|May 12, 2020|
This energy analyst says the oilsands are 'done'
|Deborah Lawrence used to be a stockbroker with Merrill Lynch. Over the past decade, the independent economic analyst has developed a reputation for telling oil investors what they don't want to hear.|
In 2009, she started warning that the financial model for shale oil fracking companies doesn't make any sense. Lawrence began analyzing financial data for Chesapeake Energy after the oil and gas company began drilling near her farm in Texas. She discovered that the company, and many others in the industry, were going through cash and accruing debt at alarming rates.
"I think we have a big problem," she told a colleague at the Federal Reserve Bank of Dallas, where she was then an advisory committee member. But finding a larger audience proved difficult. The so-called "shale revolution" was transforming the U.S. into the world's biggest oil producer and everyone from oil executives to state leaders to Wall Street bankers wanted a piece of it.
"I kept saying, look, 'There's no free cash flow and it keeps deteriorating every year I look at this,'" Lawrence recalled in an interview with The Tyee. So she contacted business outlets like the Wall Street Journal. "I sent them stuff for so long with all the underlying documentation and they were like, 'Oh no, shales are gonna save us forever.'
With those warnings eventually being taken more seriously by regulators and media outlets like Rolling Stone and the New York Times, Lawrence expanded her focus. She began looking at the finances of Teck Resources, which was in early days of proposing the Frontier mine that would massively expand its presence in Alberta's oilsands.
"The Frontier project is uncommercial even at relatively high oil prices," reads a report Lawrence co-authored in 2015, years before Frontier became a political flashpoint in Canada. Teck's problems apply to the entire sector, she argued, writing that "in spite of the optimistic rhetoric coming from the industry, the large build-out of the Canadian oilsands is probably not realistic. The implications for Alberta and Canada are only beginning to unfold."
Several years ago, Lawrence was eating lunch at an energy event in Switzerland and she shared her opinion that the entire oil and gas industry could see a huge drop in oil demand by 2025 that would devastate revenues: "I was sitting at table with a bunch of old-time oil and gas people and they were going, 'Oh that's ridiculous, that will never happen, 50 years maybe.'"
To them, Lawrence might have seemed gripped by a pessimistic "fantasy," as the head of the Canadian Association of Petroleum Producers recently branded oilsands doomers Green Leader Elizabeth May and Bloc Québécois Leader Yves-François Blanchet.
Except Lawrence's predictions keep turning out to be correct.
Chesapeake Energy is reportedly preparing to file for bankruptcy as the U.S. shale fracking industry flounders, its well productivity peaked and prime drilling areas largely exploited before COVID-19 hit.
Teck withdrew its Frontier project in February due to poor economics.
And the oil industry is forecast to lose potentially $1 trillion in revenues this year due to the gigantic drop in oil demand resulting from the coronavirus pandemic --- for reasons having not just to do with a black swan pandemic, but other fundamentals that prompted her warning in Switzerland years earlier.
Lawrence is now predicting that Alberta's oilsands industry is fast dying. The main drivers are COVID-19 and the plummet in bitumen prices hastened by Saudi Arabia and Russia fighting for world oil dominance. Already the price crash could shutter close to two million barrels per day of bitumen production. Output will stay indefinitely low, expects Lawrence and many other analysts. And that will deal a fatal blow to Canada's heavy oil industry. "Shale and tarsands, they're done as far I can see, unless there's some miracle out there," Lawrence told The Tyee.
"I just don't see how they're going to ever be able to recover," she said. "There's just too much oil and not enough demand anymore. And demand's only going down, it's not going up."
Those who remain bullish counter that the intense financial pain being experienced by oilsands producers --- some of who have seen their share price plummet 50 per cent --- is temporary. Once a vaccine for COVID-19 is widely available, global oil demand will shoot back up, and with it oil prices and the fortunes of Alberta's oilsands. "Yeah, so, we expect this to be a short-term development which will make way for gains in oil prices in the longer term, over the next 12 to 18 months," Fiera Capital's Candice Bangsund argued last month.
