anybody worried about the Alberta Economy?

[flamesfever]

I think the previous bull market demonstrated the critically tenuous line between the world's ability to supply, and the world's demand for, oil and gas.

In years to come when we are in another bull market situation, we will be faced with the same problem of spiking uncontrollable prices. I think this can be mitigated to a large extent by using the downtime to:

1. develop and/or use technologies which allow us to become less dependent on oil and gas eg. smaller less fuel dependent cars, wind, sun, tide and nuclear energy power, etc.

2. set policies which allow continued exploration and development to maintain adequate reserves of oil and gas. In spite of 1. above, I believe the world will still be dependent on oil and gas as the major supply of energy for the forseeable future.

The Alberta Government are taking money away from companies at a time when they need it most to keep their staff in place so they can go on maintaining adequate reserves of oil and gas.

[SeeGeeWhy]

Originally Posted by DFO

This and the Montney play are getting a little over-hyped IMO. Everyone wants to jump on the 'resource play' bandwagon but I don't think the geology is as easy as many make it out to be. That being said the area will benifit from a surge in drilling activity till they figure out the play isn't as attractive as originally thought.

SAGD is a "resource play", they've been really hot for about 6 years now, it all kicked off with CBM.

All the talk about tight Bakken oil has dropped off, too.

As you eluded to earlier, a lot of the SAGD projects that just started construction won't have first steam until 2011, and who knows what oil price is going to be at then (my guess is higher than it is today).

[The Goon]

A piece on Global National tonight said that oil needs to be $90/barrel for the oilsands projects to be profitable, and there's a projection oil could go below $25/barrel at some point next year (although it was said only for short term).

[SeeGeeWhy]

Originally Posted by flamesfever

I think the previous bull market demonstrated the critically tenuous line between the world's ability to supply, and the world's demand for, oil and gas.

In years to come when we are in another bull market situation, we will be faced with the same problem of spiking uncontrollable prices. I think this can be mitigated to a large extent by using the downtime to:

1. develop and/or use technologies which allow us to become less dependent on oil and gas eg. smaller less fuel dependent cars, wind, sun, tide and nuclear energy power, etc.

2. set policies which allow continued exploration and development to maintain adequate reserves of oil and gas. In spite of 1. above, I believe the world will still be dependent on oil and gas as the major supply of energy for the forseeable future.

The Alberta Government are taking money away from companies at a time when they need it most to keep their staff in place so they can go on maintaining adequate reserves of oil and gas.

While I agree with point one from a strategic perspective, you have to understand that these technologies are not yet very inexpensive. The only reason that they've become more viable recently is because oil prices are so high. Unless it is government mandated spending (see http://www.betterplace.com), or a great new technology emerges for cheap, that investment isn't going to happen until oil prices spike again.

As for point two, you are absolutely correct... but it again comes back to the economics of the situation. Oil & gas production on the scale that is needed to feed projected global demand is getting more difficult to exploit and deliver to market. We're mining & steaming low grade crude, going deeper offshore and into arctic regions... the days of easy oil are gone.

If there is zero growth in world demand, the O&G industry will need to replace nearly 40 million barrels of oil per day by 2025 to offset production lost to natural rate decline. Those are huge numbers - to put it in perspective, CERI is predicting that the peak output of Alberta's oilsands will only be just north of 5 million barrels per day. There are not very many places in the world that hold a resource the size of the Athabasca and Cold Lake oilsands (the Peace River bitumen bearing carbonate formations are still uneconomic to produce for the most part), that are as politically stable as Alberta... certainly not 8. And I think that most people would say that world demand is not going to stay flat over the next 15 - 20 years.

Something is going to give, that is for sure.

My question is just how long before industry gets serious about CO2 flooding old light oil pools? Check out Denbury resources NYSE: DNR... they've got an excellent model to cope with the coming pressures on the O&G industry. There is a lot of potential for that sort of business to grow in Alberta in some of the more mature light oil regions that helped put Alberta on the O&G map in the first place. The great part about it is that it isn't that different from what we are doing today, and it is putting to use the dreaded CO2 emission that has been so vilified as of late.

