transformed their rural landscapes with wind farms and pushed up electricity prices for consumers, yet have managed to drive surprisingly little carbon out of the energy system. The record would look even worse if Western countries had not simultaneously exported much of their heavy industry, and thus much of their pollution, to China and other emerging countries.

The large wind farm near Altentreptow is one of hundreds in Germany. Helped by some big storms, these turbines produced 41,000 gigawatt-hours of electricity in the first half of this year, 15% of Germany’s total electricity output. Add hydro-electric power stations, solar farms and biomass, and the country derived 35% of its electricity from renewable sources. Germany has become a world leader in green power, but also a warning about what can go wrong.

Wind and sunshine have two big drawbacks as sources of power. First, they are erratic. The sun shines weakly in winter when it shines at all, and the wind can drop. On January 20th this year the output from all of Germany’s solar and wind farms peaked at just over 2.5 gigawatts—a small proportion of the 77 gigawatts Germany produced that day. A few months later, during a sunny, windy spell in early June, the combined wind and solar output jumped to 42 gigawatts.

The second problem with wind and solar energy, oddly, is that it is free. Wind turbines and solar panels are not free, of course. Although the cost of solar photovoltaic panels has plunged in the past few years, largely because Germany bought so many, wind and solar farms still tend to produce more expensive electricity than coal or gas power stations on a “levelised cost” basis, which includes the expense of building them. But once a wind or solar farm is up, the marginal cost of its power output is close to zero.

The problem lies with the effect of renewables on energy markets. Because their power is free at the margin, green-power producers offer it for next to nothing in wholesale markets (they will go on to make money from subsidies, known as feed-in tariffs). Nuclear power stations also enter low bids. The next-lowest bids tend to come from power stations burning lignite coal—a cheap but especially dirty fuel. They are followed by the power stations burning hard coal, then the gas-fired power stations. The energy companies start by accepting the lowest bids. When they have filled the day’s requirements, they pay all successful bidders the highest price required to clear the market.

The surge of solar and wind power is pushing down the clearing price and bending Germany’s energy market out of shape. Power stations burning natural gas increasingly find no takers for their electricity, so they sit idle. Meanwhile the cheap, carboniferous lignite power stations burn on (see chart). Coal-fired power capacity has actually increased in the past few years. Coal is likely to become even more important to Germany’s energy supply in future because the government is committed to phasing out nuclear power by 2022. 

One of Germany’s biggest coal-fired power stations, Jänschwalde, sits near the border with Poland. Built in the 1980s, it burns 80,000 tonnes of lignite a day and can put out three gigawatts of power. Jänschwalde has also become ever more flexible, ramping up and down speedily as the weather changes. Lignite is proving to be an excellent partner for erratic wind and solar power, argues Olaf Adermann of Vattenfall, the firm that owns Jänschwalde. Sadly for the environment, he is right.

Earlier this year a shamefaced German government moved to regulate lignite-burning power stations out of existence, but after thousands of miners protested in Berlin, it dropped that policy. The country appears to be stuck with coal. It is likely to miss its self-imposed target for reducing greenhouse-gas emissions, reckons McKinsey, a consultancy. And because of generous feed-in tariffs for renewables that are guaranteed for 20 years, consumers in Germany are paying high prices for their not especially clean power. In the first half of this year households there paid €0.30 for a kilowatt-hour of electricity, whereas the French paid a mere €0.16.

Germany has made unusually big mistakes. Handing out enormous long-term subsidies to solar farms was unwise; abolishing nuclear power so quickly is crazy. It has also been unlucky. The price of globally traded hard coal has dropped in the past few years, partly because shale-gas-rich America is exporting so much. But Germany’s biggest error is one commonly committed by countries that are trying to move away from fossil fuels and towards renewables. It is to ignore the fact that wind and solar power impose costs on the entire energy system, which go up more than proportionately as they add more.

Many wealthy countries have too many power stations, the result of a building boom before the financial crisis. This oversupply, combined with the solar- and wind-power boom and the falling wholesale price of electricity, has crushed investment in modern, efficient power stations. It has also turned all energy producers into beggars. Owners of power stations burning coal and gas point out that if they are frequently undercut by wind and solar farms, their costs per watt of electricity produced rise. The government ought to compensate them for that, they say, otherwise they might have to close down.

Terrified of looming blackouts, Western governments are increasingly paying fossil-fuel power stations to stay open. Some offer “capacity payments”—money for standing by. Texas tries to keep the power stations open by promising higher prices at times of strong demand. These payments are a hidden cost of using more wind and solar energy.

