Hormuz Risk, Pipeline Momentum, and Alberta’s New Gigawatt Data Centre

This week’s podcast is the final episode before Peter and Jackie take a summer break. The show will return to its weekly schedule in September.

The episode begins with oil market news, as conflict with Iran flares up again and the Strait of Hormuz re-emerges as a critical chokepoint. Peter and Jackie discuss higher-than-expected global oil inventories at this point in the conflict, recent demand trends, and changes in China’s oil imports. While longer-term shifts, including substitution and the rerouting of oil around the Strait, are easier to anticipate, the short-term outlook remains highly uncertain.

Next, they recap the Calgary Stampede pipeline announcements, including the proposed West Coast oil pipeline and the earlier-stage Alberta-to-Ontario project. They also revisit frequently asked questions raised in conversations with the media and industry over the past week.

Finally, they review the news of Meta’s proposed $13 billion Alberta data centre project, along with the Greenlight Limited Partnership power project announced on July 2. They close by considering growing opposition to data centres, a topic Peter discussed at the Upper Bound conference in Edmonton this past May, where he participated on a panel exploring what the AI industry can learn from the energy sector.

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Episode 334 transcript

Disclosure:

The information and opinions presented in this ARC Energy Ideas podcast are provided for informational purposes only and are subject to the disclaimer link in the show notes.

Announcer:

This is the ARC Energy Ideas podcast, with Peter Tertzakian and Jackie Forrest, exploring trends that influence the energy business.

Jackie Forrest:

Welcome to the ARC Energy Ideas Podcast. I’m Jackie Forrest.

Peter Tertzakian:

And I’m Peter Tertzakian and welcome back. Well, it’s Monday morning, Monday after stampede. That was beautiful weather, beautiful parties and things. It was really an uplifting stampede for me.

Jackie Forrest:

Yeah. Yeah. And it feels like summer’s really started. We’re actually getting some… I know the rest of Canada’s had summer weather, but we hadn’t had much until the last week or so, so that’s been great.

Peter Tertzakian:

Summer has really started and that means for us, it’s a bit of a break. We’re going to take our annual, what, six-week break until September?

Jackie Forrest:

Yeah. We’ll start again with our regular podcast schedule in September. And so I’m going to get out there, enjoy the mountains.

Peter Tertzakian:

As you did. You have those pictures.

Jackie Forrest:

Yeah, I already started. So check out my social media. I did a trip to Lake Louise and Moraine, which is very hard to get into now. They limit … Cars can’t drive up to Moraine at all anymore.

Peter Tertzakian:

No, I know. It’s a different …

Jackie Forrest:

Yeah. So I went with a tour company, but because of all the issues getting there and how hard it is, apparently you have to get into the parking lot before 6:00 AM to see Lake Louise. You can’t even get into Moraine. I did do, with a tour company, and it just reminded me because we had visitors. I though, let’s do it. Just such beautiful places. And I guess I appreciate why Parks Canada is limiting access because we can’t have these places taken over completely by people, but they are really special places.

Peter Tertzakian:

They are special. And the days of pulling up in a car and just hiking at your will are over, which is unfortunate because that’s how I remember Moraine Lake and these sorts of special places.

Jackie Forrest:

But there are lots of places you can do that.

Peter Tertzakian:

Yeah, totally.

Jackie Forrest:

It always amazes me. They’re beautiful, but there’s so many other beautiful places that are a little less famous that you can still do that so-

Peter Tertzakian:

Like down Highway 40.

Jackie Forrest:

Or even in the Banff Park, hikes that are just beautiful but less famous.

Peter Tertzakian:

Right. Okay. Well, we will take the break, see you back in September, but it’s been a really, what word shall I use? Tumultuous first half. I think it’s one of the most tumultuous halves that we’ve had since we’ve started this podcast. I mean, if you think back at the year starting off with Venezuela being the big issue, then we had Carney’s Davos speech, Carney with the floor crossings getting a majority government, MOU momentum, then the Iranian war, and then against all this, the backdrop of artificial intelligence and of course the changing character of the Russia-Ukraine war. So I don’t know what the second half is going to bring, but it’s been a pretty active first half.

Jackie Forrest:

It is. Yeah. It’s been a lot to keep up with it all for us, but for our audience as well, because the outlook on things like oil price or even the outlook for clean energy is changing all the time.

Peter Tertzakian:

Everything is very dynamic. And certainly in terms of oil price, which I think this morning was at $76, it’s bumped up a bit.

