Canada oil on the rise as Russian energy uncertainty roils markets

Peter Zeihan here, coming to you from Calgary, Alberta where, of course, the topic has to be energy markets. We’ve had some interesting things going down in the Russian space over the course of the last couple of weeks. And now it looks to be pretty certain that the Russians are not going to be able to pull any sort of fast victory here. And the war is going to be a long grinding process, really no matter who wins, which means that anything that is necessary to keep Russian oil flowing is going to be very problematic. So if it’s east of the Urals and Eastern Siberia, that is all stuff that’s going to go to zero.

The Russians do not have the technical expertise to operate the reservoirs and it’s just a question of whether this stuff goes offline in three months, six months, a year, two years, three years. We don’t know. We’ve never had the sort of collapse of technical workers in an oilfield…oil zone ever before. So we don’t know how fast to expect it to go offline. But we know for sure that the Russians can’t do it and we know for sure that the Chinese can’t do it. 

You go west of the Urals, and the picture is somewhat different. There, the Russians do have the technical skills to maintain most of the output. The problem is infrastructure. And if we have a significant interruption in the flows, then pressure will build back up to the wellhead. And in the permafrost, that means that the wells get damaged and it can take decades to repair that. So based on what happens with sanctions on the war, that can go to zero, too. But it’s subject to a lot of things that will happen beyond Russia. So in the east, you know it’s going to go offline. The question is the timing. In the west, it’s probably going to go offline, but it’s subject to things that have almost nothing to do with a war. 

Which brings us to Alberta. Now, Alberta has been producing crude for a few decades, and their crude is a little non standard. It’s mined. Either they have to run some electricity or some steam into a reservoir to melt it out, or have to physically mine it. Either way, it’s very heavy, very high in sulfur, very thick. It’s very technically difficult to recover. And that means that Albertan crude has always been on the margins of the global market. 

Two big reasons in addition to the quality issue. One is infrastructure. All of the pipes that bring Albertan crude to market basically flow into the United States and end up in Texas, and Texas is already a super saturated market. So a lot of times Albertan crude sells into the market at a $30 a barrel discount, which is kind of what the Russian stuff is selling on the international market for right now.

Second is cost. As you might think, mining is something that everyone else has a liquid is kind of expensive. And so Albertan crude traditionally has sold for or has had a breakeven price of around $90 or $100 a barrel. So you only get a lot of activity expanding in the Albertan oil space in times when energy prices… you’re just gonna reach in times when energy prices are just through the roof. 

But things have been steadily changing for the last seven, eight years. Incrementally, the Albertans have managed to squeeze a little bit more…more oil out of every well that they’ve got. And incrementally they’ve dropped down the cost per barrel. So we’re now in an environment where most Albertan crude breaks even at about 55 [per barrel]. The average breakeven for Russia and crude is 54. So for the first time, the Albertans are price competitive with a country that is suddenly turning into a marginal supplier. Now, all of the normal problems remain. We’re moving into a capital shortage period. Oil is capital intensive, especially in Alberta. The transport issue is still an issue. But countries around the world are discovering that…the Persian Gulf is never reliable. U.S. shale might get locked in because of American domestic constraints. The Chinese are desperate for anything and the Russian stuff is bit by bit, falling off the market. And maybe tomorrow not so bit by bit. 

And so it was just a few weeks ago that German Chancellor Schultz came over to Canada to talk to his equivalent, Justin Trudeau the prime minister here, to ask for anything – oil, natural gas, whatever could be got. And once he got through Trudeau’s passiveness, his aggressiveness and his ideology and his…brainy, cosmopolitan intellectualism, the short answer was no. We’re not going to see a policy shift in Ottawa on this topic anytime soon, barring significant changes in the international environment. 

But those changes are coming. Russian crude is going to go away. American crude is going to probably become more locked up in the market for political reasons. And that leaves Canada as one of the very few countries and Alberta as one of the very few oil provinces on the planet, that might actually be able to contribute to a solution. But it requires a policy shift first. Okay, that’s it for me. Until next time.