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Weathering the Storm: Alberta’s Grid Alerts and 2024 Energy Themes
Peter and Jackie start the year by reviewing the extreme cold in Alberta that caused a spike in electricity demand, resulting in the Alberta Electricity System Operator (AESO) issuing four grid alerts between January 12th and 15th. The electricity supply-demand balance was the tightest on Saturday evening (January 13th), causing the Alberta Government to issue an emergency alert to people’s mobile phones. About 200 MW of demand fell off the system within minutes of issuing the notice.
Peter and Jackie also discuss other storms brewing on the horizon and introduce the 2024 energy themes to watch along with some predictions. Here are the energy-related topics they will be closely following:
- The US Election
- Canadian Politics and Energy Policy
- Interest Rates
- Military Conflicts and the Risk of Oil Supply Outages
- Oil and Gas Markets
- Climate Change Policy
- Nuclear Power
- Electric Vehicle Adoption
- Artificial Intelligence (AI) and Energy
- Clean Energy Investing
- Oil and Gas Mergers and Acquisitions
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Episode 224 transcript.
Speaker 1:
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.
Speaker 2:
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. Welcome back. Happy New Year to all, although it is January 15th when we’re recording this, and I feel like the new year is a distant memory.
Jackie Forrest:
Yeah. So much has happened in the first two weeks of the year, including the last three or four days because of this extremely cold weather. All parts of North America have seen it, but in Alberta it was pretty extreme and really stressed our power system.
Peter Tertzakian:
Yeah, I mean, in parts of the mountain, I know in Canmore it was down to, I think I looked minus 40 something.
Jackie Forrest:
Oh yeah. Fort McMurray had lows of minus 43 Celsius at times over the weekend. It’s crazy.
Peter Tertzakian:
Yeah. Well, I grew up in Edmonton, so I remember as a kid that minus 40 was not uncommon and these types of temperatures are coming back. So here we are.
Jackie Forrest:
Yeah, coldest weather they said in over 20 years.
Peter Tertzakian:
But the power grid looks a lot different today than in those days, doesn’t it?
Jackie Forrest:
Well, and the population of Alberta is a lot different for sure and-
Peter Tertzakian:
They’re pushing 5 million people now.
Jackie Forrest:
Yeah. So, we had emergency alerts each night from AESO, Friday, Saturday and Sunday. The real extreme one was on Saturday, and that’s when we got the notice from our phones telling everyone to reduce demand at about 6:45 pm. People did reduce their demand, we’ll get into that, but by about 200 megawatts, which is significant. It’s kind of half of or 40% of the Shepard gas plant in terms of generation capacity by reducing our demand. We even had, as we’re recording this morning, we had another grid alert Monday morning, which we still have very cold temperatures right now, it’s supposed to warm up this afternoon. So obviously we’re really hitting the limits.
We did hit record high usage on Thursday, but most of the weekend we were over 12 gigawatts. That combined with the fact that some of the generation capacity wasn’t there. Apparently one gas plant was offline, and one had reduced capacity, and there was no wind, obviously no solar, especially at night. So that contributed to the fact that we were very tight. Also, we had less imports coming because other jurisdictions like B.C. and Saskatchewan where we have interties from, and even the U.S., we’re also needing all of their generation. So, there wasn’t as much available in terms of what we could get from other jurisdictions. So, I think it’s worth talking about this alert. Remember when we had Mike Law, the head of AESO on our podcast last year?
Peter Tertzakian:
I do, yeah. Yeah, that was last year.
Jackie Forrest:
You have these emergency alerts and you put something out through Twitter or X out or on cable news and the radio, people don’t hear it. So, I was happy to see on Saturday that finally they got the phone alerts, and that’s the only way to kind of get people to take action. Now, you can’t overdo it or abuse it because if it was happening every day, people would kind of stop reacting, but we did see it shave off about 2% of demand. Now, you could say that’s not very much. I actually think that I was a little disappointed in that number, but residential consumers are only a portion of all of the demand. I do think we could probably do more. There was a picture of Downtown Calgary, all the lights in the towers were on, the Calgary Tower was lit up. I think there’s things that we could do to prepare for these things to be able to cut demand more than what we saw.
Peter Tertzakian:
Was that 2% of residential demand or 2% of all demand?
Jackie Forrest:
No, 2% of all demand. Yeah.
Peter Tertzakian:
Right.
