Low Oil Prices Are Killing the Fracking Industry, but the Tar Sands Will Be Fine (for Now)
The current slump in oil prices could spell the end of North American fracking, but will price volatility mean trouble for the more financially stable tar sands?
This article first appeared on VICE Canada
The price of oil—specifically West Texas Intermediate crude, the gold standard in oil pricing—has been falling steadily since June of last year, and is currently sitting around $50 per barrel. That's a far cry from the record high of 2008, when it topped out at $147 per barrel. The 2008 price surge saw hysteria about moving North America toward energy independence reach fever pitch; John McCain even called it a "national security issue" during his presidential campaign. It's also quite a ways from the $65-per-barrel point at which fracking is economically viable. That low price of oil is a huge problem for the burgeoning fracking industry, which is largely composed of small, overextended businesses that can't afford to wait out a dip in profits.
In the last decade, fracking (short for hydraulic fracturing) has built up quite a reputation for itself in North America. While it was used as early as the 1940s, fracking didn't come into its own until the 21st century's relatively high oil prices and the fear of an incipient global oil shortage made the costly method more appealing. It's currently a much larger industry in the US, but companies have been making trying—with varying degrees of success—to get at the frackable shale oil and gas in Canada, especially in Quebec and New Brunswick.
Since the boom began, there's been growing opposition from environmental activists and from people living near fracking sites. They allege that fracking comes with a series of negative effects, including contaminated and flammable water, myriad health problems, and small earthquakes. Indigenous activists have been particularly vocal in Canada, and have been instrumental in stopping fracking from becoming the booming business here that it already is in the US.
Members of the Mi'kmaq first nation organized in 2013 to prevent oil giant SWN from conducting seismic testing on Mi'kmaq land, a necessary step before the company could begin fracking there. The RCMP showed up, heavily armed and dressed for action, and the confrontation turned violent—which protesters and witnesses attributed to the RCMP, though law enforcement officials later claimed the protesters had Molotov cocktails.
After months of such actions, SWN decided to stop its push to frack in New Brunswick and the province placed a ban on the practice. Then, last month, in another blow to fracking in Canada, Quebec Premier Philippe Couillard announced that he won't pursue shale gas development—though he hasn't yet acted to formally ban fracking. And New York Governor Andrew Cuomo, has banned the practice, possibly signallng a new, less frack-friendly day in the US.
And while the hard-won victories of aboriginal and environmental activists are nothing to overlook, the current dip in oil prices might be a final nail in the coffin (for now, at least) for the practice that was so recently considered a savior of North American energy interests.
"If the price of oil stays low, then high-cost energy is in trouble," said Terry Lynn Karl, a Stanford professor of political science specializing in oil-exporting countries. "And that means tar sands, and it also means most frackers."
However, most tar sands business isn't really in immediate danger, Karl told me.
"Tar sands are a long-term scenario because there is substantial oil involved in tar sands," she wrote in an email. "Fracking varies considerably in cost, investment, and borrowing among the frackers. Where they have borrowed heavily, especially in junk bonds, they are in trouble, which gets worse the longer the price is low."
The financial difference between fracking and tar sands is that most tar sands projects are undertaken by large companies with longer timeframes for profitability, whereas most fracking operations are run by small companies, many of which are looking to cash in immediately.
"[In] fracking, you produce your oil and you need to get it out of the ground fast, you need to sell it fast, you need to reinvest fast," Karl said. "Oil sands—once you get an oil sands project going, it can just kind of continue, because it's better to produce than not produce."
In fact, both Karl and CIBC chief economist Avery Shenfeld agree that the reason (or at least a major reason) Saudi Arabia has refused to prop up the price of oil is to drive its American fracking competition out of business. Many close to the industry expected—or hoped—OPEC would reduce its oil production following its November meeting, thereby reducing the supply and, hopefully, increasing the price of oil for all sellers. That hasn't yet happened, and it's widely believed Saudi Arabia wants to put pressure on the many small firms that make up the American shale oil and gas industry.
"The biggest price drop [in the price of oil] came after Saudi Arabia and the other OPEC countries announced that they would not cut production, as some had hoped they would, to try to support the price," Shenfeld told me.
One quarter of Canada's export revenue comes from the oil and gas industry, and the high prices oil has fetched for most of the 21st century have led to a national economic dependence on the product. But most of that comes from tar sands, and as problematic as they may be, the profitability of tar sands projects isn't quite as precarious as fracking.
Although Karl thinks "anybody who predicts the price of oil is a fool," she was willing to say she suspects the price will remain either depressed or volatile for the foreseeable future. Either of those outcomes presents a problem for the small companies that make up the bulk of American frackers.
If the volatility of oil prices skews low over the next few years, that could have serious consequences for tar sands business as well as fracking. In the Globe and Mail, Jeff Rubin envisions Canada a few years into a $40-per-barrel future: a startlingly low number, but as the current situation should remind everyone, price volatility is bound to involve some startling numbers.
Rubin writes that in this hypothetical future, the current "have" provinces will lose out to Ontario and the other non-oil-producing regions. Provinces that have seen sluggish growth during times of high oil prices will, with low oil prices and the depressed loonie Rubin assumes will accompany them, once again be attractive as manufacturing sites for international companies.
Of course, Rubin is no more capable of seeing the future than Karl, Shenfeld, or anyone else. The only things we can know for sure about the future are that the price of oil will be uncertain for some time, and that that uncertainty will seriously impact the North American energy sector.
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