Canada's Oil Sands: The End Of A Boom?

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For all those who found the 2008 recession particularly hard on their wallets and livelihoods, a solution presented itself (even if it wasn't particularly well-known) for Americans looking for new work: cross the largest unprotected border in the world and get to work on the Alberta oil sand fields, where the largest energy boom in the continent unfolded and labor became so scarce that Bloomberg reported the province created more jobs in one month than the rest of the nation did in twelve. That was a viable plan in 2008, but no more. The oil boom in Canada appears to be well in the rearview mirror now that the oil sands, the prize pig of the national economy, are flirting with a dangerous line of profitability -- or lack thereof. Are Canada's days as a leading energy producer going the way of the dodo?

From The Start

Fifty years before a group of American colonists decided their taxes were too high, Canadians understood the great potential for the oil sands in their backyard. While internal-combustion engines and water heaters that rely on oil were far from being invented, the original Canadian explorers who pushed west in search of trapping beaver and homesteading found that the oil sands were a valuable tool to light fires and to kill off insects. During the 20th century, full-scale prospecting and oil refining became a modest industry in the Alberta province that lacked the manpower and technology to separate the energy from the soil on an industrial basis. Fast forward to 2004, however, and Canada had both population and know-how to churn out a million barrels of oil per day from the Alberta sands, creating the richest province in the nation, one that paid down the debt incurred by other (significantly less oil-rich) provinces. Alberta enjoyed a growth factor unmatched by any other province or any US state since 2000, adding on a million and a half persons with a 4% annual growth rate, with a median age of just 35. The influx of workers to the oil sands made a pretty penny for the province with royalties of about a billion dollars per year. A new report by energy consultants Wood McKenzie, however, put a kibbosh on the good times with the findings that the oil sands would experience a loss in cash flow amounting to over twenty billion dollars in the next decade thanks to the lowered price of oil.

Petroleum Woes

The drop in the value of oil as a commodity has had serious consequences for not just Canada but the United States and much of the rest of the world that relies in part or in full on energy sales. Peak oil of over $100 per barrel appears to be a historical footnote, much like wooden ships or horse-drawn carriages, now that oil has dropped by over 50% and it's possible to pay a utility bill for less than the price of a five-course meal at a nice restaurant for the first time in half a decade.  The lowered cost in oil isn't explicity a bad thing, with the BBC reporting that each 10% drop in price results in .1% net economic gains, while other oil companies are looking to reduce redundancies and inefficiencies in their business plans and processes. It's just particularly grim for oil sand development, which is more expensive than conventional drilling or fracking. There's two ways to extract petroleum from oil sands, and both are less than easy. The first is the blunt approach: mine away each layer of soil and mechanically separate the dirt from the oil. The second is more nuanced but no less pricey, injecting high-temperature steam underground to force the bitumen to the surface, requiring large amounts of heat and water. Since oil sands constitute the majority of Canada's reserves -- third largest in the world, which make the nation the fifth-largest oil exporter on the globe -- there's no relief coming on the horizon unless they discover massive reserves that can be easily drilled out of the Earth's crust.

Pipeline Pressure

The Canadian news is made worse by the Obama administration's decision to reject the construction of the Keystone XL pipeline that would transfer oil directly from Canadian development sites to refineries in the United States and particularly Texas, where there are more oil refineries than there are state parks. The Republican Congressional majority gave President Obama plenty of grief for limiting job creation by axing the Keystone pipeline, which is technically true but far more likely to provide Canadians with jobs than Americans. Canada needed the pipeline for more than the few hundred jobs, however. To remain profitable, Canadian oil has to provide nearly a million barrels per day to US customers, their largest clients by far since the US imports more oil from Canada than from any other nation. The pipeline project isn't officially dead although Republicans don't have enough votes to overcome a presidential veto, since Obama leaves office in 2016 and allows the can of political worms to be re-opened. 2016 is a long way away for oil giant TransCanada, however, who is losing ten million dollars per day as long as oil remains below the break-even point of about $60 per barrel for petroleum. It's not all bad news, however, since oil sands have far greater endurance than fracking, the latter of which sport a lifetime of just 18 months, and can spread out lost dollars over the course of a decade or more.

Profiting From A Bubble

Canadian oil is safer than American oil at the present, especially since the drop in oil prices will almost certainly push their American competition out of business. Indeed, some of Canada's energy producers have remained in the black: Sucor Energy (SU) trades for $30.5 a share and enjoyed better growth in 2014 than British Petroleum or Exxon-Mobile. Indeed, the bad news today is good news in the long run for oil investors: now is the best time to put money into oil sands projects, since they're not likely to drop drastically lower in price than their current value and are certain to regain value in the longer term. In the short term, however, there's less appealing options other than shorting oil and natural gas -- especially unpalatable since both commodities have risen slightly (the keyword being slightly) and are probably past their lowest point and on the long road to recovery.

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