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07/17/2009

Canada's Oil Sands

The price of crude oil bottomed in 1998 at about $10.50
 
12/99…$25
12/00…$26
12/01…$20
12/02…$32
12/03…$32
12/04…$43
12/05…$61
12/06…$61
12/07…$95…7/08…all-time high of $147
12/08…$44 

Currently about $60, so merely back to 12/05 and 12/06…but still double and triple earlier levels in the decade. 

I was thinking of oil prices last week while in Calgary, Canada, in the province of Alberta which is where many of Canada’s largest oil and gas projects are; specifically, the Fort McMurray, Alberta area, about 400 miles north of Calgary (250 above Edmonton). Calgary is home to the likes of Suncor, which specializes in the development of the tar sands, or oil sands: a huge area the size of Virginia and Maryland, centered around Fort McMurray. 

The tarlike crude that can be extracted from the sand and clay it’s trapped in is incredibly capital-intensive to produce, roughly $18-$22 per barrel, so by looking at the above price action you can guess as to when the boom and bust cycles in Fort McMurray took place. 

For example, total investment in the region was about $7 billion in 2003 and grew to $35 billion in 2008, including ancillary businesses that feed the oil shale extraction, down to the auto repair shops and new restaurants, as well as homebuilding. 

Think about this. The population of Fort McMurray doubled to 66,000 in the same 2003-2008 period. There are two main Tim Hortons doughnut franchises in town and at the peak, it was taking an hour to get thru the joints each morning. Workers were moving from all over Canada, with opportunities in traditional industries like fishing drying up, to find jobs in the oil sands. 

But then, after oil peaked at $147 in July of last year, it promptly crashed, along with equities, all the way into the mid-$30s. Oil was still as low as $38 in mid-February of this year before the recent rally that saw it climb back above $70, after which it has dipped to the current $60 level. 

The damage, though, was done, and the oil companies involved in the area, including Suncor, EnCana, Chevron and Shell Canada (owned by Royal Dutch Shell), have been suspending or pulling back altogether from the most ambitious projects. This in turn has done a number on employment, with Suncor estimating that the temporary worker labor force in the region, for starters, could be reduced from 35,000 to 10,000 by the end of the year. 

The oil sands are responsible for some 1.2-1.3 million barrels per day of crude, or half of Canada’s total production, with much of it going to the United States so you can see its potential to reduce our dependence on less secure sources of foreign oil. As well, the oil sands represent the second-largest reserves in the world behind Saudi Arabia, and if the price environment was right, the region could be accounting for at least one-fourth of North America’s total oil production. 

[There is an important flipside…the environmental impact…and it isn’t good. For each barrel of oil, converting the muck into oil for gasoline, diesel and jet fuel requires 2-5 barrels of water, you have to carve up four tons of earth, and use a ton of natural gas. The entire process thus spews all kinds of greenhouse gases into the air. The water, incidentally, becomes highly polluted and has to be placed in container pools, but much of it has leaked into the rivers, killing fish, etc.] 

Anyway, the above discussion is prelude to an observation I had in Calgary. There appear to be as many homeless people there as anywhere I’ve been to in the world… some particularly desperate looking. Many, no doubt, once worked in the oil sands, lost their jobs, had zero savings to begin with, and at that point you have to find your way to a bigger city like Calgary (pop. in excess of one million) where you have a shot at receiving some benefits and shelter. 

Lastly, I was in town for the Calgary Stampede, which advertises itself as “The Greatest Outdoor Show on Earth.” It is. Everyone should go once in their life. 

Sources: New York Times, Wall Street Journal, Washington Post
 
Wall Street History returns next week.
 
Brian Trumbore



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-07/17/2009-      
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Wall Street History

07/17/2009

Canada's Oil Sands

The price of crude oil bottomed in 1998 at about $10.50
 
12/99…$25
12/00…$26
12/01…$20
12/02…$32
12/03…$32
12/04…$43
12/05…$61
12/06…$61
12/07…$95…7/08…all-time high of $147
12/08…$44 

Currently about $60, so merely back to 12/05 and 12/06…but still double and triple earlier levels in the decade. 

I was thinking of oil prices last week while in Calgary, Canada, in the province of Alberta which is where many of Canada’s largest oil and gas projects are; specifically, the Fort McMurray, Alberta area, about 400 miles north of Calgary (250 above Edmonton). Calgary is home to the likes of Suncor, which specializes in the development of the tar sands, or oil sands: a huge area the size of Virginia and Maryland, centered around Fort McMurray. 

The tarlike crude that can be extracted from the sand and clay it’s trapped in is incredibly capital-intensive to produce, roughly $18-$22 per barrel, so by looking at the above price action you can guess as to when the boom and bust cycles in Fort McMurray took place. 

For example, total investment in the region was about $7 billion in 2003 and grew to $35 billion in 2008, including ancillary businesses that feed the oil shale extraction, down to the auto repair shops and new restaurants, as well as homebuilding. 

Think about this. The population of Fort McMurray doubled to 66,000 in the same 2003-2008 period. There are two main Tim Hortons doughnut franchises in town and at the peak, it was taking an hour to get thru the joints each morning. Workers were moving from all over Canada, with opportunities in traditional industries like fishing drying up, to find jobs in the oil sands. 

But then, after oil peaked at $147 in July of last year, it promptly crashed, along with equities, all the way into the mid-$30s. Oil was still as low as $38 in mid-February of this year before the recent rally that saw it climb back above $70, after which it has dipped to the current $60 level. 

The damage, though, was done, and the oil companies involved in the area, including Suncor, EnCana, Chevron and Shell Canada (owned by Royal Dutch Shell), have been suspending or pulling back altogether from the most ambitious projects. This in turn has done a number on employment, with Suncor estimating that the temporary worker labor force in the region, for starters, could be reduced from 35,000 to 10,000 by the end of the year. 

The oil sands are responsible for some 1.2-1.3 million barrels per day of crude, or half of Canada’s total production, with much of it going to the United States so you can see its potential to reduce our dependence on less secure sources of foreign oil. As well, the oil sands represent the second-largest reserves in the world behind Saudi Arabia, and if the price environment was right, the region could be accounting for at least one-fourth of North America’s total oil production. 

[There is an important flipside…the environmental impact…and it isn’t good. For each barrel of oil, converting the muck into oil for gasoline, diesel and jet fuel requires 2-5 barrels of water, you have to carve up four tons of earth, and use a ton of natural gas. The entire process thus spews all kinds of greenhouse gases into the air. The water, incidentally, becomes highly polluted and has to be placed in container pools, but much of it has leaked into the rivers, killing fish, etc.] 

Anyway, the above discussion is prelude to an observation I had in Calgary. There appear to be as many homeless people there as anywhere I’ve been to in the world… some particularly desperate looking. Many, no doubt, once worked in the oil sands, lost their jobs, had zero savings to begin with, and at that point you have to find your way to a bigger city like Calgary (pop. in excess of one million) where you have a shot at receiving some benefits and shelter. 

Lastly, I was in town for the Calgary Stampede, which advertises itself as “The Greatest Outdoor Show on Earth.” It is. Everyone should go once in their life. 

Sources: New York Times, Wall Street Journal, Washington Post
 
Wall Street History returns next week.
 
Brian Trumbore