As for whether or not I am concerned about Alberta's economy... not long term. 2009? I'm saving my cash, waiting to see what happens... I am also looking to buy.

I am concerned about the real estate market specifically though, as per Claeren's post above. There was a lot of spec investing and people over leveraging themselves... if we start to see a lot of job loss after x-mas it might get ugly for a lot of people.

If that does happen, I just hope that we see people helping one another. Calgary used to be famous for its small town charm despite being a "big city", but the boom really buried that sentiment... Deep down I think that it is still there and I bet that we see a resurgence in the sense of community if people have more time on their hands due to a downturn.

You never know what sort of ingenuity emerges out of tough times, either. Overall, I am positive. The people that risked too much are going to get hit. Those that took a conservative stance will be in good position to move forward and contribute some positive impacts on the community & economy.

[SeeGeeWhy]

Originally Posted by fotze

What does SAGD have to do with CBM, just curious? The horn river is actually on production compared to the SAGD stuff you just mentioned, so its not hypothetical.

They're both resource plays, as compared to the conventional E&P exploration model. Huge reserves over a large spread of land, cookie cutter development once it is going, no "boomer" wells in particular, etc.

No one was really interested in chasing the so called "resource play" until CBM got popular with investors as a means to replace reserves relatively inexpensively. Now every company tries to have a resource play in its portfolio it seems. CBM, Bitumen, shallow gas, shale gas all qualify as resource plays in my mind.

[GGG]

Remember 3 years when this boom was just ramping up and oil was $40 a barrel and how optimistic everyone was? It is the same price now.

Granted things have changed as construction and engineering costs went up but these costs will be mitigated as layoffs occur and people are forced to get new jobs at more reasonable wages. As shop space frees up cost will come down and the Price of steal will come down dramatically as demand lessons.

I believe that we are seeing the large pause now to let prices come down and in the next 6 months or so the major capital projects will start flowing again. One of the big issues facing the smaller companies is financing so if capital markets open up again things will get back on track.


The worst part of this whole recession is peoples attitudes. The economy is based on what people believe will happen so excess optimism leads to bubbles and excess pestimism leads to reccession. So everyone should help out the economy and have a positive outlook for the new year

[browna]

Opec said they were planning on making some "severe" production cuts in a week or so (after passing on that option in their mid November congregation), so that should see a bump up in prices.

[Slava]

The price of oil will rise over the next few years for a few main reasons:

A) There is a supply/demand issue already...basically the globe is on a treadmill here and we are facing a 4% increase in demand and a 1% drop in supply as it is. With production cuts this could hit as high as a 9% drop in supply...

B) A lot of countries around the world rely on the price of oil to fund their domestic economy (Alberta is not far enough from this IMO!!). Basically though, countries like the OPEC countries, Russia etc. want the price of oil to be high, and will cut enough to make that happen.

[Flames in 07]

Even at this low, 5yrs out crude is 75 bucks. This $40 level is a blip, and even if it isn't, many contracts that today are deemed economic will become economic when costs structures reset themselves for a new environment.

[Nancy]

Originally Posted by Flames in 07

Even at this low, 5yrs out crude is 75 bucks. This $40 level is a blip, and even if it isn't, many contracts that today are deemed economic will become economic when costs structures reset themselves for a new environment.

Ahh, but aren't you implying here that there needs to be heavy downward pressure on wages? Can you imagine wage levels gradually rolling back to, say, 2001 levels?

[mykalberta]

Personally I am not worried about my job at all.

I am a little worried about my RRSP contributions going down the drain as soon as I put them in. I am thinking of stopping that for now and putting that in the bank. The 8% employer match makes me rethink that though.

[flamesfever]

Originally Posted by fotze

Good story on 60 minutes now about the price of oil, from the OPEC heads view.

Also, I thought the oil companies controlled the price of oil from previous threads.

As demand for oil slows with the global slowdown, I believe OPEC has a greater ability to control the world price of oil, due to much lower production cost.

I wonder if OPEC isn't going to use this time to allow the price to drop low enough to render the oil sands uneconomic. Shutting down the oil sands would allow them to regain part of their market share.

[SebC]

Originally Posted by The Goon

A piece on Global National tonight said that oil needs to be $90/barrel for the oilsands projects to be profitable.