Jackie Forrest:

Yeah. So for WTI, we got down to $68 at the start of July and up to $75. Just as a reminder, the oil price for WTI averaged $95 when we think about the time from March when the war started to May. So a $30 difference from the lows we saw in early July. So big drop in oil price, but starting to move up because I mean, this ceasefire, it’s hard to know if it’s even on anymore. Donald Trump says it is. Iran says it’s not. It’s 30 days into the 60-day window. I mean, anything can happen here is what we’ve learned, but it doesn’t seem like a smooth ride here to get an agreement in 30 more days when straits are being closed and ships are being shot at. And actually Iran even shot it at its neighbors this weekend in the region again.

Peter Tertzakian:

In Bahrain, Kuwait, the US military basis. So it’s far from over this story and we expect to see an unpredictable set of circumstances going forward, including the oil price. I mean, you and I have been in the business of monitoring and trying to predict oil prices for a long time. It’s really a mug’s game. I mean, it’s the old adage, you’re right half the time and wrong half the time. It’s a very volatile thing. And now we don’t really know in terms of the inventory drawdowns or the visible inventories versus the not visible inventories. The visible inventories are not down by actually as much as we would’ve thought.

Jackie Forrest:

No. So the IEA comes out with their oil market report each month. The July 10th version of it showed that inventories have actually started to stabilize. And yeah, they’re not down nearly as much as we would’ve thought. They’re kind of back to more typical levels, not well below typical.

So there’s a couple of reasons for that. One is that the demand was reduced more than people thought, and the IEA estimates now that it was down almost five million barrels a day in the second quarter of this year. But the other big reason is China reduced its imports of oil by over four million barrels a day.

There’s a real paradox with the oil markets right now where in one hand, Strait of Hormuz closure and short-term maybe less oil, but this growing narrative that there’s going to be a glut in 2027 and China reduced its imports. But so far, and this is as of the report they put out last week, there’s no indication that China has gone back to its pre-war level of imports. So all to say is that we don’t really know China’s strategy. If they continue to import a lot less oil, that’s quite bearish for the oil market.

Peter Tertzakian:

Yeah. What we do know as we go into the second half is that there are all sorts of workarounds in the energy complex. So the workarounds would be more renewables in places as a substitute in electrification versus say oil and LNG products. And with respect to the Middle East, there’s new pipelines being built to circumvent the Straits of Hormuz. So the UAE is going south to bypass the Straits of Hormuz. The Saudis are going west across the desert into the Red Sea. The Kuwaitis and others are looking at northern routes. And so actually this choke point that we’ve talked about for so long that has been choked is actually creating a whole new energy paradigm, be it substitution or be it alternate trade routes. And so it’s going to be interesting to see how that plays out over the course of the next six months plus and into the long term. There is an argument to be made that the price of oil is likely to be less volatile going forward than it has been in the past.

Jackie Forrest:

Yeah, I guess so. If we have all these alternative routes of oil coming to market and hey, if we actually have more oil in storage than we think, and China has a strategy of keeping prices on the lower side by using their inventory to avoid price spikes as they just did. Yeah, I would agree with that.

Peter Tertzakian:

Well, actually it’s not so much there is more oil in storage than we think. We could actually think about it as actually the strategic petroleum reserves in the OECD plus China’s strategic petroleum reserves, they worked. There was a crisis. The choke point was choked and the oil came out of the reserves as it should during times of crisis. And it helped to moderate the situation. And now there’s long-term forces that are seeking to moderate the choke point so that it doesn’t happen again.

Jackie Forrest:

Right. But I do think that in the short term, I mean, oil price really could go … It’d be very difficult to predict because we still do depend on the Strait of Hormuz, if the Iran war situation continues, because they build things quickly in the Middle East. If I look out 18 months, I think that choke point has a lot less ability to affect the oil markets. And the fact that we still have high inventories means that we can absorb more outages in the next little while as well.

Peter Tertzakian:

Right. And that’s an average inventory for the world if you think about it. There’s regional inventories that are actually quite a bit lower. If you look at the American inventories, they’re actually quite low.

Jackie Forrest:

That’s a good point. Yeah, that is global. And so for certain regions we’ll have a very different situation. And you’re right, North America, that’s a place where we actually have, in the US, very good data and well below average in terms of inventory levels right now.

Peter Tertzakian:

Because what high prices do is they provide incentive for the suppliers to sell as much as possible to capture the high price. And because the North American oil industry, Canada and the US in particular, are free market, they’re not state-owned and nationalized, they’re free market. So when they see the higher price, they have every motivation to sell as much as possible to capture the higher revenue and the margin.

Jackie Forrest:

Yeah, markets work. Although I will say as inventories go lower and lower and lower in North America, you may actually see a situation where the North American price starts to increase relative to international to slow down that export because the inventories are getting low. So we’ll continue to watch it over the summer. All to say that certainly very uncertain over the next few months. But yeah, looking out 18 months, I think there’s more stability because of the workarounds. I also think that there’s other sources of supply that are coming on as well and that’s part of that glut narrative that the IEA talks about in their own market report.

