 In mid-April the international price for WTI crude oil reached $110 per barrel. In Saskatchewan the price of a litre of gasoline rose to $1.23. The large oil corporations are reporting record profits. Land sales for exploration and development rights for oil are at an all time high in Saskatchewan. Why is this happening? Who is benefitting?
At a recent conference in Washington sponsored by the U.S. Department of Energy, experts argued that the world production of conventional crude oil peaked in May 2005 at 74 million barrels a day. The gap to 88 million barrels a day is now being filled by much more expensive non-conventional sources. There no longer are any large new pools of conventional oil be discovered. Despite warnings by scientists about the looming disaster from global warming, fossil fuel demand is steadily rising.
(Sask Govt Photo)
Where can we find more oil?
Of the remaining oil reserves 77% are controlled by producing countries with state-owned National Oil Companies (NOCs) where the privately-owned International Oil Companies (IOCs) are excluded. These NOCs often employ western oil and service companies to extract much of their oil and gas. The Washington conference pointed out that the countries which have NOCs prefer to deal with other countries which have NOCs and a state-controlled industry.
Another 11% of reserves are in countries with NOCs where the private IOCs have some access through production sharing agreements. Venezuela is one of these. The norm in Venezuela is that the state-owned oil corporation (PDVSA) owns 60% of all developments and the private IOCs own the other 40%. Only Exxon-Mobil has declined to participate in these joint ventures.
Russia has six percent of the remaining reserves and is re-establishing state-ownership and control over the oil and gas industry. The government has also imposed export taxes when the price exceeds $25 per barrel in an effort to capture most of the excess profits.
Only seven percent of the remaining world reserves of crude oil are in countries like Canada where the IOCs have full access to the resource. Thus the large private oil corporations are having a difficult time finding new reserves. Talisman, for example, has seen the price of its stock drop due to the fact that its reserves are primarily found in mature areas with declining supply and production.
Oil and gas reserves in western Canada
As the industry moves to non-conventional sources of oil and gas, costs rise. But they have not risen nearly as fast as the international price. In the 1990s it cost around $6 to extract a barrel of oil in western Canada. This has now risen to around $15. The average in the Alberta tar sands is now between $20 and $25. The Western Canada Sedimentary Basin (WCSB) is a mature area for oil and gas. Conventional oil and gas production peaked around 1972 and has been declining. The average productivity of a conventional oil well in the WCSB has dropped from 33 barrels per day in 1994 to 18 in 2003. In 2007 the average production in Alberta was only 12 barrels per day. This is the major reason that the oil corporations are looking elsewhere for new reserves. Conventional natural gas production is also declining in the WCSB. The number of natural gas wells being drilled in Alberta, the main source of supply, has declined not only because of the fluctuation in the price but because the new fields discovered are much smaller and quickly depleted. Natural Resources Canada (2006) projects that natural gas production in Saskatchewan will peak in 2005 at 261 billion cubic feet per year and drop to only 70 billion cubic feet per year by 2020.
Exploiting the Bakken Formation
Geologists and oil companies have known for years about the Bakken Formation, which is primarily in North Dakota and Montana but pushes up into Saskatchewan and Manitoba. The oil is light crude, the most valuable, but it is trapped in non–porous shale rock. It was considered uneconomic to extract. But with the very high price of oil, and new technology, extraction is now possible. The new technology involves drilling a horizontal well, fracturing the shale formation with high explosives, and then pumping sand into the well. Oil and gas is thus released. The oil industry believes this new technology will result in extensive extraction from Saskatchewan.
Non-conventional natural gas
At present the larger natural gas corporations are shifting to British Columbia where the Dawson Creek and Tumbler Ridge pools of non-convention natural gas are much larger. A similar technology is used to fracture the non-porous rock and extract the natural gas. There are high hopes for using this new technology in the Montney play. The higher average rate of royalties (27% compared to 14% in Saskatchewan) are more than offset by the higher rates of production.
Higher royalties are a world phenomenon
All around the world oil and gas producing countries are raising royalties and taxes in an effort to capture more of the economic rent (monopoly profits) that is accruing to the industry. This is not happening in western Canada. In Newfoundland, Premier Danny Williams’ government has raised the royalty rates, a highly popular move. In the offshore Hibernia field the oil companies presently get 60% of the revenues, the federal government 32% and the provincial government 8%. In the White Rose field, the oil corporations get 56%, the federal government 33%, and the province 11%. Under the new royalty system for White Rose the oil corporations will get 37.5%, the federal government 37.5% and the province 25%. Has this discouraged investment? Husky and Petro Canada are rushing to invest there, hiring a new offshore rig which will cost them $1 million per day.
Oil Policy in Saskatchewan
Oil policy in Saskatchewan stands in direct contrast to the rest of the world. Since 1982 governments in Saskatchewan have emphasized maximizing the return to the private corporations and minimizing the return to the people of the province. Between 1991 and 2007 the province collected on average only 17% of the revenues from the sale of our oil, the lowest royalty rate in the world. This is a dramatic change in policy since the 1970s and early 1980s when our government collected over 50% of the revenues accruing to the industry. The other basic policy is to export our oil and natural gas to the United States as fast as possible. We are not to be concerned about how we will heat our homes in 2020. Eastern Canada imports almost all of their oil from abroad. There is no concern in western Canada about this situation or willingness to create a new national energy policy based on conservation and assuring first access for Canadians. The Saskatchewan NDP government fully embraced the U.S. energy strategy policy set forth by Vice President Dick Cheney in March 2001. Canadian oil is U.S. oil. On several occasions cabinet ministers, and even Premier Lorne Calvert, went to Washington to assure the Bush Administration that we will ship all of our oil and gas south of the border. Brad Wall and the Saskatchewan party agreed. And we will keep our royalties and taxes to the absolute minimum.
John W. Warnock is author of Selling the Family Silver, a study of the oil and gas industry in Saskatchewan.
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