Prices and Policies:

Transcription

1 May 19, 2015 Ranchmen s Club, Calgary Alberta Prices and Policies: Before hitting the Re-set Button, maybe do a History Check Robert Skinner Executive Fellow, The School of Public Policy University of Calgary

2 We ve been here before. -- Have we?

3 6 Four Significant Price Crashes Price of WTI at Cushing crash Nov 1997 Global GDP ? 20 0 Source of Data: US DOE EIA; IMF

4 8,000 6,000 4,000 2,000 North America Rest of OECD Regional Sources of Net Supply leading up to price crashes (1000 kb/d) 0 FSU -2,000-4,000 Rest of Non-OPEC 100,000 80,000-6,000-8, Est* Source: BP Statistical Review 2014; *IEA Medium Term Oil Market Report 2015 OPEC 60,000 40,000 20,

5 Relative Price Change Four Price Crashes 20% 10% 0% Trading days from start of price rout à STARTING PRICE = AVERAGE THREE MONTHS Before Price Decline -10% -20% -30% -40% -50% -60% % -80% Source of data: US DOE EIA

6 Main causes of oil price crash (2014) Weak global economic growth Tepid growth in oil demand versus expectations, esp. China Continued surge in Non-OPEC supply, esp. North American Unconventional oil Slackening influence of geopolitical risks on supply (e.g., Libya) Saudi Arabia refused role of swing producer While DEMAND-driven at first, the price crash became mostly SUPPLY-driven

7 January to April U.S. Rig counts and US$ WTI crash U.S. Rotary Rig Count ? Oct 1990-Feb 1991 Nov Price of WTI at Cushing Source: Baker Hughes Rig Data; US DOE EIA

8 Weekly Rig Counts U.S. 10% 0% -10% -20% U.S. Rig counts responsive to price, with an increasing lag time from price crash to beginning of decline. -30% -40% -50% -60% May 15, 2015 Rate of rig count decline more or less the same for all crashes (less so, ). -70% Source: Baker Hughes Rig Data; data to week ending May 15, 2015

9 Source: Baker Hughes Rig Data Canada Rig counts also responsive to price dropped the peak winter drilling season in 2008/09 and 2014/15.

10 60% 40% 20% Nov 1984 Nov % July 2007 Jun % Nov 1997 July 2008 Jun 2014 Nov 1985 Monthly U.S. Rig Counts 12 months before à 48 months after price crash Price crash start May 1, 2015 Months Nov 2001 July 2012 Eventually rig counts recover. -40% -60% Nov to 2002 was an exception -80% -100% Source: Baker Hughes Rig Data

11 30% 20% Monthly International* (w/o M.E.) Rig Counts 12 months before à 48 months after price crash Price crash start Months July % 0% -10% -20% -30% Nov 1984 Nov 1996 July 2007 Jun 2013 March, 2015 Nov 2001 Nov % * Asia Pacific, Africa, Europe & Latin America Source: Baker Hughes Rig Data

12 Monthly Middle East Rig Counts 12 months before à 48 months after price crash 60% 50% Price crash start Months July 2011 Nov-84 Middle East Rig counts declined after 1985 and in 2008/09, but not After 1997 and % 30% 20% 10% Nov-96 Jul-07 Jun-13 Nov 2001 Rig deployment determined more by capacity maintenance rather than cash/flow and R.O.R. Major deployment of rigs in Saudi Arabia in 2011 to drill up new fields 0% -10% Nov % -30% -40% Source: Baker Hughes Rig Data

13 Is US Tight Oil all that unique? Build-up of other production 1000 b/d Years à Data Sources: BP Statistical Review 2014; US DOE EIA; CAPP

14 China Annual growth in oil demand (1000 b/d/year) 1,200 Projected 1, E 2015 P 2016 P 2017 P 2018 P Data Sources: BP Statistical Review 2014; IEA MTOMR 2015

15 Production declines from all producing fields without further investment * 67 mb/d Note: Excluded Natural Gas Liquids; *EHOB = Extra Heavy Oil and Bitumen Source: International Energy Agency World Energy Outlook 2013

