Canada's Oil Supply


All the better for Canada's oilpatch

Neo-dictatorships' actions rattle global investors

Jacqueline Thorpe, Financial Post

Published: Wednesday, January 10, 2007

Thank you, Venezuela, Russia and Belarus. The more these neo-dictatorships wreak havoc with their oil industries, the better Canada's oil sector looks, even though the meltdown in prices is probably giving every shareholder, driller and oilsands executive north of the 49th parallel a serious case of the hebejebes right now.
"Canada accounts for 56% of the world's investable oil reserves when countries with unfriendly investment environments or high security risks like Iraq are excluded," said Peter Buchanan, senior economist at CIBC World Markets.
With Venezuela and Russia both flexing their muscles yesterday, that 56% is looking mighty attractive.
Ramping up his socialist drive -- and likely driving his economy into the ground in the process-- Venezuelan President Hugo Chavez announced plans to nationalize the country's largest phone companies and utilities and said multibillion-dollar crude-oil projects should become state property.
While the details of the "mother of all revolutionary laws" were due to be spelled out today, the impact was immediate. Shares in Caracas plunged 19%, bond prices tumbled, the country's currency -- the bolivar -- changed hands at twice the official exchange rate and stock markets around Latin America buckled.
The White House pointed out nationalization has a "long and inglorious history of failure" and demanded compensation for any expropriations in the country where U.S. oil giants such as Chevron Texaco, Conoco Phillips and Exxon Mobil are working to extract crude from the Orinoco heavy-oil belt.
Halfway across the world, meanwhile, Russia cut off its oil supplies to Europe that passed through Belarus in a long-simmering dispute over transit fees and refinery payments, and mused about cutting production after talks between the two countries failed to resolve the dispute.
The news did little to halt a slide in the price of oil, which settled US45? lower at US$55.64 a barrel in New York yesterday to its lowest since June 2005. Prices have slid 12% this year.
Warm weather has swelled supplies and hot money in the form of hedge funds and institutional investors may also be souring on the commodity amid expectations of slowing global growth.
But the fact the vast majority of the world's oil supplies is controlled by Arab princes and increasingly unreliable and erratic leaders should put a floor under the price and continue to make Canada's oilsands an attractive proposition, analysts say.
Andrew Neff, senior energy analyst at Global Insight in Washington, says that while Canada may be too far away to be a source of energy for Europe, as European countries and companies search outside of Russia for supply, competition will intensify and prices will rise.
"I think what you're going to see is ... different refineries in Germany and central Europe either being forced to dip into inventories or to look to crude stocks via the Mediterranean or overland via rail," he said.
"Even if Canada is not taking oil from Russia [as customers] you're taking oil off the world market."
You can be sure that whatever Russia and Venezuela do with their increasingly nationalized oil sectors, they will not be as efficient or productive as with investment from the private sector or big multinational oil majors. Less investment means less oil and that may also be a support for prices.
Mr. Buchanan says Russian oil production rose only 2% last year, a far cry from the initial 10% rates in the heady days of surging investment after the breakup of the Soviet Union in the 1980s.
The thing about Canadian oil however, is that it is expensive to produce as all non-conventional oil is, Mr. Buchanan says. Sakhalin II, off the coast of Russia, is some US$10-billion over cost while deep-sea drilling in the Gulf of Mexico has been known to go 400% over budget.
But with conventional supplies increasingly risky, investors will likely be willing to pay more to develop these unconventional sources, including Canada's oilsands.
Oil prices may have further to drop. The rally certainly had a speculative whiff about it, but as long as Mr. Chavez and Mr. Putin continue to mess around, Canada's oilsands will remain a haven of stability.
I think it is about time we started to brow beat the yanks for some concession in trade using our resources as leverage. When the Saudis get a cold the US runs with a hankie. Silencing the "Canada is a terrorist haven, lax on drugs, American coat tails rider" gits would be nice too.

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