Peter Tertzakian:

Well, speaking of extra supply, Canada might be offering extra supply over the course of the next 10 years.

Jackie Forrest:

Because of our pipeline news and the fact is we are going to have to fill those pipelines. So I thought we could talk about some of the questions that came from the pipeline news announcements. We had two announcements, as we introduced on our last podcast, that West Coast one million barrel a day or more via the southern route that Premier Smith and Prime Minister Carney announced. And then of course we had the announcement around this Ontario project, which could take oil from Alberta and take it out to Sarnia in Ontario. And it’s a very early stage project, just a feasibility study. But as we were going around with Stampede, we got lots of questions around the pipelines, whether it be from media or people you were talking to.

Peter Tertzakian:

I mean, you add up all the pipeline projects, whether they’re the expansions on Enbridge, South Bow, that Bridger project, the Trans Mountain existing pipeline expansion, the West Coast pipeline that’s being proposed, as you said, by Premier Smith. And actually the submission to the regulator has been filed.

Jackie Forrest:

Yeah, we will put a link to that in the show notes as well for people. It’s worth a read.

Peter Tertzakian:

It is worth a read. And then now we have the resurrection of Energy East, we’ll call it, or East two, V2.0, which is actually V3.0 because this pipeline has been proposed decades in the past and has never really materialized. But it’s interesting.

Jackie Forrest:

I feel like we’re back into 2014, Peter. Remember back in 2014 we had a Northern Gateway, an Energy East and a Keystone XL.

Peter Tertzakian:

Keystone XL.

Jackie Forrest:

And now we have the Prairie Connector Pipeline being advanced by South Bow and partners, which is kind of along more or less the route of the Keystone, although there’s some variance from that. Now remember in that episode back then not all of them went forward and that may be the case today too.

Peter Tertzakian:

No, I think it’s similar to other infrastructure mania, I’ll call it. I mean, if you think back to the early 2010s, we had all sorts of LNG facilities that were being proposed. We had 17 that were proposed at a time and ultimately only a handful are going to go ahead. One did actually go, LNG Canada won. Then we had all these oil sands projects, most of which got shelved and now are being resurrected. So it kind of goes in waves and not all proposed projects get built.

Jackie Forrest:

Now, one of the questions that I got frequently is what comes first, the pipeline or the supply? And if you go back to that 2014 era, the supply came first actually. We had all these big greenfield projects in the oil sands coming and then the pipeline proponents sort of showed up. But the industry kind of got burnt by that because it turns out those pipelines weren’t built because of various reasons with the gateway. It was rejected. With Energy East, the proponent withdrew the project, but I think there was a lot of political reasons for that as well at the time. And then we ran into the problem with all that supply coming on and no pipelines and we got those massive discounts.

Peter Tertzakian:

And the tanker ban.

Jackie Forrest:

Yeah, the tanker ban. Yeah. So anyway, we got into a situation where the supply didn’t have the outlet and we had massive price discounts. So I actually think from that era, there’s a learning that, you know what? The pipelines probably need to come before because producers don’t want to set themselves up to bring on a bunch of supply when there’s no takeaway. So I think it is a different paradigm then back then.

Peter Tertzakian:

Yeah, it’s the whole, if you build it, they will come. If you think about things like ring roads and other infrastructure, infrastructure typically comes first and then the development around the infrastructure comes second. And ideally it’s synchronized in the case of pipelines is that it starts to fill, the supply starts to come on as these pipelines come to pass, some of which are expansion, so they’re faster. Some are new builds like the West Coast pipeline. And so there has to be a coordinated effort to ensure that the building of the infrastructure is followed through fairly quickly to utilize the pipe.

Jackie Forrest:

In that respect, the Premier of Alberta talked about new financial incentives for oil sands to help with growth. Any ideas what those could be or what that might be thinking about?

Peter Tertzakian:

Well, from a resource owner’s perspective, the province of Alberta, the levers that can be pulled are obviously the royalty structure can be altered. From a federal perspective, it’s more from a tax perspective and capital cost allowances and that kind of thing. So we shall see. I would say though that if we think about the era that we’re in where we’re building large scale infrastructure and with the Major Projects Office fielding all sorts of major projects, whether it’s ports and railroads or nuclear power plants or transmission lines and pipelines and filling pipelines and so on, that you have to think differently about how you finance these things, how you test the word, is it economic or not?