Jackie Forrest:
Without that cut though, we would’ve had they were talking about 50 megawatt rolling outages. So, you might’ve had your power out for 30 minutes, which in these types of conditions, your house could cool off quite a bit without the fan in your furnace being able to push the air around.
Peter Tertzakian:
Well, at a minimum, it also affects the psychology of people. They start to panic in that kind of a situation where you lose your source of energy, primary source of energy, and things stop working. So yeah, it’s not good.
Jackie Forrest:
It’s life or death if you’re exposed to that temperature for a long time. Then for homes, and this wouldn’t be extended, but if you start to have a long period without heat, you could start to have pipes bursting, all sorts of issues, right?
Peter Tertzakian:
Right. So, what’s the upshot of all this? We’re going to talk about policy, upcoming policies, things like Clean Electricity Regulations, any other types of policies that are coming down the pipe in ’24. In fact, this podcast is about our view of 2024, but before we get to our, I don’t want to call them predictions, but our themes for 2024, maybe Jackie, you’re there. Actually, I’m happy not to be there. I’m in Scotland over here, so it’s much milder, although wetter over here. What’s the sense of your takeaways out of these power alerts?
Jackie Forrest:
Oh, just as a note, I’m sure you’re enjoying all those interties you have with the rest of Europe, which make it probably less likely you would have this situation. Do you remember when the UK energy minister came on and told us how-
Peter Tertzakian:
Yes, I do.
Jackie Forrest:
He was flabbergasted about the limited number of interties that we have and how many they have in Europe. Anyway, side note. My takeaways are, I mean, it’s obvious we need reliable base load. There were a lot of tweets about wind and solar not being around. Well, obviously solar’s not going to be around in the middle of the night, and I don’t think any planner thinks that the wind is going to be available on the coldest night. So, I don’t think anyone was planning for that. So, for people that expected that or thought that they let us down, those generation types provide a great return to their investors, but they’re not expected to be running in those conditions.
So, we do need this reliable base load and it supports the need, I think, for the market redesign. I don’t know if you noticed, but we did have an announcement from the Alberta government just in the last few weeks that they’re going to do some sort of report on the need for a market redesign. We’ll get into more of that later. So, I do think we need a policy that balances reliability with greenhouse gas emissions. I think that’s important. I do want to say a shout out to Blake Schaffer, who this weekend was working hard to get a lot of good information out on X, formerly Twitter, around the real time information about the Alberta power grid.
But he did mention that next year it looks a lot different. There’s a lot of natural gas generation coming on. There’s Cascade 900-megawatt unit coming on early in 2024, Genesee, there’s going to be a repowering of Genesee that replaces the existing coal with even more natural gas. The Suncor Cogen is expected to come on at the end of the year. So, there should be a surplus for many years once those come on, and we shouldn’t have the situation in future years once that base loads on.
Peter Tertzakian:
Yeah, there’s more supply coming on. But I think that it’s interesting to note when you’re speaking of cogeneration, Jackie, is that the power that’s generated in this province during this cold spell, about 40% of it comes from cogeneration. The bulk of which comes from the oil sands and all their big generators which have surplus electricity that they feed into the grid. So, as a side note, I think it’s important to understand that any policies that affect oil sands also affects the electricity grid.
Jackie Forrest:
Yeah, well, and especially because as it’s drafted right now, the Clean Electricity Regs talks about almost gives incentives for those plants to not supply power to the grid because if they do, they have to meet the 2035 goal. So that’s a real concern for sure.
Peter Tertzakian:
So, when you say market redesign, I mean this is so important is because as I said, we were reminiscing about, we’ve seen minus 40 before in the past, but today’s a situation in terms of how electricity is generated and how it’s fed into the grid, and ultimately consumed is way different than it used to be. There are these pressures to transition and change the grid even more. We have to have a market redesign, and the market redesign means understanding how consumption is paired with supply to ensure that the electricity is supplied in the coldest and the warmest days of the year.
Jackie Forrest:
Yeah, it was January 3rd, so it was earlier this year, the Alberta government announced that they will be reviewing the electricity market. Not all the reports will be made public, but they are doing that work, and I think this is going to obviously factor into that. Now, the second lesson is interties needed, I don’t know if you saw there was a tweet from Premier Moe from Saskatchewan talking about how they were sending more power to Alberta, and that really helped us out in that very tight market on Saturday. I think we need more interties.
