Lamphier: Oilsands enter spotlight as U.S. searches for secure energy
By Gary Lamphier, edmontonjournal.com September 10, 2011 7:02 PM
EDMONTON - On the morning of Sept. 11, 2001, Eric Newell was jarred from his slumber by a ringing telephone.
Newell had checked into a Chicago hotel the night before, with plans to attend his son’s wedding a few days later.
“Get up dad, and turn on the TV,” his son instructed. Newell, then CEO of Syncrude Canada, the country’s largest oil producer, wearily complied.
Like millions of others, he was stunned by what he saw — images of two jet planes slamming into the twin towers of New York’s World Trade Center. Within hours the buildings collapsed, killing nearly 3,000 people.
“We watched everything,” says Newell, who retired from Syncrude in 2003. “And then we watched Chicago turn into a ghost town. By noon all the downtown offices were closed,” he recalls.
“In the U.S., (9/11) had a huge impact. When the twin towers and the Pentagon were attacked, it showed how vulnerable everybody really is.”
The 9/11 attacks launched America’s decade-long War on Terror. But what’s less well understood is that 9/11 was part of a perfect storm that triggered profound economic impacts.
For starters, it deepened a U.S. recession that began six months earlier, in the wake of the tech wreck. And although the U.S. economy began to bounce back by 2002, the cost of fighting two wars, in Iraq and Afghanistan, helped fuel a disastrous growth of U.S. government debt.
A decade later, America’s federal debt totals a staggering $14.7 trillion US, up about 150 per cent since 9/11, and Washington expects to run huge budget deficits for years to come.
The growing U.S. economic vulnerability was laid bare during the brutal 2008-2009 recession. And although there has been a fitful recovery since, America remains a deeply wounded behemoth, while China’s economy and geopolitical clout has soared.
The 9/11 attacks also indirectly influenced the evolution of the Canadian economy over the past 10 years, and the resurgence of the once-derided loonie — Canada’s petrodollar.
In tandem with a series of other events, 9/11 also helped to precipitate the biggest investment boom in Alberta’s history, as tectonic shifts in global energy markets worked to the province’s benefit.
Between March of 2002 and July of 2008, the price of light sweet crude soared some 600 per cent on the New York Mercantile Exchange, from about $21 US a barrel to more than $147.
The rally was driven by soaring Asian demand, the growing challenge of replacing reserves, heightened fears about the reliability of energy supplies from the Middle East, and a sagging greenback, which drove crude prices and the loonie higher.
Those factors in turn made Alberta’s oilsands a magnet for capital. The result: hundreds of billions of dollars flowed into the oilsands, as energy producers jockeyed for a stake in what is now recognized as the planet’s third-largest pool of crude oil, behind Saudi Arabia and Venezuela.
A decade after 9/11, oilsands production has roughly tripled to about 1.7 million barrels a day, and it’s on track to exceed three million barrels a day by 2020.
With oil prices currently running in the $90 a barrel range — nearly three times the recessionary lows of early 2009 — about $30 billion (Cdn) is expected to be invested in the oilsands this year, about half of it on new projects.
As a result, Canada is now the top exporter of crude oil to the U.S., and many economists expect Alberta to lead the nation in growth — along with resource-rich Saskatchewan — for years to come.
“There’s no question that 9/11 and the War on Terror . . . indirectly were catalysts for accelerated investment in the oilsands,” says Peter Tertzakian, chief energy economist at Calgary-based ARC Financial, and author of the best-selling book, The End of Energy Obesity.
“To say it was exclusively due to 9/11 is not correct because 9/11 and the decade that ensued overlapped with the rise of China and the demand surge for energy, particularly oil. So in a sense there was a demand-side and a supply-side perfect storm. But 9/11 was a major contributor,” he asserts.
Robert Johnston, who heads the global energy and natural resources group at Washington, D.C.-based Eurasia Group, a consulting firm that specializes in assessing geopolitical risks, agrees.
“If you remember, 9/11 was followed (in 2002) by the strike at PDVSA (Venezuela’s state-owned oil company), the rise of Hugo Chavez and changing perceptions about the reliability of Venezuelan heavy oil supply to the U.S.,” he says.
At the same time, supply disruptions in key oil-producing nations like Iraq and Nigeria created even tighter market conditions. And as war raged in Iraq, terrorists launched attacks against oil infrastructure targets in Saudi Arabia, OPEC’s largest producer.
Thus, in a world of rising instability and surging energy demand, the allure of Alberta’s oilsands grew dramatically. Between 2004 and 2007, new multi-billion-dollar oilsands projects were unveiled on a regular basis. And although many projects were delayed by the 2008-2009 recession, activity in the Fort McMurray region has rebounded sharply since.
“We take Saudi oil security a little bit more for granted now. But back in 2003-2004 during the (early days of the) Iraq War, with terrorist attacks against Saudi Aramco’s (the state oil company’s) infrastructure and personnel, that was a big catalyst in the oil price rally we had,” says Johnston.
“And equally so, that drove the shift of global capital in the energy sector toward unconventional resources, of which Alberta has the biggest. So absolutely, I would say (9/11) directly contributed to that.”
If Chavez had not gained power in Venezuela in the late 1990s, ushering in an era of virulent anti-Americanism, Alberta’s oilsands may not have gained so much prominence, he argues.
“Without Chavez, what probably would have happened after 9/11 is there would have been a doubling down of investment in Venezuela. So the projects that are being developed now in the Orinoco (oilsands belt) would have probably happened a lot sooner,” says Johnston.
“But looking back, it was a real perfect storm for Alberta, that the Persian Gulf suppliers and the Venezuelan suppliers (came into question). And then of course you had the Yukos crisis in Russia, which created a big chilling effect on that market too.”
Yukos, which accounted for a big chunk of Russia’s oil output a decade ago, was charged with tax evasion and declared bankrupt by a Russian court in 2006. Its former CEO, Mikhail Khodorkovsky, was imprisoned.
Critics believe the charges were politically motivated, but the Yukos episode showed how dangerous it can be for Western energy firms to invest in Russia, the world’s largest oil producer.
Royal Dutch Shell learned that lesson in 2007, when Gazprom, Russia’s state-owned natural gas giant, seized control of the Anglo-Dutch multinational’s $22 billion (U.S.) Sakhalin Island project, then the world’s largest integrated oil and gas project.
Once again, it underlined the relative attractiveness of investing in a stable jurisdiction like Alberta. It also showed how tough it is for the world’s oil giants to replace their reserves.
“What’s happened in the last 10 years is that you’ve had so many places where (investment) opportunities have been cut off, including Venezuela and Russia,” says John Kingston, global director of news for Platts, a New York-based energy news service.
“So you could say investment in the oilsands is partly driven by security concerns. But even in Venezuela, where companies were forced to accept some really onerous terms, a lot of them chose to stick around,” he notes.
“So I think certainly the security and stability of Canada would make it even more attractive. But oil companies are willing to swallow a lot to look for oil, wherever it might be.”
That principle extends to the major oil companies of China, South Korea, Thailand and other Asian countries. They’ve joined the stampede to Alberta’s oilsands in a big way over the past couple of years, investing $9.2 billion last year alone.
“Again, I wouldn’t say that’s directly related to 9/11, but they did start (to focus on) this idea of energy security,” says Greg Stringham, vice-president, oilsands and markets, for the Canadian Association of Petroleum Producers.
“They were primarily reliant on the Middle East for crude, and now they’re seriously investing in Canada’s oil resources.”http://www.edmontonjournal.com/news/9-1 ... story.html