It’s All Downhill For Alberta As Quality Discount Hits $14 Per Barrel
Alberta in Canada is best known as the home of the oil sands, a very large reserve of hydrocarbons which must remain almost entirely in the ground in order for global warming to be addressed. Recently there was good news for the climate, but bad news for Alberta. The indicators of the past five years add up to a steeply declining economy in the province.
Carbon Brief’s analysis of BP’s 2020 report showed then that peak oil demand had already occurred, and that oil would not rebound after COVID-19. In late 2020, Equinor placed peak oil demand in 2027 to 2028, revising its previous expectation of 2030. At the beginning of 2021, McKinsey projected 2029. And October of 2021, the International Energy Agency forecasted peak oil demand by 2025.
Peak oil demand is either here or it is looming. And as peak oil demand comes, the first crudes to languish unsold will be the ones that are heavier, more sour, and a long way from water.
The heaviness part is that it’s expensive to refine and produces less high value gasoline and the like per barrel, so it costs more but makes less money. The sour part is high-sulfur, requiring more treating with hydrogen in refineries to make it low-sulfur, incidentally part of why refinery use of hydrogen will likely decline more rapidly than I had originally projected. Alberta is a landlocked province a long way from the major refineries in Texas that are some of the only ones in the world that refine heavy, sour crude.
That means it’s discounted twice compared to lighter, sweeter crudes closer to water. Reduced overall demand means that the preference for light, cheaply transported crudes is a lot easier to meet, and the fall in demand will be mostly felt in the short run on heavy, sour, far from water crudes.
That’s Alberta’s product. And it’s already starting. Rory Johnston is the founder of Commodity Context and managing director and market economist at Toronto-based Price Street Inc. His analysis recently published in the Financial Post of the heaviness to transportation discount for Alberta’s crude is a red flag.
The discount for Alberta’s crude is $21 right now, and only $7 of that is transportation. The other $14 is because people don’t particularly want it and can get alternatives that are cheaper to have delivered and less expensive to process into products that can be sold. It doesn’t help that the Texan refineries that can process heavy crude keep getting hammered by climate change-exacerbated hurricanes and flooding.
Oil and gas is about a quarter of Alberta’s GDP. That segment was off 12.5% in 2020 compared to 2019, and the overall economy was off 8%, by far the highest in Canada.
About 25% of Alberta’s economy is evaporating over the next two decades. And with the loss of that major segment of the economy, all of the secondary and tertiary economic benefits are going to disappear too. All of those highly paid executives, engineers, and geologists won’t have any money to spend at restaurants, golf courses, truck dealerships, and the like. All of those companies spending tens of millions a year on IT and its highly paid employees will stop spending that money. The real impact will likely be closer to half of its economy drying up.
Alberta’s population growth flatlined in 2020 after growing by 50% since 2000. It’s going to start to decline. Its population is more mobile than most. People moved to Alberta because there were jobs there. They’ll leave to get jobs. All of the guest workers from Newfoundland and the like are already gone, and don’t show up in these statistics anyway.
As I was discussing with one of the many Albertans I know who now live on Vancouver Island, place attachment is not strong among the 1.5 million economic migrants who came to Alberta since 2000, and as his example, and the other BC retirees show, place attachment isn’t particularly strong among long-term residents either. As the economy disappears, so will much of the population, and with them, their contributions to secondary and tertiary economies.
Like real estate. Residential real estate prices across all categories in Calgary have been declining since 2015. The primary assets that people have are losing value. Expect bankruptcies as people’s homes end up underwater and they don’t have jobs.
As one Albertan told me, he and his spouse bought a dirt cheap house in a smaller town with the full expectation of walking away from it, but that was okay because it was still a lot cheaper than rent. People are now buying real estate to walk away from with no expectation of selling it later, in part because rents in the province are much higher due to being set in boom cycles and not declining sufficiently. The high rents are necessary to pay for mortgages for property that’s losing value. The story of Saskatchewan’s disappearing small towns with lots and homes going for $500 is coming to Alberta.