Peter Tertzakian:
Yeah, there’s no question that sharing between provinces all the way potentially across the country, bring Manitoba into the Western fold as well is super important. Otherwise, we get into a situation where the lack of interties is like a constriction on electricity flow where it’s needed.
Jackie Forrest:
Right. Then all things the same, you’ve got to build way more generation than you would if you had interties. Now of course, this is very controversial, and a lot of provinces haven’t been wanting to increase the interties, but hopefully this example shows there’s a benefit as well. Lastly, consumers can and should play a big role. I mean, it was really critical that Albertans cut their demand. I think a lot more could have been done, and I do think we need to move as quick as possible to some sort of time-of-day pricing so that consumers are more motivated to make changes, especially when we think about the growth of demand from EVs, more population, Alberta’s growing very quickly. I think we need to move to a system where there’s some incentives and people, including all those office towers downtown, are incented to turn off the lights.
Peter Tertzakian:
When the demand becomes so strong, the price signal will then work as the alert to pare back.
Jackie Forrest:
Right. Yeah, there’s more economic motivation.
Peter Tertzakian:
Right.
Jackie Forrest:
So, in summary, I mean the whole thing in my view is just a real-time case study in thinking about the energy transition. We got to keep the old stuff working while you build the new stuff, and I don’t think enough time is spent thinking about how to keep the old stuff working and economic so that it sticks around during the transition.
Peter Tertzakian:
Well, these are all, I hate to say, commonsensical observations that you’re making. It’s just keep the old stuff working before you get onto wholesale new stuff. It’s just common sense. Have price signals moderate demand, it’s just common sense. I think all of these things. The requirement for more base load power in a climate where there is high degree of variability between summer and winter temperatures is just common sense. And these rapid changes and the layering of policies and so on is really, I think clouding the common sense that’s needed to achieve optimal solutions for the power grid, so this sort of thing doesn’t happen again.
Jackie Forrest:
Right. Well, you say it’s common sense, but a lot of these policies that are being drafted are, I don’t think thinking enough about keeping the old working. They’re focused on how do we move and incent the new. And so, hopefully policymakers sort of take note of that and think about how those policies could affect the old just as well as accelerate the new.
Peter Tertzakian:
Well, we’re in a situation where we’re trying to shut down the old prematurely and the building out of the new is insufficiently fast, it’s actually the worst possible situation that lacks any common sense.
Jackie Forrest:
Well, should we move on to 2024 predictions?
Peter Tertzakian:
I think we should.
Jackie Forrest:
Yeah.
Peter Tertzakian:
I think that was a very long introduction to 2024, and we’re only two weeks into the year.
Jackie Forrest:
Hey, before we-
Peter Tertzakian:
With all this excitement.
Jackie Forrest:
I know. I know. Before we get into that, I did want to talk a little bit, we had obviously our podcast about looking back on 2023, and I just wanted to talk about one thing that changed after we put that out. I had described the contracts for difference, that policy that was supposed to help the carbon capture storage projects that was talked about all year but didn’t show up.
Peter Tertzakian:
Guarantees a certain carbon price. Yeah.
Jackie Forrest:
So, I called it the mythical unicorn on the podcast because we talk about it a lot, but it never seems to happen, and we really don’t know what it is. But shortly after we released the podcast, we did finally have our first announcement. The Canadian Growth Fund announced that they were going to do a contract for difference with Entropy. Well, they have agreed to provide $86.50 a ton for 15 years for the second phase of that project through this contract for difference. They’re also making equity investment. And they’re actually giving them even greater amount of carbon credits that they can apply to other projects into the future. So, it does exist, and I hope we see more of it because I think that could underpin a lot more investment in carbon capture in Canada.
Peter Tertzakian:
Okay. Shall we move on to 2024?
Jackie Forrest:
Okay, let’s move to the big themes for 2024. The first thing I think that’s going to dominate a lot of conversation is going to be the US election. It obviously has broad implications, but it certainly has implications for energy as well. So, lots of noise right now, but I do think if you look at the polling and the expectations that it looks like Trump and Biden are going to be the two main contenders here in terms of the election.
