Jack Mintz: No need to panic yet. Alberta will sell its oil for now
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Venezuela's reserves are exaggerated and its infrastructure degraded. It will make inroads in the U.S. market but probably not quicklyYou can save this article by registering for free here. Or sign-in if you have an account.After the arrest of Venezuelan president Nicolás Maduro, United States President Donald Trump made clear this week he expects Venezuela to produce and export more oil in the coming years — to America’s strategic benefit. That raises the question: with Venezuela taking a greater share of U.S. consumption, can Canada still be an energy superpower?Subscribe now to read the latest news in your city and across Canada.Subscribe now to read the latest news in your city and across Canada.Create an account or sign in to continue with your reading experience.Create an account or sign in to continue with your reading experience.The answer is yes. If we don’t saddle it with high carbon taxes, decarbonization requirements and limited pipeline transportation, Alberta heavy oil will remain competitive for many years to come, not only in the United States but throughout the world. In the past 10 years, despite federal policies that discouraged the building of new pipelines and oilsands plants, exports grew by almost a third — to 4.1 million barrels per day (bpd) — as companies squeezed out efficiency improvements while reducing their emission intensity.Alberta’s competitiveness did benefit from the sharp decline in Venezuelan exports to the U.S. Gulf Coast in the past 20 years. Both Alberta and Venezuelan oilsands use in situ extraction methods to extract heavy oil laying below the earth so their outputs are close substitutes. But the facts suggest there’s still no reason for panic, not yet at least.Get the latest headlines, breaking news and columns.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Top Stories will soon be in your inbox.We encountered an issue signing you up. Please try againInterested in more newsletters? Browse here.• Fact 1: Venezuela was not a top producer in the past nor will it be in the future. Over two decades ago, Venezuela produced only three to 3.5 million bpd, roughly four per cent of world output. It’s now down to less than one million bpd, under one per cent of world output, a calamitous decline precipitated by the Hugo Chávez government’s expropriations two decades ago. Substantial new capital investment and time will be needed to upgrade rundown infrastructure and operations. For now, Venezuelan heavy oil can’t compete with Alberta’s efficient oilsands plants, which require only sustaining capital investment.• Fact 2: Venezuela’s proven reserves are grossly exaggerated. Between 2006 and 2010 Venezuela’s estimated oil reserves rose from 80 billion barrels to almost 300 billion barrels, which is about where they stand today. Was there a big new discovery? Not at all. Instead, proven reserves — those recoverable based on existing operations, economics and technology — were marked up to reflect a world oil price that was north of $US100 at that time. Yet with prices at US$60 today, Venezuela’s proven reserves remain — oddly — the same as in 2010. True, 80 billion barrels of proven reserves is still a lot of oil, but at four million bpd, it’s only 50 years supply, not 185 years.• Fact 3: Venezuelan exports to the U.S. will hurt Canadian producers only modestly for now. According to the U.S.
Energy Information Agency, in October Venezuela exported only 135,000 bpd of oil and liquid products to the U.S., primarily to the Gulf Coast — not much compared to Canada’s 4.4 million bpd, of which 2.8 million goes to Midwest refineries and 450,000 to the Gulf Coast. As Venezuelan oil is redirected from China and India to the U.S., there will be some downward pressure on prices and displacement of Canadian supplies. Which is why bitumen producers Cenovus and CNRL, which don’t have Canadian refining capacity, saw their share prices drop by six and nine per cent, respectively, in three days. Venezuela’s agreement to sell the U.S. 50 million barrels of sanctioned oil (equal to about 135,000 bpd over a full year) makes matters worse, though it’s not large in the scheme of things.• Fact 4: In the long run, Venezuela’s oil could be competitive if the country gets its policy framework right. Technically, Venezuelan “very heavy oil” is cheaper to produce than Canadian bitumen, making it more competitive in global markets. It’s warmer and therefore less costly to extract with better recovery rates given the higher temperatures at the equator. And, unlike Alberta, Venezuela has easy access to tidewater and little resistance to development from environmental and Indigenous groups. What has hurt Venezuela most is authoritarian, corrupt government. In 2007, private companies were not compensated for the expropriation of 50 per cent of their assets. Instead, they faced the Hobson’s choice of remaining in Venezuela with their investment controlled by state-owned company PDVSA, or leaving the country and suing for damages. Exxon and ConocoPhillips left while Chevron, BP, Total and Statoil remained. The Trump administration will pressure Venezuela to let American and European companies in but many investors, once burnt, will be shy about investing again. In the immediate future, certainly, the risk premium will be high compared with investments in neighbouring Guyana and Brazil, which have both been more welcoming to oil companies.In sum, in the short run higher Venezuelan exports to the U.S. will be challenging to Alberta producers, but hardly devastating. The future is more complex. If Venezuela manages to attract capital, Canada could be offside as the only major oil-producing country requiring the export of decarbonized oil subject to high carbon taxes. And if we dawdle in building pipelines, that will make it all the easier for Venezuela to grab our market share, provided it gets its act together faster than we do ours.Postmedia is committed to maintaining a lively but civil forum for discussion. Please keep comments relevant and respectful. Comments may take up to an hour to appear on the site. You will receive an email if there is a reply to your comment, an update to a thread you follow or if a user you follow comments. Visit our Community Guidelines for more information.