Moreover, in many countries, including America, renewable-power producers rely on coal- and gas-fired power stations to set the market price of electricity at a healthy level, points out Frank O’Sullivan, an energy researcher at the Massachusetts Institute of Technology. Solar farms that offer their power for next to nothing will eventually depress the market so much that they render themselves uneconomic without heavy subsidies.

There are ways out of this mess. If governments were to levy a hefty tax on carbon, they would drive the most polluting power stations off the system. Germany does not do this: it relies on the European Emissions Trading System, which sets a rock-bottom carbon price. But Sweden does, and Britain has a floor price, which amounts to the same thing. Better still, says Mr Helm at Oxford University, a heavy carbon tax could be combined with market reforms that would force renewable power producers to bear the costs of their intermittency. 

It would help if electricity grids were bigger and more efficient. The larger the grid, and the less power lost per kilometre of transmission, the less internittency matters: cloudy and windless conditions rarely prevail across an entire continent. Denmark gets away with relying heavily on wind turbines because it has a connection to Norway, which can supply hydro-electric power on demand. But Germany's efforts to build long-distance transmission lines have been stymied by not-in-my-backyard protests. 

Better energy storage would help, too. Hydro-electric power stations have been used to store energy for decades. But there is not always an uphill reservoir handy, and other ways of storing energy, such as lithium-ion batteries, are expensive. More promising, probably, is automatic demand reduction. Smart meters can turn down household freezers and air-conditioning units briefly when power is in short supply and then power them up again, thereby shifting demand. Sia Partners, a consultancy, estimates that European countries could cut peak demand by 9% with such methods. 

But they can only do so much. Energy storage and demand-response technologies are good for matching supply with demand during the course of a single day. In a place like California, power demand is highest on sunny summer afternoons, when people turn up their air-conditioners. Solar farms produce most of their power around the same time, so with a bit of clever demand adjustment the peaks of supply and demand could be aligned. In northern Europe, however, electricity demand is highest in the early evening in winter, when solar farms are producing no power. 

Near Altentreptow, electricity from the wind farm is being used to turn water into hydrogen and oxygen. The hydrogen is stored in tanks and burned to produce power when the wind drops. The firm doing this, WIND-Projekt, just wants to be able to keep the lights on. The process is inefficient: 84% of the original electricity gets lost in being converted and reconverted. But perhaps the hydrogen could be sold directly to consumers, or the heat could be captured. At any rate, suggests Marcus Heinicke of WIND-Projekt, the days of being able to sell power only when the wind blows will not last for ever. 

Wednesday, 16 December 2015

Social License: Risk Management or Mob Rule?

Below are excerpts taken from an article written by Pat Roche of the Daily Oil Bulletin. The excerpts we're pulled from the article because we feel as though they're the most relevant and important pieces of information; however, the full article is available here: http://www.dailyoilbulletin.com/article/2015/11/26/social-licence-risk-management-or-mob-rule/ 

Excerpt 1

Crowley sees the three top challenges facing Canada’s oil and gas industry as public ignorance about how a natural resource economy works, the rise of the social licence movement, and the growing power and authority of Aboriginal people over decision making in the natural resource economy (see separate story).
He sees ignorance of how a natural resource economy works as by far the biggest challenge: “All the other challenges — things like environmental policy and so on — flow from that ignorance on the part of the public. I’m not blaming the public for being ignorant; it’s industry and governments that have the responsibility to make sure there’s a level of understanding that allows the necessary policies to be put in place.”
A frequent international speaker, Crowley often hears from foreigners how lucky Canada is to have such a rich endowment of natural resources.
But he pointed out many other nations — from Russia to Angola to Indonesia — also enjoy big endowments of natural resources. “If that was a secret to wealth, those countries would be wealthy like Canada. But instead, they’re not. I’ve been to many of those countries and you wouldn’t choose to live there if you had a chance to live in Canada instead.”
“What we have, and what they don’t have, is a natural resource endowment ... nested inside an endowment of institutions [that] created the certainty which unlocks the investment on which the natural resource economy depends,” Crowley argued.
What are “institutional endowments”? Crowley listed several concepts: The rule of law; democracy; judicial independence; robust property rights; respect of contract; speedy, authoritative and non-violent dispute resolution; non-corrupt police and bureaucracy; a stable regulatory and tax burden; a strong work ethic; and, last but not least for his audience of accountants, strong accounting standards.