Peter Tertzakian:
As we’re recording, the Iowa primary’s going on, and we shall see. I mean, Trump is an overwhelming favorite it seems. There’s a long shot Nikki Haley, who’s gaining ground, especially potentially in some of the other states where the primary races are upcoming. But the gap to reach Trump is really very wide. And as you said, Jackie, it’s going to have ramifications on policy, including things like the IRA, who gets elected in 2024. So, increasingly, I think this is the number one story that is going to emerge. Who leads the United States is so consequential and it’s extremely consequential to energy policy.
Jackie Forrest:
Yeah, I mean I think the one kind of uncertainty around Trump is there’s so many legal cases, I can’t even keep up with them all. And do they affect his ability to win? But assuming they don’t, I would actually say a Trump win is sort of negative for clean energy investment because I think there could be changes to the IRA. There was an FT article in November saying that an unnamed senior campaign official and advisor said he would gut the law. I recently listened to a C.O.B. Tuesday podcast with Senator John Kennedy who also predicted changes to the IRA if the Republicans win. So, I think you could expect there’ll be some changes. Maybe, they’ll just be small changes. We just don’t know. I think climate progress stalls internationally and in the US and I think geopolitics are going to be less predictable. If you thought Trump was hard to predict the first four years, he’s going to be I think a lot harder to predict the next four years.
Peter Tertzakian:
Yeah, it’s going to be a lot harder to predict. And getting back to the policy, the business community I think has mispriced policy in North America. In other words, they’re not adequately pricing in the risk of political change and what it has the potential to do to investment in clean energy, investment in decarbonization at large. So, this is going to be the story to watch. And I think as we get closer to election day, as the primaries move on, we’re going to get more and more of a sense of what a Republican government, what a Trump presidency would do to the IRA.
Jackie Forrest:
Yeah, for sure. There’ll be lots of discussion on that over the year. Now, a Biden win would be pro investment for clean energy. I think we would assume the IRA stays. The US continues to work with international groups around climate issues, and the Biden administration is much more predictable when it comes to foreign relations. So, more stability, predictability certainly would help investment in my view.
Peter Tertzakian:
Okay. What’s next?
Jackie Forrest:
Well, let’s talk about Canadian politics. I mean, here’s a question. Do you think there could be an election in 2024? It’s not required, actually. Currently, the election would be in 2025, as per the rules, but it could be called earlier.
Peter Tertzakian:
I think there’s a big chance that it could be in 2024. The NDP and the Liberals are battling it out for the progressive vote. If the NDP sees that it’s gaining traction off of Justin Trudeau’s woes, they may pull the pin on their supply and confidence agreement, and they may join the Conservatives in an election call. And the NDPs have 25 seats right now, the Liberals 158. If there’s any sense that if an election will call, that the NDP could grow from 25 to say into the 30s or 40s, I think they would do it. And I think the public being weary of Liberal government, weary of Justin Trudeau’s lead may then split. Some go to the Conservatives, some go to the NDP and the Liberals become marginalized.
Jackie Forrest:
We’ll come back to this see who’s right, but I actually think probably it will happen in 2025 only because the NDP have a lot of influence right now. And in that future scenario, they don’t have as much influence, and I think that may continue just as it has for the last three years to keep them working with the Liberals. Here’s another question though. Do you think the Liberals will look for a new leader in 2024?
Peter Tertzakian:
No, I don’t think they will. I think Justin Trudeau has definitively said he’s going to lead the party. I think the party leadership is not inclined to go against their leader, and so therefore, I don’t think he’s moving away. He’s clearly said he’s going to stay on to fight the next election, whenever that may be.
Jackie Forrest:
Okay. Well, let’s talk about the federal issues that we’ll be talking about in the year. One is the carbon tax issue. We saw the reaction when heating oil was exempt in Atlantic Canada. It’s kind of quieted down now, but we are going to see the carbon tax kick up here to $80 per ton on April 1st. It won’t be an April Fool’s Day surprise. That’s a real thing. Do you think this is going to come back again into the dialogue?
Peter Tertzakian:
Oh, very much so. I think what we saw in 2023 in the Maritimes in the Atlantic Canada was very much a retail-led protest against the carbon tax, even though many of the people get a rebate. What you’re going to see this year and into next as the carbon tax rises for corporate consumers, for companies, is that they don’t get a rebate, and it’s really going to start to bite. I don’t know if you saw that article, I can’t remember which newspaper it was in. It was the Ontario mushroom farmer. It was just before Christmas, and basically talking about how much he’s paying in carbon tax, and it’s becoming an overwhelming burden. He’s not spent money on decarbonization and probably doesn’t have the cashflow to be able to do it. I think this is going to be a recurring theme where you get small business to even large business owners basically saying, “Hey, I can’t handle this carbon tax. I am going to become uncompetitive. I am going to lose market share to other jurisdictions. And I think you’re going to see stresses and strains in the policy as a consequence.”
