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Peter Foster: Petroleum’s Great Revival

Peter Foster, Financial Post

“If there is one man whose opinion matters more than any other in global energy markets, it’s Daniel Yergin.”

Trends or events attached to the word “Great” are more often to be feared than embraced. Nobody wants any more Great Wars, or another Great Depression. The “Great Moderation” celebrated just a few years ago by consecutive Federal Reserve chairmen Alan Greenspan and Ben Bernanke was followed by — indeed arguably spawned — a “Great Recession.” Now however, there is a new “Great” in the making, and it appears to be all good news: “The Great Revival” of the North American petroleum industry. This concept was invoked on Wednesday by leading global energy analyst Daniel Yergin at a presentation on the final day of the annual investment meeting of the Canadian Association of Petroleum Producers, which was this year held in Toronto.

Time magazine has written that: “If there is one man whose opinion matters more than any other in global energy markets, it’s Daniel Yergin.” Let’s hope so, for Dr. Yergin is not merely highly knowledgeable about Canadian energy, he is also a fan, and a leading consultant to CAPP.

Dr. Yergin also outlined a “rebalancing” of the entire global energy industry, significantly related to that Great Revival. He did not dwell on the irony that this revival should have taken place under perhaps the most anti-oil president in U.S. history, but then diplomacy is needed when you have the ear of the White House, which in Dr. Yergin’s case is good news for Canada.

The rebalancing to which Dr. Yergin — whose books include the Pulitzer-winning The Prize and, more recently The Quest: Energy, Security, and the Remaking of the Modern World — refers is hemispheric. The growth in the Canadian oil sands, the U.S. boom in tight oil, and the revolution in shale gas on both sides of the border, all mean that what had become a joke — North American energy independence — is now a possibility. Meanwhile east-west global oil trade will become more north-south within the Americas. Independence will not come about because of any grand energy strategy or presidential commitment (Dr. Yergin noted that presidents have been promising energy independence since Richard Nixon, even as domestic oil production has gone down), but because of ever-advancing technology, which has again and again produced wonderfully productive surprises, often from unexpected directions.

Dr. Yergin noted that the boom is significantly due to the vision of one man, George P. Mitchell, who was convinced that it should be possible to access the vast natural gas resources trapped in certain “tight” shale rock formations. Big oil companies disregarded the idea as “something that independents do.” They saw North American gas supplies running out, and believed the solution was importing liquefied natural gas. Mr. Mitchell’s own board was thinking about pulling the plug when the technological breakthroughs that would be the key to achieving his dream — hydraulic fracturing and horizontal drilling — were combined. The result has been a spectacular rise in gas reserves and production that is roiling markets all over the world (and has proved distinctly disadvantageous for Canadian natural gas sales to the U.S., which for 40 years have been major export earners).

Fracking and horizontal drilling also provided the key to unlocking tight oil reserves in geological formations such as the Bakken, which has made North Dakota the second-highest oil-producing state. Again, this has presented a headache for Canadian oil exporters because it has led to a mid-continental supply glut that has led to sharp discounts on Canadian production. This glut is why the Keystone XL pipeline, designed to ship diluted bitumen from the oil sands to the refineries of the Gulf Coast, is so crucial, and why President Barack Obama’s refusal to permit the line earlier this year was both a shock and a potential threat to projected oil sands expansion.

Dr. Yergin confirmed that the battle over Keystone XL had nothing to do with the pipeline per se. It was all about the demonization of the oil sands by environmental groups. He refused to “handicap” when the line, which is now, because of the political battle, “the most famous pipeline in the world,” might be approved, but he stressed that Canada was an integral part of the Great Revival. Republican presidential candidate Mitt Romney acknowledged that fact; newly re-elected President Obama still has a way to go.

Dr. Yergin noted that the president, despite his continued commitment to alternative energy, had been forced to acknowledge the Great Revival, which is calculated to have generated some 1.7 million U.S. jobs, and has had a dramatic impact on U.S. manufacturing competitiveness via the benefits of low natural gas prices. He acknowledged that there remains significant ignorance south of the border of the importance of Canada to the U.S. supply picture. He was asked how we might get more U.S. attention. His reply was: “Find alternative markets.”

Thus, it seems, the No. 1 job for both Edmonton and Ottawa remains to generate some Great Enthusiasm for new pipelines to the West Coast.

Financial Post, 13 December 2012