Excerpt 2

He argued development of the natural resource economy today — particularly the oil and gas economy — is being increasingly obstructed by a movement appealing to the concept of social licence.
“Social licence matters because its rise goes right to the heart of the certainty that I’m arguing needs to characterize the institutional framework for the natural resource economy,” Crowley said.
“It used to be that the framework for the development of our resources looked pretty clear. Provinces generally owned the resources and they set a regulatory and tax framework. Developers who wanted to develop resources knew in advance what the rules were. ... Regulatory proceedings were not intended to be a place for the desirability of development, per se, … to be debated. They were instead an evidence-based technical inquiry about whether the project proponents had satisfied the regulatory requirements.”
All of this occurred in a climate of public opinion that generally held that well-designed and well-run natural resource developments were in the public interest.
“Anyone who follows these things will know that there is increasing evidence that the old political consensus in favour of natural resource development is breaking down ... and with it, the confidence in, and deference towards, our generally excellent regulatory proceedings,” Crowley said.
He blamed this breakdown on vocal minorities trying to stop natural resource development by using emotion and chaos to hijack the very institutions that were created to ensure an orderly and thoughtful approval process.
“One of the greatest challenges that we face is the undermining of the institutions that surround decisions about development,” he said. “As long as we continue to fight a rearguard action in defence of individual projects — as opposed to a defence of the institutions that we have created to make sure they meet the right standards ... I believe we will always be on the defensive, and we’ll increasingly see projects fail as a result.”

Tuesday, 15 December 2015

The Paris summit: A colossal waste of time

By: Margaret Wente

Article originally published by the Globe and Mail on December 15, 2015 and can be found here: http://www.theglobeandmail.com/globe-debate/the-paris-summit-a-colossal-waste-of-time/article27751521/?ord=1 

What a cliffhanger. As delegates from 195 countries pulled all-nighters in search of a climate deal, the world held its breath. At last, success! Perhaps we’ll save the planet after all. In fact, a deal in Paris was always in the works and everybody knew it.
After the Copenhagen debacle of 2009, the mighty UN climate juggernaut desperately needed a victory. And here it is – an agreement that’s unenforceable and toothless, but makes everyone feel good. Especially Canada. Prime Minister Justin Trudeau, our fearless and photogenic leader, took a delegation of 300 politicians, functionaries and hangers-on with him just to prove it. “Canada is back, my good friends,” he announced in Paris.
Naturally, there’s a cranky old skeptic or two. “It’s a fraud really, a fake,” said James Hansen, the former NASA scientist who has been called the father of climate change awareness. “It’s just worthless words. There is no action, just promises. As long as fossil fuels appear to be the cheapest fuels out there, they will be continued to be burned.”
He’s right, and the negotiators must surely know it. The only way to begin to wean the world away from fossil fuels is to put a global price on carbon. And that’s not going to happen. Instead, it’s Scout’s honour. Every country will set its own voluntary targets and update them every five years. If you miss the targets, what happens is … er, nothing.
Everyone has pledged to rein in global temperatures to an increase of two degrees C. No one has the slightest idea how to get there. So far, all the pledges from all the countries put together would scarcely budge the needle on the great big global thermostat. But we really care! To prove it, we’re even going to aim for 1.5 degrees. Which is like saying that I aim to lose 100 pounds on my current diet of croissants and brie, minus a crumb or two. No! Make that 120 pounds!
Another awkward fact: As the rich world swears off coal, the rest of the world is going crazy for it. China alone is building 368 plants and plans another 803, according to the Potsdam Institute for Climate Impact Research. Cheap, abundant power is the only way to keep raising the standard of living of its citizens, on which China’s future depends.
China’s leaders “will not forsake national economic growth for the supposed global good,” writes Probe International’s Patricia Adams, a leading expert on China’s environmental economy. (Disclosure: I sit on a related advisory board.) By the way, that awful smog you see in Beijing isn’t carbon dioxide – it’s particulate matter from cars, construction and industry. Fixing that is much easier than cutting CO2 emissions.
So long as China and India – the world’s No. 1 and No. 3 emitters, respectively – are on a growth path, it doesn’t matter how many solar panels anyone installs. The increase in their CO2 emissions will dwarf any cuts in ours. “Emissions are rising and rising,” the Potsdam Institute’sOttmar Edenhofer has warned. “Instead of decarbonizing, we are carbonizing our economy.”
Climate activists know there’s not much point bugging India or China, which will simply ignore them, kick them out or lock them up. So they’ll keep haranguing the rich world. “We’ll be blocking pipelines, fighting new coal mines, urging divestment from fossil fuels – trying, in short, to keep weakening the mighty industry that still stands in the way of real progress,” warns Bill McKibben in The New York Times.
Here in Canada, Mr. Trudeau will lean on the provinces to strike a deal of our own. That may or may not include a national price on carbon. Despite his jaunty optimism, it’s difficult to see a road map that would get us anywhere close to the target his government (and the last one) have committed us to. To borrow a popular word from Paris, our goals are “aspirational.”
Still, there’s major money on the table – billions of federal dollars for green infrastructure, clean technology and energy efficiency initiatives, plus another $2-billion to finance projects that reduce emissions. The Paris agreement may not save the planet. But it’s splendid news for seekers of green subsidies, NGOs and climate junketeers, who will be jetting around the globe for years to come.

