Big oil’s race to the bottom is underway and tar sands producers have a head start

Two stories from Canada’s Globe and Mail this week highlight the emerging reality that the oil industry in North America is downsizing; although the commentary mostly misses the underlying trend that is staring it in the face.

Firstly, the G&M highlighted an analyst note from Toronto-Dominion Bank, which warned of a glut in oil supplies due to falling demand in OECD countries and a surge in supply, as new projects come on stream while many OPEC suppliers are failing to stick to quotas. The effect according to TD will be to hold down prices. Not good news for expensive tar sands oil.

But the uncertain future for tar sands was brought more sharply into focus when it emerged that Suncor and Imperial Oil (60% owned by Exxon) are appealing to a US regulator to force Enbridge to hold back on increasing pipeline tolls from Canada because they say Enbridge is building too much pipeline capacity for tar sands oil into the US.

Suncor and Imperial are referring to Enbridge’s Alberta Clipper Pipeline which could potentially pump 450,000 barrels a day of dirty tar sands crude 1000 miles from Hardisty Alta. to Superior Wis. The pipeline is nearly complete and is expected to start operating in April.

The problem as the oil producers see it, is that since they signed up for Clipper back in 2007, the outlook for tar sands has deteriorated sharply and they are unsure how much tar sands crude they will have available to pump through Enbridge’s new line. The contract between Enbridge and oil producers guarantees Enbridge revenue making it more expensive for oil producers to use only a portion of their allotted capacity.

Suncor’s filing to the US regulator stated that, “Shippers are not required to pay for a pipeline that did not need to be placed into service”.

I have little sympathy for either side but the situation highlights the cracks that are appearing in an industry that for so long has bubbled over with brash self-confidence and bulldozed mostly everything in its path.

The fact is US oil demand peaked in 2007 and demand in OECD countries as a whole did likewise around 2005. While the 2008 global oil demand nosedive is significantly related to the recession, most analysts agree that economic recovery will see only a moderate oil demand recovery in the US and OECD and that the graph lines for oil demand in these developed economies are heading south in the long-term. The extreme inefficiency with which the US in particular has been consuming oil is changing and this is a good thing for the US economy, the climate, and for US security.

Debate about how much China and other non-OECD countries will pick up the slack rages on and no doubt they will pick up some of it. But for tar sands producers and many of the international oil companies that are heavily weighted towards the North American market, what’s happening in the US needs to be taken seriously. The spat between Enbridge and Suncor and Imperial is just the beginning.

TransCanada’s Keystone XL pipeline proposal, which is slated to bring 500,000 b/d of tar sands crude to the Gulf Coast by 2013, will result in around 41% excess capacity in Canada-US pipeline systems, according to the G&M article. That means that on top of paying some of the most expensive capital costs in the oil industry to pull tar sands crude out of the ground, producers will be paying a premium to get it to refineries, while refineries will be paying the extra costs of processing the heavy sour crude into products that are decreasingly in demand. Sounds like the party’s over to me.

The US regulator should not be wasting its time adjudicating oil industry spats. What it should be doing is supporting the transition to the post-oil era by speeding up the development of a smart grid that will save billions in wasted energy and facilitate renewable energy sources and electric transportation. The government should fast track new planning regulations that allow and encourage mixed use development that reduces car use, enables greater take up of public transportation and results in a healthier, cleaner and more productive lifestyle for millions of people.

In short the US government needs to grab the opportunity to speed up the predicted decline in oil demand and thereby nullify the debate about tar sands oil. As the most costly, infrastructure heavy and dirty source of oil currently in production, tar sands crude will simply not be worth it once we get demand down to more sane levels.

Then I suggest we let big oil and its associated infrastructure companies sort themselves out in a Darwinian race to extinction. After all they’ve had it pretty good for a century or so, it’s time to move over.