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Oil and gas: Party on, Alberta!

Oil and gas: Party on, Alberta!

Jeff Sanford
From the September 15, 2008 issue of Canadian Business magazine

The 2008 version of the Greatest Outdoor Show on Earth swept through Calgary in July, 10 days of excessive outdoor drinking and carousing in Cowtown. As the T-shirt suggested, “It’s not cheating, it’s Stampeding.” And as the bacchanalia got up to speed, out-of-towners had an opportunity to get up-close-and-personal with genuine western culture. A Thursday night show by legendary cowpunk band the Supersuckers was a perfect example of why Alberta is its own distinct nation. The band kicked out a set of fast-paced, tightly knit country punk, and the crowd of young, dressed-to-kill cowboys and cowgirls — many of them sporting hats bigger than those worn by the musicians — sang along, making it clear Calgarians know how to have a good time. Brilliant.

But then, things have been good all over Wild Rose country. Sure, that royalty review still draws four-letter expletives from the junior drilling crowd, and that nasty U.S. hedge fund has been a pain in the side of TransAlta Corp. But the price of natural gas has swung back into the black this year, and the oil-rich Bakken Formation in neighbouring Saskatchewan has started yielding its bounty. The only thing you could ask for, as yet more reason to celebrate at this year’s Stampede, was a record price for crude — and that came about July 11, when a barrel of our most important commodity touched US$147.47.

Since then, well, prices of oil and gas have melted like bitumen in an upgrader. And some are now wondering if this is the end of the oil bubble. The short answer seems to be it is — for now — and will likely remain so until after the U.S. presidential election in November. But if there is an assumption around town about the forward price, it’s that oil had to come down a bit, but high prices are not going away.The current pullback just doesn’t seem like the end of our energy issues. It could, in fact, merely be a blip in what is actually the beginning of a transformative era.

David Collyer, the new president of Shell Canada Ltd., met with a group of Canadian and European journalists the week of Stampede and took time to emphasize the company’s focus on sustainability in its oilsands operations. The sands have become a major focus for Shell Canada’s parent, Royal Dutch Shell PLC, which picked up the outstanding shares of its subsidiary in 2007. That decision reinforces the theory that we’re moving deeper into the age of unconventional oil, which is an idea contained in a fascinating new document, Shell Energy Scenarios to 2050, which Collyer also mentioned to journalists.

The document first appeared last January in an e-mail to Shell employees from the CEO of Royal Dutch Shell, Jeroen van der Veer, who writes in the intro that “never before has humanity faced such a challenging outlook for energy and the planet.” The document goes on to assess and define two possible energy scenarios for the years ahead, a bad one and a better one.

Under Scenario 1, the Scramble, policy-makers react to mounting energy issues with short-term, politically expedient decisions that pay little attention to efficient energy use “until supplies are tight,” and greenhouse gas emissions are not seriously addressed “until there are major climate shocks.” As a result, the coal industry doubles in size between 2000 and 2025, nuclear power doesn’t become as large a part of the energy mix as it could, and civilization’s responses to climate change end up blunted and delayed as energy price spikes and volatility become the norm. It’s a disaster, basically.

The competing scenario, Blueprints, recommends co-ordinated action by national governments to quell the volatility as the world closes in on the end of “growth in the production of easily accessible oil and gas” in 2015. It is this scenario that van der Veer encourages policy-makers to embrace before it’s too late.

A similar message was delivered by Jim Gray, entrepreneur emeritus of the Canadian oilpatch, co-founder of Canadian Hunter Exploration Ltd. and an officer of the Order of Canada, in a recent speech he delivered in Washington. Gray is worried that far less energy is going to be produced in the years ahead than policy-makers are assuming — and this is going to create serious issues for the energy industry.

The Shell report suggests that some of the new, unconventional resources that investors are now investing in feature significantly larger, more environmentally intrusive footprints than traditional drilling. This, according to the report, is going to lead to a public backlash, which will limit production from many of these projects. The conclusion: A good bet is that things are going to get worse before they get better. As the report states, while “there have always been tensions in the global energy system… it is evident today that the strains are becoming more acute.”

The easiest call in markets right now is that the price of oil drops until November and the U.S. election. The more interesting and unanswerable question is: What happens after that? Will the party keep going on.

http://www.canadianbusiness.com/markets/commodities/article.jsp?content=20080915_198711_198711

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