Monday, 14 December 2015

Alchemy, Baby, Alchemy

By: Richard Bronstein

Article originally published in the December 2015 issue of the Business in Calgary magazine. The full issue can be read here: http://issuu.com/businessincalgary/docs/bic_dec2015_lo-v2/1

I hope somebody in Alberta quickly discovers the ancient science of alchemy, the secret ritual that was supposed to change lead into gold. And many more wondrous things.

We need something like that today to change our oilsands from becoming a liability into being a valuable long-term asset.

That is one lesson from President Obama wielding his mandate to kill Keystone XL and bring about the second coming of global clime justice.

It took only a split second for Green Crusaders to claim credit for sacking the Jerusalem of oilsands and restoring the glory of God of Climate for all time to come.

Unfortunately, President Obama and the green movement are peddling a false messiah. Selling us beads and blankets with smallpox. Because Obama and the greens are lying about the meaning of Keystone XL.

The real story, what some like to call evidence-based science, is that the best way of ridding the most GHGs over the shortest period of time is to stop burning coal. Period. If you stopped all coal today and replaced its BTUs with oil, you would probably reduce world GHG emissions by 20 to 30 per cent in one throw. (Who is one of the biggest coal burners in the world? President Obama’s United States.)

So here we have, as so often happens in the modern world with its vast communications webs, the perpetration of a massive fraud by the few directed against the many.

I am not a climate change denier. But I have a little bit of experience in the real world to know that blaming global warming on the oilsands is about as truthful as invading Iraq to eliminate weapons of mass destruction.

We mocked President Bush when he stood on the aircraft carrier in 2003 and said “Mission accomplished. “ That’s the same thing as President Obama saying he has saved the world from climate catastrophe because he killed Keystone XL. 

That said, we still have a problem of perception to deal with as the green movement has painted the oilsands as the hooker of all carbon fuels.

Part of the success of this movement is because successive Alberta governments and oil corporations kept kicking the environmental can down the road. We've done a lot better since about 2005. But there is still a long way to go in improving our environmental record.

The government of Prime Minister Justin Trudeau claims it will act diligently on the climate change front. What else are they going to say?

The question is:  what is this new government, in partnership with the provinces, prepared to do. These are no easy matters. But until our governments do come up with a workable carbon reduction plan, there is one thing they should do that is very easy.

All Canadian governments should say in a loud and clear voice that they don’t appreciate the president of the United States slandering a vital economic resource that is important to all of Canada. Throwing Canada’s economic future under the bus so President Obama can write a chapter in his biography about his green credentials is a cheap, harmful and untrue political stunt. 

Thursday, 10 December 2015

How The Recent OPEC Meeting Will Affect Canadian Oilpatch Spending

By: David Yager

Article originally published by EnergyNow on December 9, 2015 and can be found here: http://energynow.ca/heres-how-the-recent-opec-meeting-will-affect-canadian-oilpatch-spending-david-yager-mnp-llp/ 

