Brian Zinchuk: Talking with Gormley about high oil prices, drilling, labour, wind and solar, Mexico, Ukraine and LNG

On Jan. 19, I spoke with John Gormley on CJME/CKOM about how thing are going in the energy sector, now that oil prices have hit a recent high point. These are my notes that drove most of the discussion. Most of it made it in, but not all.

Here’s the recording:

Here are my notes:

Oil prices and drilling

Oil prices are at the highest point since the fall of 2014, at $87.04 US per barrel for WTI. That’s basically 7-1/4 years since we’ve seen this.

They’re this high likely because one of the largest oil producers in the world, Russia, is lining up to invade its neighbour, Ukraine.

That’s a price level where, as an oil company, you’re not just making some money, you should be making big money.

But it’s not being reflected in drilling activity to the extent you might think.

Historically, January and February are the highest levels of drilling in Saskatchewan. During the boom times we’d have 100 or more rigs working here.

According to RiggerTalk.com, on Wednesday, southeast Saskatchewan had 13, southwest had 2, 10 in western central Saskatchewan and just 3 in the northwest. That’s a total of just 28.

Noticeable by their absence is Cenovus, which has just one rig working near Edam. Back when they were Husky, even during the downturn they would usually have a half dozen rigs working north of the North Saskatchewan River at this time of year.

Crescent Point has 4 rigs that I can see, whereas they used to run over 20 in Saskatchewan.

So, with oil prices at the highest level in 7 years, we’ve got just one quarter to a third of the rigs going that we used to have back then.

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Now, there’s a few reasons for that. One, rigs have gotten a lot more efficient, to the point where each rig these days is doing the work of two or even three compared to 10 years ago.

But the other reason is that oil companies are much, much more focused on providing returns to their shareholders through dividends and share buybacks. And it hasn’t been on dramatically increasing what they’re paying their vendors, either.

Another reason is most of the small, junior oil companies that did a lot of that drilling have been gobbled up, and there aren’t many left.

Saskatchewan profited greatly from the model where companies spent every cent they could on exploration and drilling. Well, in 2022, that model is gone.

Labour

What I am hearing is that we’ve got a labour shortage. I spoke to a gentleman this morning who owns a dozen oilfield service companies, and he says there’s definitely a labour shortage. If we did get a lot of drilling rigs working, we couldn’t man them. Service rigs in particular are short.

For my advertisers, I’m making two versions of each ad – one saying “Hire our company!” and the other saying, “We’re hiring today! Apply now.” I figure in a few months time, up to a third of the ads on PipelineOnline.ca will be for help wanted.

Now, where are we going to get these people? I had a lengthy discussion with my best friend last night, a pipeliner from Preeceville whose now in senior management. He thinks there isn’t a lot of interest from younger people in working in the oilpatch, and those that do will value work-life balance over money.

I personally think that there’s always young guys who want to buy a fancy pickup and are willing to work for the big bucks to buy said truck. And with Newfoundland’s economy down the tubes, maybe we should be looking to attract people from out east again.

So I’ve always thought the way the oilpatch has overcome labour shortages in the past is with big cheques. I guess we’ll see which of us is right, because the oilpatch is not known for a good work-life balance. There are ways it could improve on that, but I’m not holding my breath.

Wind and solar

This past Tuesday night, at 10:45 p.m. MST, Alberta’s wind generation was producing 10 megawatts, 0.4 per cent of its rated capacity. Solar, of course was producing zero. When you add them up, wind and solar, that’s 10 megawatts our of 3005, or 0.3 per cent. Three one-thousandths of the total rated solar and wind capacity.

And yet the temperature was not -30 C in most of Alberta. Most of the temps were -17 to -27, with it colder in the north. The wind in southern Alberta just died off to single digits. But whatever the reason, it temperature, lack of wind, it makes no difference. Wind was producing 1.1 per cent of its rated capacity.

Why does this matter, and why am I following this so closely? SaskPower keeps telling us they’re going to be building more renewables – more wind, more solar. Alberta is already into this in a big way. They’ve built 26 wind farms and 13 solar plants. Their supposed solar and wind capacity should be capable of up to 2/3rds of all of Saskatchewan’s generating capacity, and yet, last night, they were producing almost zero.

How do we keep our homes lit and warm with zero?

