Protesters descended upon Washington, DC, recently. They visited our nation’s control centre to oppose construction of the Keystone XL Pipeline, from Alberta to the Gulf Coast.
At a higher level, Keystone protesters don’t want Canada to develop its oil sand resources in Alberta. It’s ‘dirty oil,’ they say. Leave it in the ground is their view.
One way or another, whether the pipeline operators build Keystone XL or not, there’s money to be made on either side of the outcome. Let’s look into it. Read on…
Strategic Keystone
I’ve discussed Keystone XL on other occasions. It’s a very important project. It’s strategic, in a profound way. Expanding the pipeline – or not – impacts America’s strong relationship with Canada, a longstanding ally.
Also, Keystone is a major issue for the US in terms of long-term energy security. Will Canadian oil flow south from Alberta, toward the US midcontinent? Will Canada’s energy economy remain tied up with the US energy economy? Or will Canadian oil flow west to Pacific ports, and thence load into tanker ships bound for Asia – and all that such a turn of events implies?
Keystone XL boils down to basic American national interests. Keystone will help secure Canadian-sourced hydrocarbons for the US economy, and do so well into the next century. Or not.
Security of oil supply will certainly matter, as time goes by, because most of the ‘traditional’ oil-exporting nations of the world – most of the critical US suppliers – have profound problems and risks associated with future oil exports.
That is, oil fields are depleting in many states (Kuwait, Arab Emirates, et al.), and/or societies are in turmoil (Libya, Saudi Arabia, Nigeria, et al.).
By building Keystone XL, the US will send a message to the rest of the world – or not, as I’ve mentioned. We’ll answer the question of whether the US is serious about long-term energy security.
Will the US take steps to develop world-class energy resources here in North America? Or – not to put too fine a point on it – has US national governance become fully divorced from energy reality?
Carry out that last line of thinking a bit more. Is the US truly in free fall from great power status? If so, should the rest of the world continue to use the dollar as a reserve currency? Some people – important people – are already discussing the need for ‘gold trade notes’ to use in international commerce. These are people with lots of gold and an antipathy toward the dollar and US hegemony in the world. I just thought I’d mention it.
‘Dirty’ Oil?
Oil from Canada’s oil sands is, to be sure, energy intensive. Still, ‘dirty’ – as the Keystone protesters label it – is the wrong word. Oil from oil sands is no more carbon-intensive than heavy oil from most places in the world – say, Venezuela, Russia, California.
When it comes to energy, we’re riding history’s timeline. It’s not your father’s world of energy. It’s not the 1970s or 1980s anymore. Heck, it’s not even the 1990s or early 2000s. The energy landscape has changed dramatically over the past decade. Large-scale energy development today requires putting lots more energy into the ground to get energy back out.
Specifically, oil sand development requires more of everything than in the past – more wells, more steel, more concrete, more equipment, more natural gas, more water, more labour, more money and capital. With more inputs of everything, we see lower ‘energy return on energy investment’ (EROI) – more goes in, less goes out. It’s thermodynamics, but it’s not ‘dirty’ oil.
At root, we’re dealing with energy economics. Oil sand development also requires higher prices to support all of the investment. If there were lots of ‘cheap’ oil out there, every barrel of which was threatening to undermine the market, then few would dare to dig oil sand in Alberta.
We’re Going to Make Some Money
We’ll see how it all unfolds over time. One way or the other, however, we’re going to see a lot of money flow into energy development in the years to come.
Look at Shell Oil, for example. Shell delivered strong numbers in the fourth quarter of 2012. Cash flow was about $10 billion, with worldwide earnings up 15%, to $5.6 billion. For the full year 2012, Shell’s cash flow was $46 billion, and earnings were $27 billion. Shell has poured funds into exploration and development, while successfully reducing debt. And the shares pay a dividend yield of 5.3%.
Or consider Norwegian oil giant Statoil. Here’s an oil major that puts its spending to good use. Statoil’s Q4 earnings were $2.7 billion, with fabulous news from the field in terms of operational performance.
That is, Statoil delivered 110% reserve replacement – it found 110 barrels for every 100 barrels it produced, thus replacing its output and then some. Statoil shares pay a dividend yield of 3.5%.
Statoil management added about 1.5 billion barrels of oil-equivalent resources in 2012. The company forecasts 2-3% annual production growth through 2016 and targets 2.5 million barrels per day of output (oil equivalent – oil plus natgas) by 2020, up from the current level of 1.8 million barrels.
That said, we’re still dealing with the oil business. As I learned long ago working for the former Gulf Oil Co., the only easy day was yesterday. No one can rest on their laurels. What did you find this morning? What are you going to find this afternoon? The key is to figure out how to improve operating performance, deliver new discoveries and operational successes and truly move the needle.
We’re in the midst of sustained high oil prices. We live in a world of growing demand and constrained supply – Keystone protesters or no.
With high prices, these should be great times for oil companies. Still, the reality is that despite oil generating immense piles of cash, everyone has to work harder and harder to keep the pipelines flowing and the tankers filled. As I said at the beginning, there’s money to be made in all of this, whichever way the winds blow.
Byron King
Contributing Editor, Money Morning
Publisher’s Note: This is an edited version of an article that originally appeared in Daily Resource Hunter
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