Monday, June 14, 2010

Economic impacts of the BP oil spill on Canada

I suspect that the oil spill will put a huge dampener on deep sea oil drilling in free market countries.  The odds of oil exploration off of BC, Virginia, NWT, Australia, and a host of other locations happening is going to be unlikely for anything in depths over 100 to 200 metres.   There has been a lot of money spent to develop deep sea oil in the Gulf, that money for exploration and development is still there but it is going to be looking for a new home.    Where will it go?

Some of it will go to partnerships in countries where oil is nationally owned, but those countries all carry a management risk with respect to the danger of the investment being arbitrarily taken by someone in power.   The Orinoco oil sands are huge and awaiting large scale development, but most companies will not go there as long as the country does not have respect basic contract law.   In Africa companies will continue to go for low hanging fruit where they can make all of their investment quickly.   Development of something like the huge Chicontepec Field in Mexico will go ahead, but there can be no investment from private companies in it.

On land the single biggest oil reserve in a free market country is with the Athabasca Tar Sands.  There is no need to search for oil, it is really obvious where it is.   All that is needed is more investment dollars.   With hundred of billions of oil investment dollars suddenly homeless, a lot of it is going to find its way into Canada and a lot of it into the existing area of production.   Those stalled out projects are going to be looking very good.  

This is a quote from the Us Energy Information Administration in their overview of Canadian oil, though this is now outdated given the BP oil spill

The combination of falling oil prices, unavailability of financing, and uncertainty about future world oil demand forced delays to several oil sands projects in late 2008. In October 2008, Petro-Canada delayed a final decision to proceed with the first stage (bitumen mining) of its Fort Hills Project and placed the second stage (bitumen upgrader) of the project on indefinite hold. Royal Dutch Shell also postponed an expansion of its oil sands project, while Suncor announced that it would reduce capital spending in 2009 by more than one-third. Some projects were still moving forward, however: in May 2009, Imperial Oil announced that it would proceed with the $8-billion first phase of its Kearl mining project, expected to come online in 2012 with production capacity of 100,000 bbl/d.

It is not only the current play out of Fort McMurray that will benefit, but also the Cold Lake and Peace River oil sands.   The Cold Lake oil sands are already leased out and has some production in place already, but not much more than 120,000 barrels a day.  The town of Cold Lake could become the next boom town if someone comes in and wants to develop and many more oil sands mine and upgrader.

There are also the Peace River oil sands as well that have not yet been developed at all.  Canada also has one more large oil sands deposit and this is on Melville Island in the arctic.   It is not clear how large that field is and it is unlikely to developed any time soon but they are already owned by companies.  These companies hold leases in the arctic because they believe the day will come when they can economically develop them.

The Gulf oil spill could very well signal a dramatic increase in investment dollars coming into Alberta over the next five to ten years.   This will continue the boom in Fort McMurray, it will push the demand for a major oil pipeline to the coast of BC, and it will increase the value of the Canadian dollar.

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