Because that’s the question we often get. Well, is it economically viable? And generally speaking for a long-term infrastructure project, if you just run it through a spreadsheet using the traditional metrics that are based on the time value of money like IRR, NAV, MPV, et cetera, you’ll find that none of the above is economic, none of the above, because these are by definition long-term projects that take a long time to construct. And if you think about the time value of money equation, it basically hammers the contribution of the completion because it’s so far out. So you have to think differently about the returns that these long-term infrastructure projects, and are they just financial returns or are they returns to the people of Canada which rather than being subsidizers of these sorts of projects become investors in these projects?

Jackie Forrest:

Well, and actually I wrote an op-ed, which I will put a link to in the show notes on we should view the West Coast pipeline as a type of insurance. And I talked about the Saudi Arabia, in the 1980s they built that East-West pipeline that you just referred to and it actually was underutilized for decades. But today I don’t think anyone’s questioning the investment they made in that insurance program, which is like what happens if the Strait of Hormuz gets closed and we’re still selling our oil? Where many other countries in the Middle East are making no money or very little money right now.

Peter Tertzakian:

Right. So you have to think in the long-term. And long-term means thinking beyond spreadsheets and traditional metrics that are used in the finance industry for measuring rates of return and assessing whether or not these projects are “economic.” And I think this is going to be what we’re going to hear a lot about as we come back in September is people questioning, well, does that make economic sense? What’s the taxpayer going to pay?

We’re in a new era here. We’ve talked about that in the podcast in the first six months a lot, that the whole state capitalism, economic warfare, economic coercion, how do we defend ourselves against that? And how do we think about setting up the country for the next generation of prosperity? 7,500 years ago, nobody was running spreadsheets to assess the economic returns of the infrastructure that we built. And even beyond that, the railroads, for example. They were built with a long-term mentality. And that’s how we are going to have to think about these things and redefine our definition of what is “economic” and what isn’t.

Jackie Forrest:

Well, and I think when we think about pipelines in the modern era, it’s public companies that back them that have an expectation of return. But the backers for this pipeline eventually, I do think if this pipeline moves forward, and I hope it does, there’ll be different types of investors, maybe national oil companies that want access to Canada oil and gas for energy security reasons. And they may want a much lower rate of return than what the companies like Enbridge or TC Energy want. And so that’s another factor we need to think about. I will talk about the cost of the pipeline because that was in that document.

Peter Tertzakian:

Yes.

Jackie Forrest:

Construction started, the early works, in 2027. They estimate it could be $35 billion. So it certainly is a lot of money. And to just get your return on tools I think is going to be challenging, but if you have a lower expectation for return or you see other value like insurance, like energy security, like creating new trade partners.

Peter Tertzakian:

Well, like long-term stream of royalties and taxes.

Jackie Forrest:

Right. Yeah. So there’s other kind of factors that-

Peter Tertzakian:

Because the pipelines that have been built in Canada and the resources that go through it and now the royalty streams, royalties and taxes of upstream oil and gas this year are likely to be around ballpark $30 billion, $32 billion. I mean, that’s a huge number. And as I said, if you put that in a spreadsheet and discount it using the time value of money formulas way out into the future, it almost contributes nothing. But when you get to the future, it’s a huge payback. And so you have to think differently about how these projects pay back and the benefit to society. Again, whether it’s a transmission line, a nuclear power plant, a port, a railway, a pipeline, you name it, LNG facility. These are big infrastructure projects that take a long time to build, sometimes decade plus, and then they start contributing meaningfully in the decades to follow.

Jackie Forrest:

One important point is Alberta has this goal of they’re almost at five million barrels a day now in terms of oil and condensate production. Want to get to eight million barrels a day. So those royalties could grow quite a bit if these facilitate that type of production growth for the province.

Okay. Another question I got, and I have to admit, I did some interviews with the CBC. So I got the question, why do we need oil pipelines? If oil demand is declining in the mid-2030s, aren’t we building stranded assets? So what’s your answer to that one, Peter?

Peter Tertzakian:

Well, again, we’ve talked about it on the podcast, written about it. There’s a tendency to homogenize oil as a singular product and homogenize its use into vehicles and transportation. Oil is a multifaceted product with high utility in all sorts of different markets. As I like to say, we don’t stop using copper because we have gotten rid of the penny. Copper is used in all sorts of different applications from wires and so on. So I’m not denying that transportation is a big fraction of a barrel, but that fraction of the barrel is not declining as fast as one would think. But the other uses of oil is actually increasing to offset. And our heavy oils are tailored to a lot of the modern refineries in Asia that can basically take the oil and turn it into a multitude of products from the clothes on your back to the soles of your shoes to the pharmaceuticals to you name it. And that demand for that is not declining.

Jackie Forrest:

And I would also add, if you look at the IA, even their stated policy scenario, oil demand is almost a hundred million barrels a day in 2050. So there’s still a lot of oil demand. So I think that’s the first narrative. But the other thing I think that differentiates Canada is even in a world where oil demand is declining, I think Canada would be an advantaged supplier of oil.