Jackie Forrest:
And this discrimination where people burning natural gas pay and people with fuel oil don’t doesn’t help for sure.
Peter Tertzakian:
No, it doesn’t help at all.
Jackie Forrest:
Let’s talk about the emissions cap, the oil and gas emissions cap. Of course, there was the draft document. And just a reminder to everyone, February 5th is the date to write into the government with your opinions on that. We’re working on our letter, but we hope that a lot of people participate in that. Now, I think that this kind of adds fuel to the fire here with this Atlantic heating oil issue, because here, Atlantic Canada gets off without even paying heating oil, which is really not that consequential to their economy. And here we’re talking about an emissions cap on Canada’s largest industry, which has real consequences to revenues, cash flows, costs for the industry.
Peter Tertzakian:
Well, and ultimately consumer prices for commodities like natural gas, diesel, and all sorts of other hydrocarbon end use products.
Jackie Forrest:
Yeah, for sure. I mean, it really could cause energy shortages in Eastern Canada. They do depend on a lot of Canadian produced oil and natural gas. So, do you think that this goes into legislation in 2024?
Peter Tertzakian:
No, I don’t think it goes into legislation, but it could go into what’s called the Gazette, which is the precursor to legislation. I think that there’s a lot of work to be done. The letter or the policy paper that was put out in late 2023 really lacks a lot of detail, and I think following the February 5th submissions that you talked about, Jackie, we’re going to see a lot of discussions going on behind the scenes looking for clarity. It is a very complicated piece of potential legislation that is going to be layered on top of already complicated legislation, and I’ve talked about that before in last year’s podcast, so how it all manifests itself and comes about, we’re going to have to wait and see, but for sure in the interim period, the uncertainty and uncertainty for investors is, as we’ve discussed in our podcast late last year, not a healthy thing.
Jackie Forrest:
Yeah. Well, I’m hoping it just goes away altogether and we don’t even get a gazette, but there’s real potential for winners and losers here depending on how those carbon allocations are given out. Canadian Electricity Reg, we have the draft gazette out. Do you think this will go and become legislation in 2024?
Peter Tertzakian:
I don’t think it’s going to be legislation again, because there’s a lot of work that needs to be done. I think that there’s behind the scenes going back to the drawing board on some of these things, and I think that events of the last week of this cold snaps and the potential impact of burdening natural gas fired power plants in provinces like Alberta, Saskatchewan, and even into Ontario, I think is really quite… It gives people pause for thought in terms of how such a legislation should be designed.
Jackie Forrest:
Okay. Well, I hope you’re right. I actually think that this will get pushed through by the federal government. I think it’s a very important piece of policy for them. I think if that happens, of course there will be legal challenges by the provinces right away. That means that nobody invests anyway because there’s so much uncertainty. But I just think that the federal government seems like they really want to push this one through, but I hope you’re right on that they take pause and do it the right way.
Peter Tertzakian:
Well, if they push it through, one hopes that it’s pushed through with the common sense that we talked about in the earlier part of this podcast because we need base load power. We don’t have hydro in provinces like Alberta and Saskatchewan. We need that backup when it gets really, really cold. And wind and solar, as you said, the wind doesn’t blow and it’s really cold and it’s dark, so at night, that’s not a baseload power solution.
Jackie Forrest:
Yeah, I will say history has shown that once those policies are out in draft in the gazette, they don’t change too much, but I hope you’re right in this case. Alberta’s renewable moratorium, when they came out in August, they had talked about it ending in February of 2024. Do you think that will happen and do you think we’ll get on track with building renewables in Alberta in 2024?
Peter Tertzakian:
Yeah, that’s a great question and I am a little bit reluctant to give an opinion on this because I’m not that plugged into this moratorium issue. I think that the way it could go is that the moratorium will not be lifted until the market redesign work is done. I mean, you sort of need the market redesign and the moratorium work sort of put together if you want to get a holistic picture of how to grow Alberta’s grid going forward.