16 Oil Stocks (storage) 4 years before & after crash % 2.0% 0.0% -2.0% -4.0% -6.0% -8.0% -10.0% -12.0% -14.0% -16.0% Aug 27, 1982 Dec 27, 1982 Apr 27, 1983 Aug 27, 1983 Dec 27, 1983 Apr 27, 1984 Aug 27, 1984 Dec 27, 1984 Apr 27, 1985 Aug 27, 1985 Dec 27, 1985 Apr 27, 1986 Aug 27, 1986 Dec 27, 1986 Apr 27, 1987 Aug 27, 1987 Dec 27, 1987 Apr 27, 1988 Aug 27, 1988 Dec 27, 1988 Apr 27, 1989 Aug 27, % 10.0% 5.0% 0.0% -5.0% -10.0% -15.0% Jan 01, 1993 Jan 01, 1994 Jan 01, 1995 Jan 01, 1996 Jan 01, 1997 Jan 01, 1998 Jan 01, 1999 Jan 01, 2000 Jan 01, % % 2014 May 8, % 30% 20.0% 15.0% 10.0% 20% 10% 5.0% 0% 0.0% -5.0% -10.0% -15.0% Jul 02, 2004 Jul 02, 2005 Jul 02, 2006 Jul 02, 2007 Jul 02, 2008 Jul 02, 2009 Jul 02, 2010 Jul 02, 2011 Jul 02, % -20% Jun 18, 2010 Aug 18, 2010 Oct 18, 2010 Dec 18, 2010 Feb 18, 2011 Apr 18, 2011 Jun 18, 2011 Aug 18, 2011 Oct 18, 2011 Dec 18, 2011 Feb 18, 2012 Apr 18, 2012 Jun 18, 2012 Aug 18, 2012 Oct 18, 2012 Dec 18, 2012 Feb 18, 2013 Apr 18, 2013 Jun 18, 2013 Aug 18, 2013 Oct 18, 2013 Dec 18, 2013 Feb 18, 2014 Apr 18, 2014 Jun 18, 2014 Aug 18, 2014 Oct 18, 2014 Dec 18, 2014 Feb 18, 2015 Apr 18, 2015 Source of data: US DOE EIA

17 NYMEX Prompt prices & Forward Curves WTI $/bb/ <$5.00 ~$10.00 Courtesy of TOTAL

18 Outlook Foggy Some signs of demand growth (India, China, US), but Strong U.S. $ will weaken demand in some importing countries Tax wedge opportunity? Reduce fuel subsidies (India, Indonesia, Iran?) Reduced demand in M.E., Latin America and FSU Record Crude & Product in storage; U.S. starting to come down but a lot to burn off before Q3 OPEC & Non-OPEC output increasing; Tight Oil production will not be V -shaped Crews left the field; Service Cos in trouble Drilling with debt a doubtful model at low/ uncertain prices Investment pull-back à longer term price surge Need to add productive capacity of mmb/d per year to offset decline and meet modest oil demand growth The shape of future oil price path?

19 Pressures on the oil price WTI ECONOMIC Global Private Investment Pullback Demand in Asia outside China - India? TECHNICAL U.S. LTO declines Global Decline Rates (GEO)POLITICAL Russia /Ukraine - sanctions Libya, Yemen, Syria, Venezuela, (ISIL in Iraq), Nigeria, Angola 60 US economy EU & Japan CAFE standards Saudi Policy? US $ Exchange Rate IMF Outlook 2015 North America FSU, Middle East Latin America U.S. Demographics High oil stocks, Fracklog NON-OPEC supply (FSU, Brazil, China, Malaysia) Iran/Nuclear oil response GHG policies

20 Price outcomes from other crashes > 10 years (1985) 1997 ~ 3 years (2008) 2014 Oil price likely to recover in a saw tooth stuttering W a shorter Post- 85??

21 Energy Policies This* is why we need a Canadian Energy Strategy * Shale gas moratoria * Pipelines stalled * Climate Change * Aboriginal involvement in resource development

22 Drivers of Energy Policy in Canada Aboriginal Rights The Constitution Provincial Jurisdiction Trade & Investment; U.S., WTO, I.E.A. Arctic Aboriginals Regional economic objectives International Events Environmental policies The Economy Global Economy, turmoil in oil states à Oil$ West Coast Tankers Unity policies, Ghost of John A MacDonald Distribution of O & G Vs Consuming Provinces` Geology & Geography Proximity to/size of U.S.A.

23 40 Years Ago (1975) WW II à 1974 Brent ($ of the day) Oil Sands: Syncrude Decision (Canada, Alberta, Ontario); Established Canada/Alberta Oil Sands Env. Research Program Decision to build & subsidize Sarnia à Montreal P.L. (Line 9) CDA/US agree to Joint Tanker Traffic Management Juan de Fuca & Puget Sound Petro Canada Act Formal end of Market-based prices for oil and gas NEB concludes Canada will run out of oil & gas; stop exports (U.S. furious about gas) NEB begins hearings for Mackenzie Valley Pipeline CERI established by Canada, Alberta, Industry & U of C Price Data Source: BP Statistical Review 2014