Morningstar equity analyst Preston Caldwell meanwhile predicted "a relatively V-shaped recovery." Once oil demand comes back, "Canadian crude supply ramps up," he wrote, adding, "we expect all the major pipeline expansions to be operating near full capacity within the next decade."
By this line of thinking, Premier Jason Kenney's $7.5 billion wager of taxpayer money on TC Energy's Keystone XL pipeline, which Moody's deemed so risky it downgraded the company's credit rating, looks solid and perhaps even visionary. "The collapse in oil prices has hurt Alberta's energy companies, but it has absolutely devastated their peers in the United States. Market watchers are already suggesting the collapse of the shale industry could ultimately be a boon for Canadian producers, who had already spent the past few years cutting costs and tightening up their operations," writes former Alberta Oil magazine editor Max Fawcett in the Globe and Mail.
Lawrence is not buying it. "I think that's magical thinking," she says of the idea that the oilsands will emerge unscathed from this crisis. While oilsands operators have become more efficient in recent years, the industry still produces some of the world's most expensive oil, requiring an "unenviable" price of US$45 per barrel to break even, the UK-based consultancy Wood Mackenzie noted in March. By comparison, producers of conventional oil break even at a much lower price. For Saudi Arabia, it's around US$4 per barrel. So long as oil prices stay low --- even Kenney predicts "probably 12 to 18 months" --- the oilsands will hemorrhage money.
"It's just simple economics," Lawrence says. "I mean, unless you can get tarsands down to $10 a barrel, you can't compete, and there's no way they can do it for anywhere close to that. They've always been the highest-cost producers." The only way the industry can recover is with a swift rise in oil prices, but not even top oil producers consider that very likely.
During an extraordinary late April conference call, the head of oil and gas supermajor Shell admitted it has no idea what to expect for the future. "Everything has become much more challenging macro-wise, and we know it's going to get worse before it gets better," said the company's CEO Ben van Beurdan. "The biggest challenge we find ourselves is this crisis of uncertainty that we have."
The social distancing measures brought in around the world to combat coronavirus have cut deeply into global demand for oil. With far fewer people flying and driving, analysts forecast a drop of 29 million barrels per day in April. Shell told its shareholders in the call that the idea of a speedy return to normal for the industry is extremely doubtful. Its CFO Jessica Uhl anticipated "more of an 'L'-shaped recovery than certainly a 'V' or sharp recovery."
But the news is even worse for Alberta. As global cases of coronavirus decrease, the world is likely to enter a punishing recession that could keep oil demand and prices low, while at the same time concerns over climate change are rising. This could put Alberta's expensive and emissions-heavy bitumen industry at the back of the line for recovery, which is exactly the risk Shell hoped to avoid when it left the oilsands in 2017. "We have made the choice to get out of high breakeven, high carbon projects," van Beurdan confirmed on the conference call. "I think more of that may be still to come going forward."
Plotting the fate of the oilsands is made harder by the wildcard of how much the pandemic will change people's behaviour in months and years ahead. Do people go right back to flying to conferences and booking international vacations once fears of coronavirus ease, or do our lives become much more decentralized, virtual and local?
"People won't be travelling for business or going on cruises and all the rest of it," predicts John Nenniger, a Canadian cleantech scientist with over 40 years' experience in the Alberta oilsands. "So I think the demand destruction is likely to be permanent, it's quite likely it will be really long before the market gets to balance."
The longer it takes to regain that market balance, if it can be attained at all, the bigger the edge for electric vehicle manufacturers, clean energy companies and other potential competitors to oil. "If demand for fossil fuels bounces back in 2021 by half the amount it fell in 2020, and grows at 0.5 per cent a year, it would take eight years to get back to where the industry started," writes Kingsmill Bond with the U.K. group Carbon Tracker. "And in the meantime, the renewable energy revolution has not stopped."