And I’m going to do another shout-out for another op-ed I did on Canada Day. I talked about the fact that countries are signaling that they want more supply from Canada, whether it be that G7 meeting in France where they said they welcomed the potential for Canada to deliver additional supply. We are trusted … They didn’t say this, but this is my view. We are trusted to not use our oil exports for political gain in a world where many countries are. And we have no physical choke point shipping issue, which is really in the front of people’s minds right now. And a case in point, we have interest by Germany in Canadian LNG. So I think even in a world where oil demand is flat to declining a bit, people will want more supply from Canada.

Peter Tertzakian:

I’m thinking, I just keep coming back to something we’ve talked about ad nauseum. A hundred million barrels a day is just such a colossal number. It’s hard to fathom. It’s a huge demand number. And if it goes down to 95, 95 is a huge number. And why are we scared as Canadians not to compete for the market share? We’re ideally positioned off the West Coast to serve the Asian markets at an advantaged transportation paradigm. We have high quality oil. We’re, as you said, a reliable supplier. People want our oil. There’s an intangible value to Canadian oil. And so we are able to compete handily as you think about the global situation and take market share. So what’s the next major question?

Jackie Forrest:

Okay. Well, let’s move to this east pipeline called the Northern Shield proposed by Ontario’s premier Ford. From an oil market perspective, why would we build that pipeline? What’s the arguments for and against it?

Peter Tertzakian:

Well, the big one is energy security. That’s what we’ve been talking about ad nauseum over the course of the last many decades and certainly several times in this podcast. Whether you need to spend that much money for energy security and arguably at a time when you think about what I said earlier in the podcast that the price of oil may become more stable because of the workarounds of the Strait of Hormuz. It’s not clear, but there’s a strong argument that we should have sovereignty over a lot of our supply chains and systems. It’s not just oil, not just gas, whether it’s electricity, pharmaceuticals, food, forest, lumber products, et cetera, that there’s a lot of merit to having more cross-country independence and less dependency on foreign sources of supply. And Central Canada is highly dependent upon outside sources of petroleum products.

Jackie Forrest:

Well, they do get the oil from Canada. I mean, a lot of the oil consumed in Ontario is coming from Canada, but via the Enbridge system. We talked about that C.D. Howe lost the battle. He wanted the oil pipeline to be built on Canadian soil.

Peter Tertzakian:

But it’s not all on Canadian soil.

Jackie Forrest:

No, now it goes down … Because it’s very expensive to construct a pipeline across the great Canadian shield. Solid rock. I actually haven’t driven along it to see it myself, but that’s what I’m told. So it’s much cheaper and actually shorter route to go under the Great Lakes and then into Ontario that way. And that’s why the Enbridge mainline and the Enbridge system, which delivers oil to Ontario today exists in that form.

Now my point is we actually don’t know what this is going to cost. That’s part of what this early stage feasibility study I’m sure we’ll be looking at. But just let’s look at the West Coast pipeline, $35 billion. Now I know we’re not going over a couple of mountain ranges, but it’s much further and it’s going over this northern shield. So I wouldn’t be surprised that it’s quite a bit more than that project, making that up. So the question is, if that’s the situation, if it’s going to be in the $30 billion plus range, how much are people in Ontario willing to pay for energy security? Because I would reckon that the price of oil could be 10% higher taking oil that way versus taking it through the existing Enbridge system.

So it’s just, is that the most efficient use of money at this time? The other concern to think about is this doesn’t actually create new markets for Canadian oil. We can’t grow our production because there’s only so many refineries in Ontario and they’re not changing. So all we’re doing is substituting, moving through an existing system to moving the same amount of oil through a new system. So it’s not creating a new market or new demand for our product. So it doesn’t have that advantage as well.

Peter Tertzakian:

Yeah, I think there’s a lot of good questions that you bring up about this East pipeline. And even with my arguments about using long-term economics, whether or not it would even pass that sort of test, because there are other ways of satisfying Central Canadian energy security, including using rail as an alternative in the event that there is supply restrictions. But I do think that what it does is forces the country to think about its energy security. That’s what it does. I think that’s something that needs more discussion.

Jackie Forrest:

I totally agree. I think rail is actually something we should seriously look at as a backup plan. It would be a lot lower cost. We’d need to build rail cars, have them available sitting on standby, have some rail offloading capacity. But I think that would be a good idea for the country too.

Peter Tertzakian:

There are other options too, including building a strategic petroleum reserve. Okay. Well, speaking of building out infrastructures, talked about ports and railways and transmission lines and pipelines and LNG facilities. Then there’s data centers.