24 A Brief History of Energy Policy in Canada Canada agrees Copenhagen Targets Brent Oil price 2010 US$ 100 Harper 2006-Present Martin Canada ratifies Kyoto Protocol - Canada one of first to sign - Kyoto Protocol Chrétien NAFTA Canada 8th to ratify UNFCC 1990 The Green Plan 1988 Energy Options Process 1986 New Policy Atlantic, Western, N. Accords The National Energy Program Campbell 1993 Mulroney Turner 1984 Trudeau Clark An Energy Strategy For Canada Part II An Energy Policy for Canada Part I Trudeau Pearson National Oil Policy Gordon and Borden Commissions Diefenbaker National Election Minority Government - Conservative - Progressive Conservative - Liberal St. Laurent Kimacal Energy Strategies Ltd

25 Policy Themes have changed with time and with oil price Pre-1970s: Western Economic Development, Arctic Sovereignty, resist U.S. Import tariffs and press for access to U.S. market (NOP); concern about dominance of foreign (US) investors 1970s: Resource nationalism; Security of Supply; export licenses terminated; price controls à Fed/Prov. fiscal tensions 1H 1980s: NEP Fiscal Balance, Fairness, Security of Supply, Canadianization, Made-in-Canada prices for oil and gas à Worsened Fed/Prov relations à constitutional issues 2H 1980s 90s: Jobs, Jobs, Jobs, Market Liberalization, Accords, Free Trade, regulatory reform; commodity surpluses, ~ dinosaur industries 2H 1990s 2000s: Climate becomes proxy for energy policy; Oil Sands fastest growing source of GHGs in Canada; labour issues, regulatory constipation & First Nations engagement/scc Case Law, SOE/SWFs buying up Canada Post-2004: Economic center shifts to western Canada; SOEs; regulatory streamlining & reform; unconventional oil & gas and pursuit of market diversity, ENGOs dominate the message

26 History of Oil Royalties Alberta Brent 2013 $ : Old & New Oil 1974: Price Agreements with Old & New Oil OZawa $ - sensidve 1993: Major Royalty Changes; >$ sensidvity 3 rd Vintage; H.O. Separated from light 2007: Royalty Review 2009: Vol & $ Sliding scales : 5% Flat 1935: 10% Flexible 1941: 5-15% Flexible 1951: Vol % Vol 5 steps 1962: % Vol 3 steps 1997: Generic Oil Sands Royalty 2015 Royalty Review Data Sources: Alberta Energy; Univ. of Calgary School of Public Policy

27 Official Energy Policy since 1986 Natural Resources Canada Website Canada's energy policy is guided by a series of principles, agreements and Accords (1986). The main principles of our energy policy are: A market orientation Markets are the most efficient means of determining supply, demand, prices and trade while ensuring an efficient, competitive and innovative energy system that is responsive to Canada's energy needs. Respect for jurisdictional authority and the role of the provinces Provincial governments are the direct managers of most of Canada's resources and have responsibilities for resource management within their borders. Where necessary, targeted intervention in the market process to achieve specific policy objectives through regulation or other means These policy objectives include issues of health and safety (e.g., pipeline regulation) and environmental sustainability. Kimacal Energy Strategies Ltd

28 Industry s Concerns (2003/4) North America running out of natural gas; Energy Prices rising, gov ts & consumers energy illiteracy à risk that gov ts would be pressed to do something Growing resistance to build needed infrastructure & capacity while regulatory process sclerotic à risk of govts making hasty decisions Energy realities & Climate ambitions not aligned At the very least get a national dialogue going to improve energy literacy of elites Not necessarily asking gov ts to do anything; rather, to THINK more about what they were being pressed to do. Kimacal Energy Strategies Ltd

29 Energy policy themes The same old chestnuts Collaborate (All governments and First Nations, Industry, NGOs) Regulatory reform Energy literacy Energy Efficiency Environment, Carbon pricing (or not) Renewables, nuclear R & D, technology innovation, commercialization Labour (immigration strategy ß à productivity ß à education) North America but new markets too Pipes and Wires as Nation-building Grand Projects Aboriginal issues Kimacal Energy Strategies Ltd

30 Is an Energy Strategy for Canada doable? A National Energy Strategy is not like selling the Free Trade Agreement Constitutional & Geological realities cannot be simply wished away As a resource exporter, price-taker: challenge of government inertia versus market volatility à we signal dithering & uncertainty to capital markets Firms review their strategy more frequently at times of uncertainty and increased risk; led by top executive team; on-going If Strategy means Planning, it is doomed If Strategy means Dialogue, OK, but continue with the job jar (C-38, oil sands monitoring, labour market reform, engage & involve FNs, Pacific Basin trade frameworks, support R&D&C, GHG regs/charge, NEB hearings, provincial bilateral issues up to provinces concerned), STOP using Social License to Operate ; feeds regulatory anarchy Kimacal Energy Strategies Ltd

31 Thank You