Thing is, that number is not independent on the price. Oil price comes down, steel, labour etc. comes down, break-even price of oil comes down. The guys who have cash will be able to build their upgraders cheaper in the current environment because the guys who don't will be out of the market. But still, the process of bringing the economy back into equilibrium will hurt.

[SebC]

Originally Posted by flamesfever

As demand for oil slows with the global slowdown, I believe OPEC has a greater ability to control the world price of oil, due to much lower production cost.

I wonder if OPEC isn't going to use this time to allow the price to drop low enough to render the oil sands uneconomic. Shutting down the oil sands would allow them to regain part of their market share.

It won't shut down the oil sands. Existing projects would still be producing (as their capital costs are already sunk). Problem for Alberta is that a fair bit of our economy depends on the design and construction of new projects.

[Phanuthier]

Originally Posted by SeeGeeWhy

While I agree with point one from a strategic perspective, you have to understand that these technologies are not yet very inexpensive. The only reason that they've become more viable recently is because oil prices are so high. Unless it is government mandated spending (see http://www.betterplace.com), or a great new technology emerges for cheap, that investment isn't going to happen until oil prices spike again.

Few issues there, SGW. First off, I disagree about alternative fuels, solar cells made its big push because of the dot com crash and silicon suppliers were dumping Si for cheap. I heard an interesting concept coming out of a company in Isreal about using organic photosynthesis rather then silicon semiconductors to harvest energy from sunlight as well. What solar cells need is a small push for an avalanche effect to make them cheap IMO as they are using pretty standard CMOS process fabrication techniques now. Solar panals are still pretty pricey, but something like an Obama plan could drop prices and the ball gets rolling there. I've seen alot of wind farms around Canada as well as the USA, and then the contraversal biofuels. Heck, even plasma fusion, although thats definately long term. What does all this science mean in economic terms? I guess thats anyone's guess.

Nevertheless, I don't see Oil rising as fast as when it went from $100-150 if Obama is serious about pushing this idea of going green.

[SeeGeeWhy]

Originally Posted by Nancy

Ahh, but aren't you implying here that there needs to be heavy downward pressure on wages? Can you imagine wage levels gradually rolling back to, say, 2001 levels?

There needs to be heavy downward pressure on all costs, including wages. Wage inflation was insane over the last few years. As an individual I am happy that I was able to get in when I did, but it isn't hard to recognize that those conditions are not sustainable.

Would I be upset if I had to take a cut in my wage to keep my job? No.

I think the bottom line to all of this mess is that there were too many companies opening up, offering terrible service/products, and overcharging just to get their cut of the boom. A slowdown will bring competition and will force inefficient firms out. Overall, this is a good thing because it will redeploy capital to where it will be used optimally. Its hard to know what is optimal in such an overheated economy because EVERYTHING seemed to be insanely profitable.

[SeeGeeWhy]

Originally Posted by Phanuthier

Few issues there, SGW. First off, I disagree about alternative fuels, solar cells made its big push because of the dot com crash and silicon suppliers were dumping Si for cheap. I heard an interesting concept coming out of a company in Isreal about using organic photosynthesis rather then silicon semiconductors to harvest energy from sunlight as well. What solar cells need is a small push for an avalanche effect to make them cheap IMO as they are using pretty standard CMOS process fabrication techniques now. Solar panals are still pretty pricey, but something like an Obama plan could drop prices and the ball gets rolling there. I've seen alot of wind farms around Canada as well as the USA, and then the contraversal biofuels. Heck, even plasma fusion, although thats definately long term. What does all this science mean in economic terms? I guess thats anyone's guess.

Nevertheless, I don't see Oil rising as fast as when it went from $100-150 if Obama is serious about pushing this idea of going green.

Interesting perspective!

But I stand by my point that major change in the short term will have heavy reliance on government support (an Obama plan).

Private investment will not occur until the returns are attractive enough, which means that a final product must be able to compete with the incumbent (oil).

