May 22, 2018
As published in the Globe & Mail
There is growing consensus that the world is going through an energy transition. Everybody has heard politicians or CEOs of large energy companies making that statement. But then, most of them add the disclaimer: “But it won’t happen overnight.” That, of course, begs the question: Okay, but when could it happen?
If we were to think of the energy transition as a baseball game, we could see the stages of its progression over the past decade. In the first inning, coal lost to gas in the competition for power generation in North America and Europe; solar and wind lit up the scoreboard with incredible cost reductions in the second inning; but in the third, shale oil and gas rallied, creating an energy boom in U.S. gas and making that country the international swing player — supplanting OPEC in that position.
Now we are entering the fourth inning, with a playing field of abundant cheap energy and midway through the ball game it looks like the players highest on the cost curve will be the ones striking out. Those players will likely include both new projects in Arctic oil and the oil sands, as their business case makes them weak in a game where cost is key.
Why? Not all oils are equal:
This leads to considering the business case for the Kinder Morgan pipeline:
On this basis, we would have to presume that the Alberta and federal governments hadn’t seen the Kinder Morgan order book before they announced an intention to financially support the company’s pipeline, because that may show a rapidly deteriorating business case. Of course, some will argue that my numbers are incorrect, and there could be a margin of error. My point is that all stakeholders need clarity on this matter. They need a better understanding on how strong the business case for Kinder Morgan is, or if this investment could turn into a “soon to be stranded“ asset. The departure of all oil majors and many large financial institutions from the province of Alberta is also a sign that should be taken into account.
But you may say: look, oil is at US$75 today — sunny times are on the horizon again. However, it should be considered that the current US$75 is not driven by normal market demand but more likely by temporary geopolitical circumstances.
The Alberta, B.C. and federal governments should form an independent committee to provide the necessary detailed analysis and cost due diligence on the business case for oil-sands oil over the next decades.
Let’s get honest about the real outlook for the oil sands. Let’s get some facts. The energy transition will not happen overnight, but the cold numbers may tell that the “high on the cost curve oil-sands oil” will not just strike out much sooner, but much earlier than the fans had hoped for. Are we trying to cheer on a team here that doesn’t have the strategy to win the future game? As such, we may need a Plan B for Alberta sooner, rather than later.