The OPEC meeting held December 4 in Vienna went worse than anticipated. Although there is no humor in what transpired, there may be something to be learned from the old joke about the scorpion and the frog.
Somewhere near the Persian Gulf, a scorpion wants to cross a stream but obviously cannot swim. So the scorpion asks a frog if it can ride across on its back.
The frog responds, “But you’re a scorpion and you can kill me with one poisonous sting.”
To which the scorpion replies, “But if I did that we would both drown. Why would I kill us both?”
This made sense to the frog so it allowed the scorpion to hop on its back and across they went. Halfway to the other side, the scorpion did indeed sting and poison the frog. In a dying gasp, the frog asked “Why did you poison me? Now we will both drown!”
The scorpion replied, “Welcome to the Middle East.”
Trying to understand why Middle Eastern oil producers do what they do remains perplexing for many in the west. The math is simple. Saudi Arabia is producing 10.3 million barrels per day and fetching about $45 per barrel or $463 million per day. Shutting in 1.3 million barrels per day could cause the price of oil to double. The result would be 9 million barrels at $90 per barrel or $810 million per day.
But, as always, it is more complicated than that. This latest OPEC meeting was a disaster for world oil markets in the short term. The Saudi Arabia-led cartel had maintained a 30 million barrel-per-day quota for some time but has actually been producing more like 31.5 million barrels per day. OPEC has produced above its official quota for over two years. At the meeting, the thought was at least the quota could be raised to match actual output, thus retaining some semblance of credibility for the organization. But according to a Reuters media report from Vienna on December 6, a major problem is now Iran, which announced its intention to ramp up production by 1 million barrels per day or more as soon as possible, OPEC quota or not.
The article quoted an OPEC source who said, “The ceiling issue was very controversial and they could not decide on it. Nobody was happy.” So the meeting adjourned with no official quota whatsoever. This means for the first time in decades OPEC has no formal production ceiling. It is every producer for itself. While the cartel has appeared to operate this way from time to time over the years, it has never done so formally. More commentators than ever are speculating if OPEC is not officially dead, it might as well be. “OPEC is dead” was the front page headline of the December 7 edition of the National Post.
Further complicating the issue is the increasing tension between Iran and Saudi Arabia for influence in the Persian Gulf region. The Reuters article said, “But the present Sunni-Shia conflicts setting Saudi Arabia and Iran at each other’s throats, particularly in Syria and Yemen, make the relationship between the two OPEC powers even more fraught.” A European investment analyst said, “The fact that Iranian–backed Houthi militants are squaring off against Saudi–led troops in Yemen is not helpful, as increased Iranian oil revenues are likely to find their way to Iranian military interests in Yemen, Iraq, and Syria.”
So why would Saudi Arabia voluntarily cut its output to raise prices for everyone when Iran intends to increase its output regardless? And Iran would use the extra cash from higher prices to forward its aspirations in the Middle East? The Saudi’s would not, which is exactly what happened.
If this analysis is indeed true, then oil has again become a weapon by certain oil-producing countries. In the past, high prices were meant to punish western countries – particularly the United States – for intervention in international affairs and pursuing what many in that part of the world consider to be a decadent lifestyle. Now it appears low oil prices are being used to punish other oil-producing countries at a great cost to both parties. Think scorpion.
The response by oil markets was predictable. While few thought anything really positive would emerge from the OPEC meeting, the fact the organization no longer has any quota at all was not anticipated. Prices started falling December 4 and the bloodbath continued December 8th. Combined with a massive buildup in crude oil inventories around the world, the bears have control of futures markets for the time being.
Prior to the meeting, some OPEC members thought increasing its quota to reflect current output might be the best possible strategy due to the daunting overhang of oil storage. Let demand rise, production fall and eventually markets will balance. But even a 1 million barrel per day decline in output might not reduce storage to historic levels for a year and eliminate the significant market overhang. OPEC analysts were said to be pessimistic about improving world oil markets before the meeting. Apparently, Iran’s announcement it was increasing production as much is possible regardless of what OPEC decided was a tipping point in the final disappointing outcome.
What does this mean for Canada’s oilfield service industry (OFS)? Probably the worst winter drilling season in recent memory. Although the futures price for WTI a year from now is still about US$10 higher than the current price, it is not high enough to materially increase producer cashflow. Therefore, no evidence is available to indicate producer cash flow available for reinvestment in 2016 will increase, barring an event so unforeseen no one has any idea what it might be. With bank credit facilities tightening and equity markets being terrible, exploration and production (E&P) companies will be living on cash flow, leaving no additional funds for increased spending. In fact, the events of December 4 are likely to cause operators to review budgets and spend even less money this winter than they had planned as recently as a week ago.
Analysts like Goldman Sachs have been very bearish on oil for some time. The foundation of the “lower for longer” thesis is high storage levels, unrestrained output by everyone and Iran adding more production as soon as sanctions are lifted. This combination gives traders no reason to believe the price of oil will rise anytime soon. In reading and analysing everything written about crude oil markets for decades, one important driver of higher oil prices is more investors believing the price should go up than believe it should not. Because of the significant amounts of oil in storage, there is no reason to see a shortage of oil any time soon, no matter what happens. And the strong U.S. dollar continues to put pressure on the value of crude oil and every other commodity.
Closer to home, political priorities are not pro-industry at this time. If there is a problem with Canada’s oil and gas industry, most governing politicians – with the exception of Saskatchewan Premier Brad Wall – believe it is excessive carbon emissions, not excessively bad economics and opportunities. Apparently Canada’s delegation to the Paris Climate Change Conference was in excess of 350 people, greater than the representatives of Australia, the United Kingdom and the U.S. combined. It appears politicians are out to fix the oil industry but not the way the people who work in it want them to.
The Alberta government has already raised fuel taxes, corporate taxes, carbon taxes, and income taxes. Higher levies on all forms of energy have been promised. The as yet unknown outcome of the royalty review should be revealed within a few weeks.
At the federal level, new Prime Minister Justin Trudeau is promising increased tax rates on high income earners as early as January 1. Ottawa’s carbon strategy is as yet unknown. However, after the language used in Paris, it is unlikely Ottawa will delay implementing any carbon taxes because Canada’s valuable oil and gas industry is under severe financial strain.
However, oil markets should eventually improve. Low oil prices will ensure more spending is cancelled or delayed. The decline in U.S. light tight oil production will continue and low prices will ensure consumer growth in oil demand.  Iran may have great plans to increase oil output but it will take time. Notwithstanding high storage levels, global crude supply and demand curves will meet then likely cross at some point in 2016.
But the challenge for E&P and OFS will be figuring out how to stay in business until market conditions improve. After the OPEC meeting, there is no relief in sight for the industry’s depressed activity outlook.