Jackie Forrest:

Yeah. And we had some big AI data center news. Of course, we talked about it on our last podcast that that green light power facility got the green light and was having a final investment decision. But we also learned later on last week that Meta is going to build a $13 billion Alberta data center, its first in Canada. And this $13 billion figure, and this is according to Chris Fargo at the Calgary Herald, who did an excellent article. I will link to it in the show notes.

Peter Tertzakian:

Yeah, we’ll post that.

Jackie Forrest:

He’s talked about the fact that this figure does not include the cost of the high-tech computer chips.

Peter Tertzakian:

That’s a big number. $13 billion for the data center and not including the computer chips.

Jackie Forrest:

Yeah. When I first heard the number, I was like, oh, it’s probably all computer chips bought in Taiwan or whatever and really not being money being spent in the Alberta economy.

Peter Tertzakian:

Well, there is a lot of that.

Jackie Forrest:

I’m sure some of that $13 billion is not being all spent in the Alberta economy because they’re still going to need, I don’t know, backup generators, battery systems, racking systems. I don’t think they’re all coming from Canada, but still it’s a big number. And this is a big scale facility that meta talks about this being at the scale of some of their bigger US operations.

Peter Tertzakian:

Did Mark Zuckerberg come in a cowboy hat? I didn’t see him.

Jackie Forrest:

No, no. They had a VP there on the stage with Premier. And as part of the announcement, Meta has been working closely with Greenlight Limited Partnership, which we talked about. AltaLink and Capital Power are also part of it. And of course the AESO has been involved in it as well. Construction could start soon, but it may be a few years before operational. And yeah, there’s other kind of news too. They were very careful about talking about water use, that they’re going to be very careful in the amount of water that they’re going to use. In fact, they say its total annual water use would be less than that of a typical Alberta golf course because water use has been one of the things that stakeholders have been concerned about.

Peter Tertzakian:

This is a big deal. Meta’s announcement is $13 billion for one gigawatt, not including the computer chips. And we also have the announcement for basically a gigawatt, I think it was 960-some megawatts from the Greenlight group.

Jackie Forrest:

Right. And that’s actually not part of that $13 billion. So that’s another $4.6 billion of investment.

Peter Tertzakian:

Yeah. And so what this does is it says that this is really a huge energy play. And I’ve got a piece coming out on this in the next couple of weeks, so we’ll post that as well when it comes out. Because what I do is I track the value of a gigajoule of natural gas, which today say trades around $2. And as it goes through all the industrial machinery, including the power plants, and then ultimately through the computer chips and comes out as consumable tokens in the AI world, what do you think the value lift is? $2 in for a gigajoule. Recognizing that really the only input, the only raw input into a data center is energy, electrical energy.

Jackie Forrest:

Right. Well, I guess you have the depreciation of your equipment and things like that.

Peter Tertzakian:

We have all the depreciation of equipment and all kind of stuff.

Jackie Forrest:

But let’s say it’s 10-fold.

Peter Tertzakian:

It’s not 10-fold.

Jackie Forrest:

So it’s $20 of value add.

Peter Tertzakian:

Well, $2 in is enough to create $2,100 in tokens. So that’s a thousand time lift.

Jackie Forrest:

Right. Wow. I guess we don’t know what the cost of all that equipment and being depreciated.

Peter Tertzakian:

Well, it’s huge.

Jackie Forrest:

Because those chips have a short life.

Peter Tertzakian:

… $13 billion plus another 50% probably for the chips. So you’re talking about $20 billion, not including the electrical infrastructure. So the profit margin has to be huge and it is. $2 of gas turns into $2,100 in these tokens. And so the margins are huge. There’s no other industrial process, like a lump of coal in to create steel or natural gas fired infrastructure to make fertilizer or making all sorts of other products, aluminum. Those are typically 10, 20 times multiplier on the unit of energy that goes in. This is a thousand times. It’s absolutely huge. It has to pay for all this massive infrastructure that is built in. Plus there’s a pretty fat profit margin for the AI labs like Anthropic and OpenAI and Meta and others that use it. But the point really is that that tells us that the value of the energy going in is only a small fraction, a very small fraction of the whole process. These labs are rather insensitive to the price of the energy going in.

Jackie Forrest:

And that speaks to, we talked about the CER being one of the bigger sources of uncertainty, that Canadian electricity reg that requires carbon capture storage on your power plant. But maybe that speaks to why a project like this can go forward even despite that risk. Because if you actually look at the CER, if you can qualify as a planned unit and that means that you are under construction by December 31st of 2027, which this one would be, I would think, then you can operate without that carbon capture storage for 25 years.