Jackie Forrest:
I agree. They could lift it, but from a person who’s investing in renewables in Alberta, I think they’re going to want to know the whole picture because these changes could really impact the return on their investment. So even if it’s lifted, I think you’re going to see slowdown in terms of capital being spent because of the uncertainty.
Peter Tertzakian:
Well, I think the announcement that there’s going to be a potential market redesign, that in itself leads to uncertainty in terms of understanding, well, if I’m an investor in renewables, well, what’s the new market look like?
Jackie Forrest:
Let’s talk about interest rates. That obviously was a really big factor in terms of slowing down the investment in clean energy investing. In 2023, economists are predicting as many as three to six cuts to the US interest rates, which Canada often follows. So, if we assume 0.25% per cut, we could see interest rates drop in the range of 1% or even 1.5% in 2023. And as a reminder, the current Bank of Canada policy rate is around 5%, so that would be quite a significant drop getting us down maybe into the four to three point a half percent range. That would, I think, be quite consequential in terms of clean energy projects moving forward.
Peter Tertzakian:
Yeah, I’m not as optimistic as others about potential interest rate cuts. Yeah, I could see a half point to a point, but I think there’s still inflation out there. The long-term ramifications of what’s going on in the Red Sea, the rerouting of all these ships to go around the Horn of Africa adds a lot of cost onto transporting goods. The military conflicts and geopolitics are adding all sorts of uncertainties as well to economy and potential trade flows. So I am just not as optimistic as others in terms of how far interest rates will fall. I do believe that they’ve peaked, but how fast they’ll fall, I’m not in the camp that they’re going to fall fast.
Jackie Forrest:
Right. Well, I think you’re right. I think there’s a ton of uncertainty. I was actually just reading all the headlines this morning before we came in to record, and man, there’s a lot of uncertainty in the world, and so that ties into your ability to predict what’s going to happen with interest rates and some of that uncertainty coming from all these military conflicts. I started this document as you know, Peter, at the beginning of the year, and I was telling you, it seems like every day I got to add something to this military conflict section because it just seems like there’s so much changing here, and it’s obviously the Middle East is a big hotspot, but we’ve got things in South America, China, and Taiwan issues. It’s lots going on.
Peter Tertzakian:
Yeah, it’s very, very disconcerting what’s going on in terms of the world peace and stability.
Jackie Forrest:
Let’s get into specifics. The Middle East, which is very consequential to oil prices as well, activities certainly heating up over this last weekend. As we’re recording, it’s January 15th. There’s more of these strikes around Yemen to stop the attacks that are happening on the Red Sea. I was reading an article by Helima Croft from RBC who thinks that the market’s sort taking this too lightly, that there’s real concern from her perspective that this could turn into a broader conflict that could affect energy infrastructure. And just as a reminder, back in 2019 before COVID, remember when we had attacks against Saudi infrastructure on some major oil infrastructure that they had there. So she thinks the current oil price, which hasn’t reacted much to everything that’s going on, really just up two or $3, doesn’t reflect the real risks that is out there in the Middle East.
Peter Tertzakian:
This notion that the military conflict is going to expand beyond Gaza, you hear these headlines and articles that, oh, another strike from the Houthi rebels has the potential to expand. Well, guess what? It has expanded already, but this has already escalated to the point where the military theater is beyond Israel and the Gaza Strip, and so I agree with Helima Croft that it’s being underpriced as a risk in the marketplace right now. I think that this is more serious and it is getting more serious as every day goes on.
Jackie Forrest:
Yeah. Now we’ve still got this Ukraine-Russia war, which seems like it’s at a stalemate here, and there are some talks that maybe there could be some end to this conflict through a negotiation. Now, I’m not sure if Ukraine can agree to that, but I think the US seems to be weakening support and in an election year, do they want to continue to be piling money into Ukraine? That actually could have a downside, could be bearish for energy, because it could mean that there’s more Russian supply available. I don’t know. Lots would have to change.
Peter Tertzakian:
Well, I don’t know about that. I think that even if there was some peace deal negotiated in 2024, which is a possibility or a ceasefire or something like that, it’s going to be a long, long time before the sanctions on the Russians are lifted. And beyond that, I would also say that the Russians are already getting by the sanctions in all sorts of different ways. So I think whether there’s a peace deal or not is not going to affect the oil markets that much.
Jackie Forrest:
Okay. That’s fair. I think you’re right. There’s a lot of oil in the market regardless.
Peter Tertzakian:
That’s right.
