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The energy crisis in Europe caused by Russia’s invasion of Ukraine could upend the markets for decades to come. The European Union has already implemented an embargo on Russian oil brought in by sea. That ban will go into effect in December. Straight Arrow News contributor Peter Zeihan says as global markets deal with Russia’s energy uncertainty, Canada oil is on the rise. He notes that Alberta’s oil production now rivals Russia in terms of cost, and that’s a potential game changer for energy markets.
Excerpted from Peter’s Sept. 22 “Zeihan on Geopolitics” newsletter:
A decade ago, Alberta’s oil sands were the home of the most expensive to produce crude oil on the planet. Not only that, but Canada’s mix of intra-provincial competition and weak federal control left the landlocked province with few options to send its oil outside of the US – a country experiencing a rising boom of natural gas and light, sweet shale crude oil. The outlook for the oil sands was…not good.Now? Alberta’s oil producers have gotten leaner, and while not meaner (they’re still Canadians, after all) they have slowly-but-steadily become more efficient and cost effective in terms of production. While certain challenges remain (Alberta cannot change its landlocked geography), Canada’s largest oil producing province has suddenly found itself cost competitive with Russian oil, and the world’s energy markets are on the cusp of upheaval. Suddenly the future of Canada’s oil sands doesn’t seem so bleak after all.
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.