So normally for a natural gas power generation plant, you may amortize that over 40 years or something like that. You could pay more. Assume you can only use this plant for 25 years and it would still make sense because like you say, the power price is not so much. Or maybe even if you don’t meet that criteria and you need to put carbon capture storage on by 2035, which is the other thing, if you don’t start construction and you’re not deemed to be what they call a planned unit, maybe you can say that’s okay because power price is not a big part of my whole thing.

Peter Tertzakian:

No, it’s important to clarify something because there are a lot of people that are saying, “Oh my gosh, we can’t afford power prices going up. We can’t afford to be allocating a gigawatt of electricity capacity to this thing.” This is all being constructed behind the fence, right? It’s not-

Jackie Forrest:

Well, they are going to add this new generation, but yeah, I don’t know if it’s truly behind the fence. I think there will be some grid connection, not completely isolated. But it is important that when Meta announced this, they did say, and I will put a link to their actual announcement, that they are planning years in advance, paying the full cost for energy used by our data centers. So including the infrastructure and things like that, not putting that on the rate base. So that’s become a real hot topic around data centers.

Peter Tertzakian:

It has.

Jackie Forrest:

And so we’re seeing more and more of the data centers saying, “Yeah, we’re going to build for the link to connect us to the grid. We’re going to pay for that. We’re going to pay for all the infrastructure. And so it doesn’t cost Albertans.”

Okay. So in summary, I mean, I think that this is great validation that Alberta can attract the capital despite some of the regulatory uncertainty, especially from a leading hyperscaler like Meta. This is not a fly-by-night company and a big project at this scale. Maybe there will be others. I will say though, although this one went forward, I think if we could clean up our regulatory issues, I think there would be a lot more. We learned from Minister Nate Glubish that the province is in talks with 60 other data center proponents.

Peter Tertzakian:

Six-zero.

Jackie Forrest:

Six-zero. So I think there are others, but I do think if we could clear up this regulatory stuff, there’d be more projects going forward. Maybe we’d have more announcements.

Peter Tertzakian:

Yeah. And then we get back to the podcast we had about labor.

Jackie Forrest:

Yeah, that’s true.

Peter Tertzakian:

We’re going to build pipelines, LNG facilities, interconnects, and now we’re going to connect all these data centers. I mean, this one data center I think is like 3000 skilled trade workers.

Jackie Forrest:

At the peak, 3000. And I’m not clear if that includes the power plant. I’m kind of thinking it doesn’t, but I think that’s just the data center.

Peter Tertzakian:

So if you want to renovate your house, you better get at it.

Jackie Forrest:

That’s right. Well, and probably a lot of electricians will be in demand for something like a data center as well. But let’s talk about another topic related to this. Now, I don’t know that there’s any opposition to this particular site, and I think it is quite unique in that it’s being built in an industrial area. It’s in the heartland, which was already zoned for industry, not close to people’s homes. But we are starting to see more opposition in the US, but also here in Canada to some of these data centers and even here in Alberta. And I want to talk about a new report done by, there’s a group called Data Center Watch, that’s how big this is getting, tracking the opposition to data centers and that about $130 billion of projects have been blocked or delayed, 75 projects in the US and the most since the group started tracking this in a three-month period.

So there’s this growing opposition and here in Alberta, we’ve had opposition like the Wonder Valley Project in Grand Prairie is facing legal challenges from the Sturgeon Lake Cree Nation. There’s this Synapse data center. This is the one in Olds that the Alberta Utilities Commission has actually rejected the application. And there’s also a lot of concerns by local residents about the data center. So Peter, I know you were at a conference on a panel lately, and I know we can put a link to the actual recording.

Peter Tertzakian:

Yeah, we can do that, at the Upper Bound Conference in Edmonton.

Jackie Forrest:

And it was called What AI Can Learn from the Energy Sector Scars.

Peter Tertzakian:

Yes. Data center opposition is growing quite dramatically, particularly in the US. And it’s a multidimensional, unlike in the oil business and pipelines. It’s multidimensional because the overlap is with the environmental concerns, the emissions, especially if you use natural gas and in case diesel engines and even in the United States are talking about firing up more coal-fired power plants. But there’s also the perception that there’s not a lot of value added once the data center is built. It’s only a fraction of the people that actually work in these things for not a lot of value to the community. In fact, it’s a drain on the community. It makes a lot of noise if you’re living beside them. And then there’s the big one that there’s a perception that it destroys jobs and basically destroys the fabric of the economy because everything is taken over by machines and artificial intelligence.

So the AI industry has been rather arrogant to this point. In fact, trumpeting the fact that it takes away jobs. They’ve changed their narrative now, but I think it’s probably too little too late because the momentum behind these protests is growing. And it’s going to be very interesting to follow this story. AI is a strategic thing now. I mean, it’s part of the economic warfare narrative, China versus the US versus others. And certainly in the military, AI is being used, which is another contentious point.

