Energy

Liam Denning is a Bloomberg Gadfly columnist covering energy, mining and commodities. He previously was the editor of the Wall Street Journal's "Heard on the Street" column. Before that, he wrote for the Financial Times' Lex column. He has also worked as an investment banker and consultant.

In the past 24 hours or so, one major oil producer announced a radical change in policy, while another simply reiterated an existing one. Oil markets on Monday chose to ignore the first and focus on the latter.

The big news was from Alberta, the center of Canada’s oil industry, where the new government announced sweeping plans to rein in carbon emissions, including a cap on those from oil sands projects. The not-so-big news was from Saudi Arabia, where the cabinet restated its willingness to work with other members of OPEC and oil producers outside the cartel to “preserve the stability of the market.”

It was the second item that led to a jump of around $2 a barrel in Brent crude futures on Monday morning, before giving some of that back. Extrapolate that across a roughly 94 million-barrels-a-day market, and all you can say is that it certainly pays for Saudi Arabian officials to simply repeat themselves.

Misguided Jump

The country’s call for cooperation is its not-so-subtle way of telling rival oil producers that it will not bear the cost alone of cutting output to rebalance an oversupplied market. It pulled this off before, back in 1998, when it corralled Venezuela, Mexico and others into cuts to fend off single-digit oil prices.

That looks harder to do now. One big non-OPEC rival, Russia, is certainly not pleased about Saudi Arabian barrels edging into its traditional markets in eastern Europe. But the rhetoric out of Moscow is bellicose, not conciliatory. And while many in OPEC’s own ranks -- Venezuela prominent among them -- preach supply cuts, their empty coffers mean they expect Saudi Arabia to pick up the tab.

Another rally inspired by Saudi Arabian repetition at the end of August fizzled, and this latest one looks shaky, too.

More surprising, perhaps, is that Alberta’s announcement didn’t really register. Granted, you may have difficulty recalling the last heated debate you had in a bar about Canada’s politics, even if you live there. Yet the country matters in global oil -- a lot.

In its latest long-term outlook released earlier this month, the International Energy Agency projects Canada’s oil output to rise by 1.2 million barrels a day between 2014 and 2025, with three-quarters of that coming from oil sands. Given that the IEA expects non-OPEC output to rise by just 0.7 million barrels a day in that period, Canada’s contribution is critical. And Alberta’s new policy, on the face of it, throws that contribution into doubt.

Except that the implications will likely take several years to play out, and in today’s jumpy oil market, the foreseeable future extends to maybe the end of any given week.

Alberta’s new annual emissions cap of 100 megatons for the oil sands business is still roughly 40 percent higher than current emissions, providing room for growth. And the panel advising the government estimates that the C$30 per tonne emissions charge due in 2018 would add less than $1 a barrel to the cost of a typical new project. Considering that two-thirds of that extra Canadian oil projected by 2025 is scheduled to arrive by 2020, the country’s spigots will not be shut off entirely.

Sands Of Time
Projected cumulative increase in oil supply from 2014
Source: International Energy Agency

Indeed, the added pressure on the sector’s emissions will likely spur an existing trend to cut costs and consolidate. Triple-digit oil prices brought a windfall to the oil sands business, but also a rate of cost inflation that was three or four times the general level in Canada, according to analysts at Desjardins Securities. Hence, leading oil sands producer Suncor Energy -- which backs the Alberta plan -- is guiding its cash cost down to about $20 a barrel and has launched a low-ball takeover offer for rival Canadian Oil Sands. Similar to how efficiency gains have imparted some resiliency to U.S. shale output this year, so Canada’s oil industry is likely to eke out more from less.

Yet there is no avoiding the obvious: Carbon restraints ultimately limit growth in the output of a carbon-intensive fuel, period. This holds both peril and promise for the oil business. On the peril side, Alberta’s move is one more sign that efforts to curb emissions are gaining momentum. Potentially stranded assets don’t come much bigger than Canada’s oil sands, so the industry and its investors just got another big reminder that the long-term value of oil reserves isn’t a given.

In the meantime, though, oil remains indispensable, and today's low prices -- abetted by Saudi Arabia’s policy of maximizing production -- are forcing retrenchment in investment from the shale basins to the Arctic. This will tee up the eventual upswing in oil prices, and Alberta’s new policy adds further pressure on that front.

For this to happen, though, the oil market must endure its present pain for a while longer. Which is precisely why it would be counter-productive for Saudi Arabia to actually shift tack right now. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Liam Denning in San Francisco at ldenning1@bloomberg.net