It means, if Saskatchewan goes down this path, we have no choice but to back up every single megawatt of supposed wind and solar power with natural gas or coal generation. We may need to built nukes. But since we’re getting out of coal (BD Unit 4 shut down in December), that doesn’t leave us many options, does it?

 

Mexico

Mexico has decided to keep its oil to itself. Mexican oil is generally heavy oil, the same sort of thing we produce around Lloydminster. In fact, its specs are almost identical to Western Canadian Select and Lloyd Blend. Mexico was the second largest oil exporter to the US after Canada, but it’s slashing that this year and cutting them off completely next year.

It’s doing this because it would ship a lot of its oil to the US Gulf Coast, where it would be refined, and then bring back refined product. Now, with a new refinery opening, the country plans on refining all of its own oil.

The question is, will Canada, and Saskatchewan, be able to take advantage of it Mexico leaving the US market?

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If Biden hadn’t killed the Keystone XL pipeline for good, that pipeline, right now, would be about half built. By the time it would have been done, we would have had a direct route to the Gulf Coast refineries to supply them with Saskatchewan heavy oil. Now, maybe we can take advantage of the Oct. 1 opening of Enbridge’s Line 3 replacement, which added 370,000 bpd in export capacity. I don’t know if that will happen. But it sure would have been better for us if Keystone XL hadn’t died, again.

And if not Canadian oil, where will those refineries get their heavy oil? Venezuela? Not likely? I guess we’re going to find out.

Also, two Gulf Coast Refineries, each capable of a quarter million barrels a day, have recently shut down. I don’t know what that impact will be, but it will be something.

LNG

On the topic of the Gulf coast, I’ve spent a lot of time looking at it on Google Earth. You can’t swing a dead catfish without hitting an operational LNG export terminal. There’s four operating, five under construction, and another 16 approved, as of 2020.

We did have close to 20 LNG facilities under consideration at one point in Canada. The federal government has issued 24 LNG export licenses since 2011, but we haven’t completed one project yet.

If you spend time looking at Google Earth, you will find the Texas and Louisiana Gulf coast is littered with completed and operating liquified natural gas plants. While Canada dilly dallied over the last decade, and started building one big plant, the US has built enough to become the largest LNG exporter in the world this year, surpassing Qatar and Australia. There’s going to be new expansions at Corpus Christie, Plaquemines and Driftwood in Louisiana.

Sabine Pass, on the coast where Louisiana and Texas meet, has built six liquefaction trains. LNG Canada is working on two now and two later. Sabine Pass alone will be able to put out 30 million tonnes of LNG per year, and LNG Canada will do 14, then, some day down the road 28 million tonnes per year.

Last July, Quebec killed the Energie Saguenay LNG plant, which would have taken Western Canadian-produced natural gas, via the TC Energy mainline, and shipped it into the Atlantic basin, including Europe. That would be one of the two places experiencing an energy crisis this winter.

Now, Energie Saguenay would have taken several years to build, but eventually, we could have supplied our European allies with our ethically-produced natural gas.

Now, why do we care?

Ukraine

It turns out, history didn’t end in the 1990s.

Any day now, Russia could invade the rest of Ukraine, after having a slow simmering war there since 2014. Instead of rising up and telling the Russians we’re not going to put up with another ground war in Europe, Western Europe is increasingly dependent on Russia for its gas supply. The Nordstream 2 pipeline will make Germany even more dependent on Russian gas. You don’t tell the country that’s keeping your people warm they shouldn’t invade their neighbour, do you?

But if we were supplying LNG to Europe, and oil through the Energy East pipeline which was never built, wouldn’t that have made a difference?

And when it comes to Ukraine, my last name is Zinchuk, after all. My grandfather got on a boat at the age of 12 in 1930. The Zinchuks got the hell out of there just before Stalin decided in 1931 that Ukrainians didn’t need to eat, and millions starved.

Secondly, if we had built Energy East, and Energie Saguenay, and all these other projects, this energy crisis in China and Europe would be going cha-ching, for us. We’d be putting huge amounts of there money in our pockets. Instead, that money is going into the American’s pockets.

We’re facing the largest budget deficits in history right now, not just federally, but for most provinces. Do you think we could have used that money, now?

 

Brian Zinchuk is editor and owner of Pipeline Online. He can be reached at brian.zinchuk@pipelineonline.ca.

 

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