HUSKY DEAL SHELTERS CENOVUS FROM KXL.
Refineries in U.S.
• Executive orders from U.S. President Joe Biden on the energy file will hurt the American oil industry and provide a boost to Canadian crude producers, says the head of Calgary-based Cenovus Energy Inc.
Since taking office earlier this month, Biden has signed a long list of executive orders aimed at combating climate change and reducing emissions, including a ban on drilling on U.S. federal land that was sharply criticized by the American Petroleum Institute, a U.S. lobby group for the oil industry.
“I don’t think anyone in our industry should take any pleasure in seeing our industry peers, you know, having challenges, whether it’s by political decree or otherwise,” Cenovus president and CEO Alex Pourbaix said on an investor call Thursday. “But, yeah, directionally those are helpful for the Canadian industry.”
Over the past decade, U.S. oil companies had been outperforming their Canadian peers and have experienced explosive growth through shale drilling in the Permian basin first under former Democrat President Barack Obama and then the proenergy policies brought by the recently-ousted president Donald Trump. The Canadian industry, meanwhile, had struggled to attract investors as a result of depressed heavy oil prices and a lack of new export pipelines.
But the COVID-19 pandemic and oil price crash in 2020 caused a “massive disruption in capital spending” by U.S. producers last year, Pourbaix said. The fallout from that oil price crash and the election of Biden “create the opportunity for a positive situation for Canadian heavy.”
Still, Biden’s executive order to kill TC Energy Corp.'s 830,000-barrels-per-day Keystone XL pipeline linking Alberta’s oilsands with heavy oil refineries in Texas and Louisiana on his first day in the office is a “tragedy” for the Canadian oil industry, said Pourbaix who previously was an executive at the pipeline company.
From the shadows, we are now seeing that the old economy isn’t so old after all. Much of the new energy transition hardware requires earthly resources — metals and minerals — which are suddenly escalating in price.
Prices of copper, nickel, cobalt, platinum and rare earth elements are all inflating as electric vehicles and the wider electrification trend starts pulling on constrained resources. For example, nickel prices just closed shy of a five-year high, copper is up 30 per cent from PRE-COVID levels, and cobalt has jumped 25 per cent in value in 2021 alone.
I should note that the solar industry’s achievements are often quoted as a template to how fast clean energy costs can come down. But let’s be careful. Made from silicon, the most plentiful element in the Earth’s crust (think sand), solar panels don’t have a resource-constraint problem. Many of the vital metals and minerals needed to electrify transport and other industrial segments of our economy don’t enjoy the same abundance.
Rising resource costs of these more constrained commodities shouldn’t surprise us. The inflection point of demand for electric vehicles has been crossed in a handful of countries, including China. That’s the point — a market share of around five per cent or more — at which consumer adoption begins to take off exponentially. More variety on car showroom floors, including pickup trucks and SUVS, will add to the momentum.
There are now dozens of electric-vehicle manufacturers at various stages of development around the world. Tesla Inc. is the leader, of course. Volkswagen AG is going all-in, and General Motors Co. is expected to accelerate from a trot to a gallop by mid-decade. Upstart companies are collectively raising billions of dollars to roll out new models. Expectations for EV sales are at high voltage, and now those expectations are zapping the resource sector. No wonder some investment analysts speak about a forthcoming “commodity supercycle.”
Consider the scale of what’s happening.
Tesla sold just shy of 500,000 vehicles last year. It’s an impressive number, but — in a world of a billion-plus cars — it’s still de minimis. At Tesla’s current rate of sales, it would take over 2,000 years to replace the world’s fleet of combustion-engine vehicles. We have barely dented the market for EVS.
Now let’s look at what it takes to power one of them. A typical 75-kilowatt-per-hour electric-car battery is 5,000 times the capacity of the one in your mobile phone. And that’s for a medium-sized sedan such as Tesla’s Model 3, not the super-sized pickup truck or SUV that most people are aspiring to develop.
From a money lens, the demand for natural resources is getting to be much more than a dent. Mining.com’s EV Metal Index for November 2020 show that sales of lithium, graphite, cobalt and nickel just for making EV batteries have risen rapidly to US$325 million per month. A mere four years ago, that number was a tenth of that. And we are going to sell how many EVS by 2030?
The point is, we don’t need a spreadsheet to realize that the transition to an electrified clean energy economy is going to result in a monumental draw on metals and minerals from the Earth’s crust. And it’s going to cost a lot more money. In the past few months, rising commodity prices are a wake-up call to that reality. In the old economy, an inflection of demand that pulls on constrained resources leads to price spikes.
At a minimum, the assumption that costs for new energy technologies will fall smoothly and forever needs a serious rethink, especially for metal-intense segments of the business. At worst, commodity price inflation that passes through to end customers will restrain adoption of new-age products.
Sure, the challenges can be overcome. When commodity prices rise, more resource projects are permitted, financed and built, often in unsavoury places.
We’ve seen it before. The world grew its oil production from nothing to an unfathomable 100 million barrels a day. But it took 150 years and hundreds of trillions of dollars. Along the way, there were plenty of commodity supercycles, not to mention geopolitical issues, which is a whole other supercharged issue when it comes to rare and geographically concentrated minerals.
And the challenges can be overcome by technology, too. For example, a new generation of solid-state batteries will ease the pressure on some metals, though the timeline for those is a decade out.
The resource world doesn’t move nearly as fast as technology, which is why commodity value is now chasing technology value. And the larger lesson is that the new economy can’t go anywhere without the old.