So we’ll see where this ends up. I mean, the narrative behind the panel that I was on was largely as an industry, AI needs to get ahead of this thing before the freight train against it gathers so much momentum. But I think the freight train has long left the station here and it’s going to be very challenging. What we have here in Alberta is a lot more land, as you said, in the heartland and places like that, that’s away from neighborhoods and things.

In the United States and places like Virginia and others, my understanding in the videos and things that I’ve watched is these things with their gigantic air conditioners and diesel engines are right next to neighborhoods, which is frankly not so smart because obviously you’re going to get local opposition to these things that just feeds into the anti-AI momentum.

Jackie Forrest:

But I think there definitely is a correlation between, for example, that Olds one is quite close to people. Here’s a quote from an article from a resident lives down the street from the proposed development says she and other residents plan to keep fighting it because it’s so close to their homes. So having it further away is helpful. Although I would say that Wonder Valley, that’s really quite remote. And there’s opposition to that too.

Peter Tertzakian:

Isn’t that next to your ancestral house?

Jackie Forrest:

That’s right.

Peter Tertzakian:

The Forrest ancestors.

Jackie Forrest:

It’s in the Grand Prairie region, but it is in kind of like bush area. Not a lot of people close to it, but there’s opposition to that as well. Yeah, it is interesting in this Meta announcement, they are trying to get ahead of that. You can see that. They’re talking about, “Hey, we’re not using a lot of water and hey, we’re paying for our infrastructure.” And so they’re trying to message to people right off the get-go that some of those opposition points that you’ve brought up, they’re doing things about them proactively.

Peter Tertzakian:

Well, what we’ll talk about when we come back, because I’ll have a lot more of the analysis done and we’ll publish it. I said $2 a GJ gets converted into $2,000 plus of AI tokens, which is a huge value lift. The question is along that chain from molecule of natural gas to electrons and a power generator into the chips to create the tokens and so on, where is the value captured? Who captures the value? And that’s going to be a key question because if the conclusion is that the communities that they affect do not capture much of the value, then AI is going to have a lot of difficulty gathering momentum in places where there are density of people.

Jackie Forrest:

That’s a good point. I think that’s learning from the oil and gas industry, isn’t it?

Peter Tertzakian:

That is.

Jackie Forrest:

That benefit agreements didn’t exist at all or they were not very much money being given to the communities who are affected by these developments. And today it looks very different in terms of the benefits that come to indigenous communities, but other local communities, whether it be a pipeline or upstream oil and gas development.

Peter Tertzakian:

And the other dimension is that the benefits are perceived to be accruing to a very small constituent of tech billionaires and that doesn’t sit well either.

Jackie Forrest:

Right. Yeah, you hear about the big the hockey player type salaries for some of these AI experts while a lot of people are losing their jobs.

Peter Tertzakian:

I think they make a lot more than hockey players. Some of them.

Jackie Forrest:

The other kind of paradox in this whole thing is though nobody wants these data centers in their backyard, but everyone’s using chat for everything. And I’m sorry, I think a lot of these people that are opposing data centers are probably using AI to help with their campaigns against this thing. So we’re all using this. So there has to be some footprint associated with this new thing too.

Peter Tertzakian:

That saying, sitting in front of a two-dimensional chat window, you don’t have an appreciation for what goes on behind the scenes.

Jackie Forrest:

You want it in someone else’s backyard.

Peter Tertzakian:

You want it in somebody else’s backyard.

Jackie Forrest:

You still want to have access to these tools that make you more efficient.

Peter Tertzakian:

Well, it’s going to be a fascinating debate and observing how it goes not only globally in terms of the economic impacts of AI globally, how it intersects with the geopolitics of energy globally, and then distilled down to the Canadian situation and then down here to Alberta where there’s all sorts of industrial projects being proposed from pipelines to AI data centers and beyond. So it’s going to be a fascinating fall and I’m looking forward to coming back, but I’m looking even more to the taking a little time off summer. Thank you to our audience. We’ve had so much good will and people coming up to us over Stampede saying we love your podcast. It really inspires us, doesn’t it?

Jackie Forrest:

It does. Yeah. No, it was fun talking to all of our listeners over Stampede. Lots of them came up to us, so it was great.

Peter Tertzakian:

Yeah. So happy summer to all.

Jackie Forrest:

Yeah, we’ll be back in the fall. So thank you to our listeners. If you liked this podcast, please rate us on the app that you listen to and tell someone else about us.

Announcer:

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Hormuz Risk, Pipeline Momentum, and Alberta’s New Gigawatt Data Centre

Episode 334 transcript

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Jackie Forrest

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