Tuesday, 8 December 2015

A liberal's lament

By: Zanny Minton Beddoes, Editor-in-Chief, The Economist

Article originally published in The Economist on Nov 2, 2015. 

The open, globalised world faces growing threats – and too little is being done to counter them, warns Zanny Minton Beddoes

Look around the world as 2015 draws to a close, and it is hard for a liberal internationalist to find many reasons for optimism. Yes, digitally driven technological progress – from artificial intelligence to gene editing – is dazzling, and digital access is transforming the lives of ever more people in poor countries. But on three important counts the outward looking globalisation of recent decades is in worryingly poor shape.

The first danger comes from China’s slowdown. By loosening monetary policy and launching yet another stimulus package or two, China will probably avoid a hard landing. But there is little sign of the debt clean-up, state-enterprise reform and overhaul of monopolies that are needed for a service-and consumer-led economy to thrive. China looks set for an ever more sluggish limbo: the old growth model dead, no new one to take its place. 

A slowing China means global GDP growth will struggle to pick up pace and could even slacken further – remaining well below the speed necessary to quell deflationary pressure. That would rattle financial markets and stymie central bankers’ plans. America’s Federal Reserve may raise short-term interest rates by a quarter-point or so, but 2016 will see no serious monetary tightening. In the emerging world, despite floating currencies and fatter reserves, the year will expose vulnerabilities. There will surely be some debt crises (Venezuela? Or even scandal-plagued Malaysia?). More corrosive will be the disappointment that sets in as it becomes clear that the rich world’s economies are losing oomph and that the era of rapid catch-up growth across poor countries is over.

The second concern for the liberal order is in the realm of great-power politics. America is turning inwards just as the global security system it underwrites faces its biggest challenges in a quarter century, from Vladimir Putin’s adventurism in Syria to China’s muscle-flexing in the South China Sea. Mr Putin’s cruise missiles will not win the war for Syria’s dictator, Bashar al-Assad. But they will prolong the conflict, swell the exodus of refugees to Europe and so exacerbate the biggest political crisis the European Union has faced. Across Europe, 2016 will be a year of bitter recriminations and gradual unravelling. Even if the Schengen system of passport-free travel officially remains in place, “temporary” border controls will spread, Europe’s frontiers will be blighted by the barbed-wired perimeters of “migrant processing” camps – and still hundreds of thousands of refugees will stream in. 

The third risk comes from the rich world’s domestic politics. On both sides of the Atlantic, public trust in government has slumped and populist policticians are enjoying growing appeal. One strand of populism is the xenophobic right-wing sort (exemplified by Donald Trump in America or Marine Le Pen in France). Another is a soak-the-rich left –wing type (see Jeremy Corbyn, the hard-left new leader of Britain’s Labour Party or Bernie Sanders, the self-proclaimed democratic socialist who is challenging Hillary Clinton for the Democratic presidential nomination). These people are all tapping into a popular disillusionment with the pragmatic political centre. They have done far better than anyone would have expected even a year ago.

Some of these worries may prove ephemeral. In Britain Mr Corbyn’s party is in opposition and in a mess. America’s presidential primaries are often marked by a noisy populism which gives way to centrism when the general election comes. Some risks will counter each other. Europe’s migrant crisis will force a short-term rise in public spending that will boost demand and mitigate the economic hit from slower growth in China.

Still, it would be a grave mistake to be sanguine, not least because 2016 is a year of high-stakes votes, from America’s presidential election to (possibly) Britain’s in-or-out referendum on EU membership. More than is usual in a single year, decisions in 2016 could, as Barack Obama would say, bend the arc of history. That is why those who believe in an open, liberal world order need to act more boldly in its defence. Top of the list is Mr Obama himself. America’s president is still the single-most important individual defender of liberal internationalism. To uphold it, his remaining year in office needs to be marked by more active American engagement, particularly in the Syrian crisis and in the refugee exodus that it has spawned. 

Liberal internationalist of the world, engage!

Mr. Obama has an exceptional responsibility, but all politicians who value open internationalism need to fight for it. They need to expose the false logic underpinning xenophobia. The evidence, from America’s experience in the early 20th century to the Vietnamese boat people, is unequivocal. Provided they are quickly assimilated and integrated into the workforce, a tide of migrants is an economic boon --- all the more so in ageing societies. Shamefully, Angela Merkel, Germany’s chancellor, is the only European leader brave enough to make this case. If the EU is to survive, others need to join her.