So if there is no "V-shaped" recovery for the oil industry, what should oilsands investors and miners expect instead? At the very least, a much slower pace of bitumen expansion. Even the best-positioned producers are suffering massive losses. Back in March, the Financial Post described Suncor as being "better prepared" for this crisis than it was during the price crash in 2014, given that it had managed to reduce its operating costs by 17 per cent in recent years. But that still didn't prevent the top integrated oilsands company from reporting a $3.5 billion net loss in early May. Nevertheless, some investors tried spin it as a positive, with one writing that Suncor's massive financial hit "may not have been as bad as what some market participants may have expected."
Some of that pain was due to Suncor having to shut down production at oilsands projects like Fort Hills because of the price of oil being so low. RBC Capital Markets forecasts further oil sector cutbacks to be as high as 1.7 million barrels per day in the coming months. To Lawrence, this is the very definition of "stranded assets," an endgame that groups like Carbon Tracker have been warning about for years. "When you've got an asset and you can't afford to produce it, it's stranded," she said. "What are they going to do with this stuff?"
If and when those shuttered oilsands projects become profitable, it may not be easy to restart them. "A halt in mining can permanently damage underground reservoirs if heat and pressure are not maintained," Quartz reports. Any maintenance that was deferred can slow things down further.
"That asset integrity issue does kind of loom here depending on how bad this demand destruction gets and how much volumes eventually have to be taken offline," explains Thomas Liles, a senior analyst with the oil and gas consultancy Rystad Energy. "There's certainly the potential for permanent damage for those smaller, lower quality assets, some of which have already been taken offline, so we have a hard time seeing those coming back."
Rystad is forecasting oil prices will return to something resembling normal by 2022. But even in that scenario, oilsands industry growth is likely to "be slower than it has been over the past five to 10 years." The time for large new projects is likely over. "I think it's going to be extremely challenging for any operator to seriously propose a greenfield mining project on the scale of Teck's Frontier," he says.
An era of slow growth and few prospects for major expansions is not an enticing pitch for investors. Even before the current crisis, financial giants like BlackRock were cutting funding to the oilsands. The one factor that could stall this market decline, even if only temporarily, is the direct intervention of governments. We're seeing this with U.S. shale producers begging the Donald Trump administration for a bail-out, or Alberta Premier Kenney floating the idea of state ownership of oil projects and pledging billions of dollars in public money for Keystone XL.
"The situation that we're seeing right now is governments and industry scrambling to keep the show going," says Nafeez Ahmed, an investigative U.K. journalist and energy and climate researcher who recently wrote a piece in Le Monde headlined "Will COVID-19 end the age of Big Oil?"
Ahmed cautions that a rapid and ongoing collapse of fossil fuels could have "huge repercussions" for our ability to manufacture things, or grow food at the scale society requires. Alternatives to oil are improving quickly, but ongoing neglect from our political leaders in favor of industries like the oilsands means those alternatives still aren't able to replace the energy source upon which most of our global economy is based.
"There are some people who are looking at this and in a way celebrating, going 'Yay, it's the collapse of the oil industry, finally, we can switch to renewables and it's going to be great,'" he says. However, "this is not a staged and managed happy transition, this is coming at us really fast and we're not ready for this, and governments haven't anticipated the risks or prepared for them."
The moment demands that political leaders work towards a planned, quick and smooth transition away from fossil fuels in any ways possible.
Lawrence expects that will be very hard for the fossil fuel industry and politicians who are tied to its fortunes. "They're eternal optimists who always think the price of oil is going to $140. But it will never do that again in my opinion," she says. They didn't listen to Deborah Lawrence before and she's an unusual and unwelcome voice in their midst now.
Are the oilsands really done? "You're not going to hear that from many other people, but I was the first to call" the decline of shale oil, she reminds. "I said 'It doesn't work.' And I don't mean to toot my own horn, but I was right. And I think that's what you're seeing now."