Now that Premier Danielle Smith’s favourite foreign autocrat appears to be on the brink of transforming himself from a successful “peace candidate” into a war president, it would behoove folks here in Wild Rose Country to remember why American-imposed regime change in Venezuela is bad news for Alberta.
Anyone who has paid even casual attention to the political career of U.S. President Donald J. Trump is unlikely to be surprised by his sudden transformation. With his threats ignored by Russian President Vladimir Putin and his begging by the Norwegian Nobel Committee, and with his popularity plunging at home, of course Mr. Trump was going to turn to beating the crap out of a small Latin American country. This is not exactly without precedent in U.S. presidential history.
But who knows? If the Venezuelans put up a fight, it might even give Mr. Trump the excuse he needs to cancel the U.S. mid-term elections next year and make Americans feel great about not getting to see the Epstein client list!
But never mind that. What we really need to talk about right now is why this matters to Alberta.
Almost seven years ago, I warned in this space that if the wag-the-dog scheme Mr. Trump was promoting in Venezuela were to come to fruition, cheered on by then foreign affairs minister Chrystia Freeland and the rest of the Trudeau Government, the potential for the Alberta oilpatch would be dire.
The problem then appeared to be that the Americans’ favoured replacement for Venezuelan President Nicolas Maduro, the Obama lookalike Juan Guaido, had promised to end the Maduro Government’s policy of requiring the national oil company, Petroleos de Venezuela, to hold a controlling stake in any joint venture with a foreign corporation.
“That would open the door to heavy U.S. corporate involvement in the vast Venezuelan oil reserves, said to be the largest in the world, and which include oilsands similar in size to Alberta’s,” I wrote. That, in turn, would end the U.S. blockade of Venezuelan oil, an ongoing part of Washington’s bipartisan campaign to topple the Maduro Government.
This was potentially a big problem for Alberta because Venezuela is conveniently located just across the Caribbean Sea and the Gulf of Mexico from the U.S. refineries along the Gulf Coast of Texas, where a lot of Alberta’s low-quality bitumen ends up nowadays. The cancelled Keystone XL Pipeline project was intended to make it easier to ship even more Alberta bitumen to Texas.
In other words, regime change in Venezuela would likely result in the U.S. market, with limited capacity for refining heavy oil, being flooded with cheaper heavy oil from the Orinoco Belt.
After that, it would just be a matter of supply and demand. A big increase in supply, conveniently located for inexpensive ocean transfer, would depress the price fetched by low-quality oilsands bitumen from Alberta, which already has a relatively high breakeven cost.
“Given the size of Venezuela’s reserves, the low prices could last for a very long time – possibly until the planet’s transition from a fossil fuel economy is complete,” I wrote back then. “U.S.-owned fossil fuel companies that have resisted building refining capacity in Alberta because they don’t want to compete with underused capacity at their Gulf Coast operations will have no problem replacing their Canadian supplies with cheaper Venezuelan crude. They have no loyalty to any jurisdiction, or to any notion of ‘ethical oil,’ only to the best price and the best return on investment.”
So that was the potential situation in February 2019. What’s changed since then?
Not much. Mr. Maduro is still president of Venezuela, although he’s promised to make it easier for the U.S. to have a bigger stake in his country’s oil industry. Mr. Trump is president of the United States again and he doesn’t care about Mr. Maduro’s concession. He wants a fight to prove he’s still the boss of something. It looks very much as if he will launch attacks on Venezuela within days, if not hours.
Meanwhile, Alberta oilsands bitumen is still expensive to process and ship. U.S. heavy oil refinery capacity is still limited.
As a result, one oil market analyst wrote Friday, “These developments cast a long shadow over Canadian pipeline projects. The timing of any regime change in Venezuela could materially affect the viability of new Canadian oil infrastructure investments. Industry insiders are watching closely, mindful of the fragile balance between supply and demand.”
As an aside, I am always astounded at how difficult it is for Alberta oil industry enthusiasts to understand the iron law of supply and demand, a relatively simple concept as economic fundamentals go.
“Timing is everything,” explained reporter Al Salazar. “By the time a new pipeline comes online, will Venezuelan production have already increased? That’s a real risk for those investing billions to unlock more Canadian barrels. This uncertainty adds another layer of complexity to an already contentious debate over Canadian pipeline expansion.”
I’ll say! Pipelines nowadays are the kind of enterprise that put the mega in megaproject. Just look at the cost of the Trans Mountain Pipeline expansion, which the Trudeau Government kindly built and gifted to Alberta and for which it was never thanked, which the last time I looked was said to be something in excess of $34 billion!
Ask yourself, how long would any new pipeline have to turn a profit to justify a return on such a massive investment?
With cheap Venezuelan heavy oil flooding the Gulf Coast refineries, China electrifying as fast as it can and helping the Third World do the same, and Mr. Trump leaning toward ending sanctions on Russia and allowing more cheap oil to pour from there into Asia, you don’t have to be a professional energy analyst to see why no private company is likely to invest in another pipeline from Alberta. The only way another pipeline from Alberta is ever going to be built is if it’s paid for by Alberta taxpayers, or Canadian taxpayers if Ms. Smith’s sly separatist threats gain any traction in Ottawa.
Our tarsands oil is not just expensive to ship, it’s expensive to extract and process. Thanks to geography, Venezuela’s is cheaper. Saudia Arabia’s still-abundant supply of sweet crude is probably the cheapest of all, ethical or not.
So Saudi Arabia will probably pump the last barrel used on earth before the oil market goes the way of the market for beaver pelts from Rupert’s Land. Higher cost producers will be priced out of the market one at a time as demand for oil declines.
Major North American oil companies have understood for a long time that, one way or another, the Venezuelan oil market was going to come back on stream. They almost certainly also understand that as a producer of relatively expensive oil, Alberta will be one of the first to be priced out of the market.
They don’t care, although they’ll be happy to take all the tax breaks Ms. Smith’s government throws at them in the meantime. Why do you think they keep shutting down their offices and laying off staff in Calgary?
Likewise, Mr. Trump doesn’t care. He says Canada doesn’t have anything he needs – and that includes Alberta oil. Sure, he’ll pose for a selfie with Ms. Smith, but I doubt he’d return a phone call from her. Chances are, replacing Alberta heavy oil with Venezuelan heavy oil is now part of his administration’s plan.
Albertans who want our oil industry to endure, let alone prosper, should pray that Mr. Trump doesn’t manage to change the government in Caracas. Otherwise, we’ll soon be left with plenty of oily sand that nobody wants. We still haven’t run out of beavers whose pelts no one wants any more either.