At the same time, the genuine problems of sluggish growth and stagnant wages demand bolder solutions, not populist quick fixes. Big ideas exist, whether large-scale investment in infrastructure or dramatic reforms of education and training. But too many politicians are trapped by a small-bore mentality: a tweak to an existing scheme here, a fiddle with a tax rate there. From the devolution of decision-making to the overhaul of schools, Britain’s Conservative government is the closest the rich world currently comes to a radical-centrist agenda, though it is marred by a misguided desire to cut tax credits for the working poor. Others need to emulate its ambition.

If market-friendly internationalism is to prosper, small-bore will not do. In 2016 it is time for radicalism at the centre

Saturday, 5 December 2015

Is the Collapse of Saudi Arabia Inevitable?

By: Heather Douglas

Article originally published by the Roughneck Magazine in their 2015 November issue. Order the Roughneck magazine here: https://www.northernstar.ab.ca/the-roughneck 

“Under Al Qaeda (and now ISIS’) leadership in Saudi Arabia, the (jihadis) were able to lure impressionable young recruits through a mix of religious and political rhetoric, as well as by promising them everlasting glory and heavenly bliss. Many joined and a murderous and highly visible campaign of kidnappings, shootings and bombings was launched across the Kingdom.

“If the Saudi experience holds a lesson for Western policy-makers seeking to redefine their engagement with the Middle East, it is that established states should be bolstered. The chaos that results from even the most well-intentioned efforts to replace the powers-that-be wholesale is the best breeding ground for terrorism and unhappiness.”

Path of Blood – the Story of Al Qaeda’s War on the House of Saud by Thomas Small and Jonathan Hacker (published 2015).

Many think Saudi Arabia is on the brink of a perfect storm of inter-connected challenges that will be the monarchy’s undoing within this decade. The country currently produces 10.5 million barrels daily and a disruption in that amount of crude oil will inevitably spike the price globally – perhaps even overnight.

On one hand Saudi supports jihad – 15 of the 19 9/11 hijackers were Saudi, as was Osama Bin Laden and most of his private donors. On the other hand they see jihadis as a mortal threat to their Kingdom. They also realize that ISIS wants to destroy the House of Saud and remake the Middle East.

How far is Saudi Arabia complicit in the ISIS takeover of northern Iraq? Initially the Kingdom financed the takeover of Mosul (in Iraq) by ISIS and the subsequent slaughter of Shia Muslims, Christians and other religious minorities. It continues stoking an escalating Sunni-Shia conflict across the Islamic world as it persists I funding much of the insurgency. 

On Sept 22, 2015, a senior member of the Saudi royal family called for a “change in leadership to fend off the kingdom’s collapse.” The author of the letter, circulated among the Saudi princes, is the grandson of the late King Abdul-Aziz Ibn Saud. “We will not be able to stop the draining of money, the political adolescence and the military risks unless we change the methods of decision making, even if that implies changing the king himself.”

King Salman, the current king, threw caution to the wind when he came to the throne in January. He is burning through the kingdom’s money reserves at an unsustainable rate. The Kingdom has more than (US) $600 billion in reserves (down from an estimated $750 billion in 2014) it can draw upon should its expenditures outstrip income from oil exports. The country has projected an official budget shortfall for 2015 of $39 billion, although the International Monetary Fund (IMF) and others believe the actual deficit will be much higher. 

Not only is the country using cash to fund its proxy war with Iran in Yemen, Syria and Iraq, but it is also battling ISIS and splinter Al Qaeda groups within its borders. Saudi Arabia has not learned the lessons of civil unrest – experienced by Iraq, Syria, Yemen and Egypt – and the impact of an all-out war on the overthrow of its government. Meanwhile, its own ‘war on terror’ demands more money even as the House of Saud debates whether or not to invest in a nuclear weapons program.

Writing in the Lebanese Daily Star after a visit to Dubai, columnist Rami Khouri described a sense of alarm sweeping through the Gulf. “Seen from Riyadh, Kuwait and Abu Dhabi, the world around the mostly wealthy oil producing states, called the Gulf Cooperation Council, has been turned on its head in the last four years. Every major geo-strategic potential threat or fear that they have quietly harboured for years has started to materialize – virtually simultaneously.”

Khouri cites the following threats to stability in the region:

  •  The street revolution of 2011 that overthrew several Arab leaders (coupled, more generally, with growing popular aspirations towards democratic pluralism through the region);
  • The rise of Muslim Brotherhood parties, the current turmoil in Libya, Iraq, Syria and Yemen, which has also spawned a plethora of jihadist groups and militias;
  • The growing influence of Iran;
  • Concerns the U.S. is trying to disengage itself from the Middle East; and
  •  Russia’s military support for Syria, Iraq and Iran.