Calgary has the highest office vacancy rate in North America, with five buildings in the downtown core completely empty and another 14 distributed through the city. This isn’t going to get better, it’s going to get worse. Calgary’s core will be a dark museum of edifice complex.
In discussion with the Albertan who doesn’t live there anymore, as he defended the prospects for the province, he said it has the potential to be a renewables superpower. That’s true, as far as it goes. They have amazing wind and solar potential, and actually are the only bright spot for Canadian build out of renewables at present. The numbers aren’t big, frankly, but wind and solar farms are being constructed and commissioned.
However, there are no signs of Alberta having a sensible and realistic strategy to pivot. The largest consumer of energy in the province by far is the oil and gas industry, and it’s going away. When I analyzed ATCO’s generation assets a few years ago while I was being headhunted for Director of Innovation for its electricity arm, the number of co-generation gas units associated with the oil sands for steam-assisted gravity drainage (SAGD) floored me. The economics of far northern gas generation plants are disappearing, so expect much of that co-generation to drop off the grid entirely. The economics of coal plants have already disappeared with the federal carbon price, and they are closing earlier than the planned phaseout.
There is a pumped hydro facility approved near Hinton, but by pumped hydro standards it’s tiny, at only 75 MW of capacity. There are 55 GW of pumped hydro under development globally, and the average project is in the GW range, so Alberta and TC Energy aren’t serious about what the grid will actually look like in 10 years, never mind being a part of a larger regional electricity ecosystem.
All the wind and solar and pumped hydro will be doing will be keeping the lights on for the residents and light commercial businesses that remain.
If Alberta was seriously thinking of being part of the electricity ecosystem of northwestern North America, it would be lobbying for and building HVDC connectors east, west, and south. Instead, it’s all pipelines, all the time, an irrational frenzy for stranded assets.
Similarly, the proposed unconventional lithium extraction facility from sub-surface brine would already be in operation, instead of ignored by everyone except the company proposing it. They find it difficult to get anyone’s attention, when they are proposing to help Alberta become a key resource location for the rapid growth of electrified transportation.
It’s not like other parts of Canada are not deluded by the future of fossil fuels as well. Trudeau’s Liberals nationalized the soon-to-be-stranded asset of the Trans Mountain Pipeline, and are continuing to twin it, although that work has been seriously disrupted by the floods that have damaged existing pipelines, destroyed bridges, and halted rail and road traffic to the province. The current pipelines aren’t pumping anything until they are stabilized and reburied, something that the additional incoming atmospheric rivers will have a say in.
That’s well over $10 billion in Canadian taxpayer money down the drain for an economy that’s disappearing rapidly. And British Columbia, where I live, hides billions in LNG subsidies under cover of its reputation as a green province, Horgan’s NDP proving to be poor stewards of the environment and just as deluded as the Liberals before them about fossil fuel exports.
But the rest of Canada — barring Alberta’s differently challenged neighbor Saskatchewan — has massively diversified economies by comparison, and economies that have not been allowed to be heavily distorted by fossil fuel royalties and taxes. Alberta has been the grasshopper in Aesop’s fable, and now, winter is coming fast and hard.
The only bright spot Alberta has is that it’s part of Canada. The biggest growth opportunity in the province is cleaning up the $200 billion in unfunded oil and gas remediation that the province and its ‘regulator’ have allowed to emerge. And the Canadian federal government is the organization that will be paying for that. Edmonton will become the economic capital of Alberta as it doles out federal money. But the stadium shaped like an oil drop will be a dusty edifice too.
That a bunch of Albertans think that they are better served by leaving Canada is a quite extraordinary resistance to economic reality. They are still Canadians and we’ll have their backs through the coming hard decades. Leaving Canada would be to throw themselves off of a stable, large ship into shark-infested waters with a leaking inflatable pool toy out of a fit of pique that another crew member didn’t give them the respect they deludedly thought that they deserved.
A version of this article previously appeared in The Future is Electric.
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