Jackie Forrest:
Now, there’s a number of other events. In addition to those two hotspots, there are a couple of other ones too. We’ve got conflict between Venezuela and Guyana. In Sudan there’s a civil war that started in April that continues to rage on. And in Ecuador at the start of this year, there was a surprisingly fast set of events where the country’s in a state of war against drug cartels. Now, Ecuador is a producer, 500,000 barrels a day. Venezuela, Guyana, they’re all oil producers.
Peter Tertzakian:
Sudan’s a producer, yeah. Venezuela. Guyana’s a new up and coming producer, so these are all potentially events that should affect the price of oil. What’s surprising though is that the price of oil is not really responding to any of these things in any meaningful way. It is responding to some of the events in the Middle East, but by and large, if this was 10, 15 years ago, we would be seeing major spikes in the price of oil and today we’re not, which basically says that the market is fairly comfortable that the world is well-supplied, and that demand is not growing potentially as fast as it was historically.
Jackie Forrest:
Right, which gets us into the oil and oil markets, and we’ll talk a little bit about those. That is the case. If you look at the outlooks for demand, if you look at the IA data for instance, they expect demand to be only about 1.1 million barrels a day in 2024, that’s less than half of the previous year, and we’ve got a lot of spare capacity sitting there that OPEC has taken off the market right now. And at the same time, there’s an outlook for strong non-OPEC growth. We had a lot of growth from the US last year, even when you consider the expectation that the US won’t grow as much in 2024, there’s still a lot of growth from other places like Guyana, even Canada. So, the outlook is that we’re going to have a well-supplied market and prices can stay in this range. Now, what could change there is if we get a major outage here, especially in a big producing country like the Middle East, that tightens the market. On the negative side, things like recessions or OPEC non-compliance could be bearish.
Peter Tertzakian:
It could be bearish. I think the big thing to watch obviously is really what’s going to happen in the Middle East right now. The action is around the entrance entranceway to the Red Sea that’s affecting global shipping and trade, some tanker traffic, but really, we need to be watching the Strait of Hormuz, which is the choke point through which I think it’s 20 million barrels a day of oil flow on the other side of Iran.
Jackie Forrest:
Yeah, that’s a major… if anything happens around there, I would think the oil markets would respond with higher prices because of the concern. I will quickly mention natural gas: it continues to have low prices, we’ve got, with the exception of this last four or five days, very warm weather in North America this winter. And supply is actually quite high. You should see how the US production’s really grown more than people thought. So, it seems like a market that’s oversupplied and that’s what’s been reflected in the pricing. Now by the end of the year, there may be is some good news. We’ve got a couple of LNG facilities in the US Gulf Coast that are starting up, which will hopefully help the market in 2025, but it looks more of the same right now, unless this cold weather really sticks around.
Peter Tertzakian:
Well, it does look like more of the same, and I think this is a story that we have to follow in 2024 or expand upon, and that is that the ability to bring more and more natural gas out of the ground and faster timeframes at lower cost is just really remarkable. The technology and the innovation in drilling and completion, I think we should get some guests on our podcast to talk about that because it is really quite staggering how natural gas production can really respond to price. In other words, when price goes up, the drilling rigs goes out and they’re extremely productive and bringing more of the commodity out of the ground.
Jackie Forrest:
Yeah. And even in a case like this year, the rigs didn’t come out and production continued to grow. So yeah, I think that’s a great idea. Before we leave oil markets too, I wanted to talk about one of the biggest factors impacting the Canadian oil markets this year will be the startup of the Trans Mountain Expansion Project. There was a lot of uncertainty around that because the Canadian Energy Regulator made a decision right before Christmas that they did not want to approve TMX’s request for a smaller diameter pipe. The good news was Friday, January 12th, the CER has put out a new decision saying that they will approve that and that it looks like the pipeline is on track for startup maybe around the middle of the year. So, that’s good news. That will really help Canadian oil producers.
Peter Tertzakian:
How long have we been waiting for this?
Jackie Forrest:
Over 10 years. We are definitely going to celebrate when that happens. We’re going to have Dawn Farrell on the podcast to tell us all the ins-and-outs.
Peter Tertzakian:
She’s the CEO of Trans Mountain.
Jackie Forrest:
That’s right. Okay, so let’s talk about another topic that will shape the discussion we think in 2024: will climate change continue to be a key driver of energy transition? Will it continue to drive more policy in the new year as compared to the last few years?