“Each is dangerous for Gulf rulers,” Khouri said, “but together they take on the dimensions of a tsunami.”

While all of this is true, we believe the fall of the House of Saud is inevitable. The Canadian oilpatch will need to deal with the repercussions of global energy insecurity, crude price spikes and the unavoidable call for more production from safe, reliable and secure oil fields. How quickly can we ramp up when the predictable happens? 

Friday, 4 December 2015

Realism, not rhetoric, must drive the climate discussion

By: Jeffrey Simpson

Article originally published by the Globe and Mail on Dec 2, 2015 and can be found here: http://www.theglobeandmail.com/news/politics/globe-politics-insider/jeffrey-simpson-realism-not-rhetoric-must-drive-the-climate-discussion/article27549989/%3bjsessionid=tNhHWgnZc1K2Gv8Wp0GhW027WJ7fGZ1LFNSQpvyNQlzGrp2gCnhX!1362456394/?ts=151203160516&ord=1 

About 80 per cent of global energy consumption is based on fossil fuels, according to the International Energy Agency. This consumption is the major reason for global warming that produces climate change. Reducing the share will take a long time; eliminating fossil fuels completely is a pipe dream.
Fossil fuels – coal, oil and natural gas – will be with the world for a very, very long time because they are abundant, cheap and reliable. Alternatives such as solar and wind and tidal power are more expensive and produce energy only intermittently.
The idea that renewables will any time soon replace fossil fuels is greenwash, to turn the meaning of a common environmental word on its head. Renewables are growing in importance in some parts of the world, but they are far, far from replacing fossil fuels.
It is said, correctly, that about 13 per cent of energy today worldwide comes from renewables, and the share is growing. But this 13 per cent exaggerates the impact of what we think of as renewable energy, because it includes burning wood, charcoal and animal dung, as anyone who has visited India can tell from the acrid smell in the air.
Renewables would of course include nuclear energy, but most (not all) environmentalists detest nuclear power. Getting a nuclear power plant built in most western countries is difficult to impossible, so fierce is local reaction. (Germany is shutting down its reactors.)
Wind power is terrific, but for the fact that wind blows intermittently. Figuring out how to store intermittent energy remains a technological challenge. Wind and solar both need backup energy for peak periods or when those sources cannot supply enough energy. Fossil fuels provide the backup.
Then there is the Not In My Backyard syndrome, witness to which in Canada is the hostile reaction to turbines on the islands off Kingston or the shoreline of Lake Huron in Ontario.
Just imagine in British Columbia, where environmentalists fulminate against fossil fuels, pipelines and tanker traffic, if a thousand or so wind turbines producing renewable power were proposed for both sides of the Georgia Strait from Horseshoe Bay to Powell River and from Victoria to Comox.
Coasts are often where wind blows strongly. The mere mention of the idea – or putting the turbines on mountainsides near the coast – would turn every B.C. greenie purple with rage.
Renewable technologies are becoming cheaper, which helps them gain market share. But oil, too, has become sharply cheaper, even in countries which do not subsidize the product.
Cheaper oil invites higher consumption. For the foreseeable future the world will be awash with oil, especially when more Iranian oil joins supply international supply chains and technology unlocks more tight oil – although anyone predicting long-term oil prices might make money writing books or giving speeches about the future while only guessing.
No matter what pledges are made to reduce carbon emissions at the Paris Climate Change conference, worldwide energy use is going to continue climbing. The challenge – and there is no solution yet – is to decouple greater energy use from higher carbon emissions. That decoupling happened for the first time in 2014. It must accelerate fast and be sustained for the rise in global warming to be kept under 2 C.
China’s emissions are going to keep rising until 2030. Can one be sure about China’s numbers when the country recently admitted it had under-reported coal consumption by 17 per cent from 2000 to 2013?
India’s needs are immense. The country is the largest importer of coal and the second-largest coal producer. India will rely massively on coal – the most polluting of all fossil fuels – to provide electricity for 240 million people without it. These Indians represent about one-fifth of the world’s population without electricity.
Other less populous developing countries will be using much more energy, often from fossil fuels. And then there are the Middle Eastern oil producers who subsidize the use of oil at home and have little interest in climate change.
None of these geopolitical and domestic political realities is pleasant to contemplate if one worries about global warming. A whole lot has to be done, on many fronts, to slow down warming.
It is better, however, to understand how hard the challenge will be rather than be beguiled by loose talk or frightened by apocalyptic rhetoric from environmentalists.