The Biggest Energy Transition

On Monday US President Trump tweeted that “OIL (ENERGYIS BACK!!!!” 

He’s right: oil is no longer being given away for free. Benchmark prices have clawed their way above $30-a-barrel for the first time since early April. But few would be convinced that THE NORTH AMERICAN OIL INDUSTRY IS BACK!!!! 

The devastating effects of the pandemicforced production shut-ins—could put Canada and the United States on a regressive path toward dependency on “foreign oil,” a historically disparaging term. 

Let’s flip the calendar back to 2008 or so. The United States had sent about 150,000 troops to Iraq, where the post-Saddam-Hussein war was still raging. America was “addicted to oil” as President George W. Bush had proclaimedAt the high point of US dependency, in 2008, about two-thirds of that addiction was fed by imported oil. Excessive dependency on foreign oil was also costly. A dozen years ago oil prices averaged $US 100/BDaily foreign imports of 12.9 million barrels of crude oil and petroleum products were costing the country close to $US 500 billion a year, a transfer of wealth that foreign petrostates were happy to ring into their treasuries. 

Then came one of the fastest and largest energy transitions in history: The North American shift to shale gastight oils and oil sandsThe combined US-Canadian supply growth of 10 MMB/dall in the span of a decade, pushed foreign oil out of the continent faster than virus in a night club. Well not that fast; but in the 160-year timescale of the oil industry, the transition from foreign imports to nearself-reliance was incredibly quick. 

The details are not as important as what was accomplished. By 2020, the United States reduced its foreign imports to only 40% of consumptionFrom a combined team USA-Canada perspective, our continental reliance fell to a mere 20%. In other words, Canada and the United States were close to being energy (oil) independent in the lead up to the COVID pandemic (see Figure 1). 

Being mostly self-secure in oil supply shields us from the possibility of foreign disruption, but the economy and environment benefit too. Keeping several hundred billion dollars of commerce within our boundaries helps trade deficits and creates tens of thousands of high-paying domestic jobs. Having oversight of environmental regulations is also vital to keeping tabs on climate change targets. 

Now, the post-pandemic fallout could reverse a decade of energy security gains. Estimates vary, but more than 3.0 MMB/d of combined US and Canadian oil output may be shut-in due to the COVID-induced demand destructionCars are hitting the road again and petroleum consumption is rising, however not all North American production is likely to come back, even when oil sees $50-plus again. 

Permanent impairment of some domestic oil supply is guaranteed. The only question—potentially a multi-trillion-dollar question—is how much? It’s too early to know, but financial lens is needed to see the real root of the problem.  

Pushing foreign oil out of North America over the past 10 years has been costly. Oil companies, backed by investors and banks, spent $US 2.2 trillion to achieve near oil-independence. Cash flow, equity investment and debt paid for all of it 

Post-pandemic all three sources of capital will be scarce. Cash flow by itself won’t be enough. Thirty-dollar oil may keep the lights on but doesn’t provide enough money to sustain flat productionEven fifty bucks makes it tough. Investment from Wall Street and Bay Street? That was largely cut off starting in 2018. And now access to debt will be scarce toowhich bank will want to risk lending money to the industry after this catastrophic event? 

In the absence of capital, shale oil production is likely to decline further over the next 18 months. Contrary to popular belief oil sands won’t decline much, because its extraction process requires little capital to sustain outputRegardless, give it about a year and the demon of foreign oil packed with its geopolitical baggage will be knocking on the doors of North American import terminals—again. 

There is a question to ponder here: Whose responsibility is national energy security? Does it lie with our free-market oil companies? Investors? Banks and lenders?  

It seems western society and their governments have relinquished that responsibility over the past 10 years, wanting nothing to do with oil. But it’s an important chinscratcher, because North America is unlikely to shed its oil addiction anytime soon.  

Regaining lost market share and flushing out our independence was exactly what the Saudis and Russians wanted when they started a price war 10 weeks ago. At the time neither imagined the severity of the coronavirus. Now, as the pandemic eases the losses to North American oil production are becoming evident. The opportunity set for ‘foreign oil’ is potentially even greater than they could have ever imagined.