Canada’s windfall
The Canadian energy sector can look forward to an investment windfall of US$1.6-trillion during the next two decades, provided it can keep a tight lid on project costs, especially in the oil sands, the International Energy Agency says. The country’s oil sands sector alone would require US$42-billion a year, or US$840-billion in cumulative investment till 2035, to ensure the industry remains an engine of growth. The IEA’s investment figure is a third higher than the US$29-billion the Canadian Petroleum Producers Association expects the industry to invest this year. Canadian investments will be crucial for global oil markets as the U.S. oil sector is expected to plateau by mid-2020s and investments in the Middle East remain uncertain due to political instability and security challenges in the region. Maria van der Hoeven, executive director at the IEA, spoke to Yadullah Hussain, the Financial Post’s energy editor, this week about revisions to the European Union’s fuel quality directive and the global industry’s rush to access difficult basins despite the dangers of cost overruns. This is an edited version of their conversation.
Q The Spanish company Repsol YPF SA bought more than 500,000 barrels of Canadian oil and shipped it to Europe last week. Do you expect more Canadian oil shipments to Europe, and do you think the EU’s fuel quality directive will be tossed aside?
A The European Union is currently revising the rules of the fuel quality directive with regards to greenhouse gas intensity. We all know that Canada has been very active in lobbying in the European Union. Canada is the second-largest oil producer in the OECD, and a large producer of natural gas outside of OPEC. Today the European Union is increasingly relying on diesel imports that are sourced from United States, and a high share of Canadian oil is processed at U.S. refineries. It would be very difficult to distinguish diesels derived from Canadian feedstock — it is very complicated. We also have to bear in mind that with regard to the fuel quality directive member states have made no final decision and it would be quite premature to talk about methodologies. We also have a new European Parliament in place and there will be a new commission. It is also important that legislation that allocates additional charges on oil ultimately derived from Canada should be clear, transparent and fair and also take into account Canada’s role as a reliable and politically stable supplier.
Q Is the IEA pushing the EU to secure more Canadian oil given the geopolitical tension with its key supplier Russia?
A What we are pushing in Europe is that they have to look into diversification of their supply routes, diversification of countries and diversification of their energy mix, and also looking at investing in domestic resources.
Q Where does Canada fit in the global energy supply equation? We think of ourselves as an emerging energy superpower, but does the IEA believe Canada can get there?
A Oil prices make it profitable for more difficult fields and projects to be developed. At the same time, the oil sands need to bring costs down and find right answers to the environmental aspects — technology might help here, but it will come, of course, at a cost.
Q The IEA’s latest World Energy Investment Outlook report considers the Middle East vital to meet global energy demand. But if you think about how unstable that region is, do you expect to see prices trending higher as investment decisions are delayed?
A The world is now talking about the United States being the biggest oil producer for some years to come, but it will plateau from the mid2020s. It will be the Middle East again that will provide the necessary sources to meet oil demand. The Middle East’s increased investments remain absolutely critical to the long-term outlook for oil markets.
Q If you expect oil prices to remain elevated, then that should benefit high-cost Canadian projects.
A It’s not only for Canadian projects. We mentioned in our previous World Energy Outlook that the era of cheap oil is over. We see countries and companies moving in more difficult fields. We are talking about the Arctic, offshore, deepwater and the oil sands. The conventional and unconventional oil is not easy to access, so they are not as cheap as what we had. We expect Canada’s upstream oil sector investment of US$940billion, of which conventional will need US$130-billion and unconventional US$810-billion, between 2014-2035.
Q The IEA’s medium-term gas report published this week did not dwell too much on Canada’s natural gas export plans. What is the IEA’s view on our West Coast LNG projects?
A The Canadian liquefaction products are quite important for Canada to position itself as an established exporter to new markets in Asia. Of course, none of the projects has been approved.
Q Many large oil and gas projects are suffering from cost overruns. How damaging is that for future growth of the industry, especially as renewables and coal become cheaper?
A It is difficult question to answer. There are cost overruns and project delays, yet other projects are delivered on time. It is important that there is a stable investment climate because at the end of the day, the investment needs to be timely and have to have returns, otherwise the prices will be too high. Between now and 2035 there will be tremendous growth in global energy demand. To meet this energy demand, we will need a lot of extra supply which will partly come from the oil and gas sector, but from renewables and coal. Coal is really the elephant in the room, because there is so much coal everywhere and it’s very cheap to produce. Some renewables are coming of age. Hydro is mature. Solar and wind are mature in a couple of regions, but not everywhere. In other parts of the world subsidies will be needed so that they are part of the market. But the point is that when you look at the electricity grid, it cannot only live on renewables. You need others sources like gas, coal and nuclear to stabilize the grid. The picture is quite complicated.