Sudden shocks to a system are never good. Things break under stress, sometimes permanently, sometimes with unforeseen consequences.
In the oil world, things could start breaking in a matter of weeks. Here in Canada the situation is likely to be acute, because of our concentrated exposure to one customer, the United States.
Oil markets worldwide are under extreme stress. First there’s the OPEC price war, a deluge of barrels thrown into markets opportunistically during the COVID-19 pandemic. The massive glut in oil—still unknown in magnitude, but potentially over 10 million barrels per day globally—has pounded the price of a premium barrel to near $US20. At that price, very few producers make enough money to sustain their longevity.
Prolonged financial stress, measured in months not years, will lead many oil producers to distress and some to demise. It’s easy for people to be dismissive about this situation from an armchair, staring out the window over the horizon, far away from where the oil and its petroleum products originate. Consumer detachment from our many supply chains leads to a lack of awareness about what goes on behind the scenes.
While the oilfields of OPEC and Russia are a world away, the COVID-19 pandemic is here — and the problem is a lot closer than you think. Oilfields are the starting point of our biggest energy system, a multi-trillion-dollar grid of pipelines, refineries and distribution systems that plug into airports, gas stations and manufacturing plants that give us our modern amenities (including medical supplies and equipment).
Free-market oil companies and their related infrastructure partners have dealt with price wars and geopolitical shenanigans on the supply side in the past. But they haven’t experienced a catastrophic collapse in demand due to a sudden paralysis of human activity. The latter, closer-to-home problem is potentially more consequential to stressing North America’s energy system than decisions being made in Moscow and Riyadh. And these proximal stresses are about to ripple right up the pipes to Canada’s oil fields.
Here is the problem: In the past week, big cities, provinces and states across North America have ordered their citizens to leave their workplace and stay at home with varying degrees of enforcement. So, the big loss is in the use of transportation fuels: for flying and daily commuting. Fuels for light duty vehicles represent some 40% of the volume that comes out of a refinery; jet fuel is 10%.
We don’t yet know how much of North America’s oil demand will be impaired over the coming weeks, but estimates suggest in the range of 30% continentally is possible, and greater in the hardest hit areas such as the US Northeast.
So, where do you put the surplus petroleum products if nobody is using the stuff?
Some of the big refineries in the American Midwest are 80% or more reliant on heavy oils, with much of that coming from the oil sands region. Refineries in Ontario and Quebec are also dependent, receiving western Canadian oil through US pipelines. With limited space in storage tanks, the refinery complexes are starting to turn down their volumes. And that means they need far less oil from western Canada’s oilfields.
Soon, large Canadian producers are likely to shut in their production. Preliminary estimates suggest in the range of over 1 million barrels per day of oil supply could be turned away, mostly the heavier grades of oil. For scale, the Alberta government’s 2019 curtailment order was for a mere 325,000 barrels per day.
The exacerbating issue is that not all oilfields are the same; some can’t be turned on and off like a hairdryer. For instance, the steam-assisted heavy oil reservoirs can be damaged by shut-ins, as can operations that have corrosion concerns.
In a prolonged scenario, there are potential knock-on effects. Financial contracts, backed by creditors and counterparties, are potentially impacted with unknown aftereffects that can ripple into the banking system.
Pure capitalists would suggest letting the free market decide the fate of these vital supply chains across the continent. Yet mere low oil prices are a reckless arbiter of who shuts in production and who doesn’t. Price regulates volume, but it doesn’t consider factors that range from permanent supply impairment to unexpected system failure.
A societal disruption of this magnitude affects the suppliers and consumers of energy, and everything in between. Because “everything in between” spans the continent, back and forth across the US-Canada border, this looming system-wide issue isn’t exclusive to western Canada’s oilfields. The entire system is affected.
If major shutdowns begin, it’s desirable to have a triaged, holistic process, managed from the most vulnerable segment to the least. State-owned, integrated oil companies can manage such a task, yet in a free market like North America that’s called collusion. During this exceptional crisis, maybe we can think about multiparty collaboration instead?
Our personal health is paramount followed by putting food on the table and shelter over our heads. After that comes the protection of essential infrastructure and services that are necessary for our modern society to function well.
Canada’s oil and gas industry remains an integral, real-time supplier of energy to some of the most populated US states and eastern Canada. Annual oil, gas and petroleum exports last year tallied close to $C120 billion.
Right now, in a time of crisis, this is about more than incomprehensively large dollars in an industry that has historically polarized our society. Canada’s energy industry serves us all — it heats our homes, it fuels the trucks that bring food to our tables and it’s relied upon to create critical medications in our cabinets. And right now, the industry is on the verge of a system-wide crisis. Without care and consideration, the effects won’t just be experienced in some far-off oilfield, we could feel them in close-to-home ways.
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We need to think outside the barrel. Industry, government and all stakeholders should proactively work together to minimize damage to our energy systems. Because this isn’t an industry issue, it’s now societal.