If oil is super cheap (and it is, for how damn useful it is), only early adopters will buy an alternative that is more expensive. Even then, it is not certain that the oil alternative will ever become a widely adopted product - thus major private investments in those technologies will be delayed until oil prices become high enough to push a majority of people into utilizing the alternative. Of course one thing that will ensure such a product gets widely adopted is government mandates (i.e. everyone Must use solar on new houses). Also, government subsidization will bring down the average cost to produce an alternative, making the investment threshold lower for the R&D companies that are developing them (i.e. the $2B green tech fund established by the Alberta gov't this year).

Another significant hurdle that renewables have to overcome is the pure utility of oil. Its energy density is very high, it is relatively stable in a wide range of conditions, it is easily transported and stored... and there is a lot of technology out there that is set up to use it, and use it very well.

I have a feeling that renewables will need to be applied on an 'as available' basis - meaning, solar will only be popular in sunny areas, wind will only be popular in windy areas, and so on. This might seem obvious, but the discussion to date has generally been that there is going to be "one" renewable technology that will replace oil - and I just don't think that will be the case.

The "silver bullet" in this case will not be one technology, but a variety of technologies applied on a regional basis, coupled with a significant change in lifestyle that makes it possible to take advantage of the new wave, so to speak.

Populations will need to shift to where food, water, and a number of renewable energy sources are readily available.

Hence why it has been such an uphill battle to overcome oil... it fuels a way of life that industrialized nations are not going to be able to let go of easily.

Then there is the simple fact that oil isn't used just for electricity generation - it is also used for heating, chemical production, transport fuel, fertilizer production, etc. Solar and wind do not offer these "byproducts", thus they just don't offer enough to knock oil off of it's pedestal.

What humanity is going to need to do to truly break our "reliance" on oil is to either find an alternative for each of oil's multiple uses, or to find a way to make oil a renewable resource itself... and there are groups making headways in that respect as well! I just don't know if that is the best idea from an environmental perspective.

I like the sound of that isreali technology... do you have any links? The best technology immitates nature.

[Phanuthier]

God damn I love your posts SGW, you don't post often, but when you do, they're insightful to read. Clear, concise but comprehensive, understandable but scientifically, economically, and otherwise realistically backed up.

Can't argue much with your post there. Agreed on the early adopters though I believe that is where we are, and this recession and Obama is a push towards cross the chasm, so to speak. The startups are there, and alot of alternative fuel companies were picking up steam up to the recession.

Agreed as well that the functionality of alternative energy is for stable temperatures, and large parts of Canada doesn't really fit the bill due to wide temperature variations and gradients which would probably compromise the functionality of some of this technology, i.e. solar via semiconductors or engineered photosynthesis. I know another issue with wind farms has been that it compromises the aerial navigation (i.e. airplanes) communications at times notably in Ontario, though I know alot of projects that were going through last year. Also agreed it will be a eligent array of alternative fuels rather then one winning over the other as well, to survive and meet the environment and its elements.

Oil is great (lots of energy packed, and simple and small technology to convert), can't argue that at all. There will always be a niche market for it, and will always have a niche market no matter how much alternative fuels take. I suppose a hope is to minimize our reliance on oil rather the relieve our reliance on oil, and keep those wells full for us for years. I do have hopes of laser plasma fusion to supply us energy, and that gives us alot of energy, obviously.

Agreed on government sponsorship to help alternative fuels companies along as well. I know Arnold is doing that for the state of California right now with solar panals, and solar panals are quite popular here.

Isreal - sorry, I forgot the name of the company. I'll grab it from my friend when I see him next. I believe he had told me it was a concept that was either moving from R&D into production or ready to be moved to production. I have a belief that we will not improve the efficiency of semiconductor solar panel anymore then we are now, so I was quite delighted to hear about this innovative solution that I believe was pushing high efficiency rates over 50%, but don't quote me on that or ask me what that means.

[tjinaz]

Especially Wind and Solar.

The way the Electrical grid works is based upon immediate demand. Power in and power out nearly instantaneously. There are no giant batteries you can spin up to hold on to the power you have generated. You can't predict with the accuracy needed the amount of wind or solar available at a specific time. Without that accuracy the entire grid loses stability.

Wind and Solar might work well as suplementary (Peaking) sources of power but we will be tied to Hydro, Nuclear and Coal to maintain the stability of the national electrical grid for the near future.