Peter Tertzakian:
Yeah, the Paris Agreement was struck in December of 2015. In 2024, we’re almost on the eve of the 10-year anniversary of the Paris Agreement. And I think that the lack of progress on emissions reduction, in fact, there has been no emission reduction. What are the numbers? I think we’re up and not down.
Jackie Forrest:
Yeah. From 2014 to 2022, which is the latest data, up 5% globally. That’s according to the IAA energy-related emissions.
Peter Tertzakian:
Yeah. But in 2015, by this time, we were supposed to be substantially down. I don’t know what the number is or what the targets were offhand, but the fact that emissions continue to go up as we approach a milestone anniversary, I think is going to lead to more consternation in terms of emissions. And honestly, I don’t know how much more policy you can layer on top of policy. All I would say is that the plan of imposing lots of policy is not working and the numbers bear that out on the upcoming 10-year anniversary of the Paris Agreement. So if plan A isn’t working, I think we need to go to plan B.
Jackie Forrest:
Yeah, and I think with all the economic issues, I think climate’s not going away. I think maybe in some ways, the concerns are increasing because of all the volatile weather. But I do think we’re suffering from policy overload. I don’t expect a whole bunch of new policies: I think we have to digest what we have, figure out if it works, and if it actually does reduce emissions. Let’s quickly go to another topic: nuclear power is an area that is growing, and I think will be a part of the energy transition story in 2024.
Peter Tertzakian:
I think so. I think that the realization that base load as we talked about earlier, is so important, particularly in climates where there is wide variations between winter and summer temperatures. I think nuclear power is starting to get some momentum. It started to get momentum at COP at the end of last year. And so yeah, watch that space.
Jackie Forrest:
Okay, so we’re running out of time here, Peter, but so we’re going to do rapid fire, quick predictions. Electric vehicles, will adoption momentum slow in 2024 or will we continue to see growing growth rates? So, I think we were going to grow about 18% year-on-year in 2023. Will we see less growth this year?
Peter Tertzakian:
I think we’ll see less, I think, but it’s going to be regional. I think in China, you’ll continue to see the same level of growth or more. But in the Western world and other parts of the world, I think you’re going to see less.
Jackie Forrest:
Okay. Do you think we’re going to see applications of artificial intelligence in energy that in 2024 that are obviously making changes to the energy system?
Peter Tertzakian:
Absolutely. I think you’re going to see it all across the energy landscape, whether it’s in energy distribution management, consumption management, but all the way upstream to even oil and gas, the use of artificial intelligence to optimize production, to optimize exploration and development. All across the board, you’re going to see this technology create greater efficiencies and lower costs.
Jackie Forrest:
Yeah, I just saw something actually before Christmas about some tools that are coming along around oil and gas optimization that were pretty amazing. Next one: do you think clean energy will still grow in 2024? It slowed down a bit in 2023, do you think it’ll grow at a faster pace or-
Peter Tertzakian:
Do you mean I think it will accelerate?
Jackie Forrest:
Yes.
Peter Tertzakian:
I think we will see it accelerate a little bit, but nowhere near what we need to be on target for achieving the net zero by 2050 type targets.
Jackie Forrest:
Okay. Yeah, and if the interest rates come down, that’ll certainly help. Last question. We’ve seen a lot of M&A in oil and gas in the US. In fact, there’s been a couple of big blockbuster deals here, including now just Chesapeake and Southwestern Energy right before the weekend. Do you think that that M&A is going to come to Canada? Why or why not? And do you think actually we could see American companies come here to Canada to start to acquire some of our companies?
Peter Tertzakian:
Mm-hmm. I think you’ll see consolidation in Canada. Mature industries tend to consolidate to lower costs, so I think that that is going to be a broad-based trend across the oil and gas industry, including in Canada. I don’t think we’re going to see American investors come here because, as we’ve discussed before, I think our policies are too complicated to attract the capital here.
Jackie Forrest:
Well, lots to talk about the coming year. We will cover a lot of these topics as the year goes on, and we really want to thank our listeners for following the podcast. We wish you a happy new year and look forward to great discussions in 2024 and energy.
Peter Tertzakian:
Thank you.
Jackie Forrest:
And thanks to our listeners. If you enjoyed this podcast, please rate us on the app that you listen to and tell someone else about us.
Speaker 3:
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