 | | Todd Crawford
Economist
Provincial Forecast |
On April 20, 2010, an oil well blowout resulted in a catastrophic explosion of the Deepwater Horizon oil-drilling platform roughly 60 km off the Louisiana coastline. The explosion killed 11 people, injured 17 more, and is now counted as the worst oil spill ever in U.S. controlled waters. While it is unfortunate that opportunities arise out of disasters such as this, the forthcoming review of offshore drilling practices could present a unique chance for Canadian oil sands producers. Only three potential outcomes are likely following the conclusion of this review.
First, the review may determine that current regulations are sufficient to ensure safe development of resources in deepwater Gulf drilling. This option is particularly unlikely – public outcry has been monumental, as this disaster has placed a heavy burden on residents and local business. The tourism and fishing industries, both high-profile industries along the Gulf Coast, hang in limbo and leave thousands without work. Add to this the near continuous news coverage highlighting the lost jobs, lost government revenues, and environmental carnage, and inaction by politicians is really not an option at this point.
Equally unlikely is the opposite end of the spectrum, where Congress endorses a complete ban on offshore drilling. According to the U.S. Energy Information Administration, at 1.6 million barrels per day, offshore production in the Gulf accounts for about 30 per cent of domestic oil production. To stop production overnight would immediately create a supply crunch, push oil prices higher, and potentially, slow the economic recovery. Furthermore, Gulf States depend on offshore development; the industry directly creates thousands of jobs, and when you factor in indirect effects, oil and gas extraction is probably more important to their economy than either the fishing or tourism industries. The fact that the Presidential order declaring a moratorium on offshore drilling was challenged by local businesses in court highlights just how important the oil and gas sector is to residents along the Gulf coast. Politicians are loath to implement any measure that creates job losses, and if you consider just how dependent the U.S. economy is on oil, it seems safe to say that offshore drilling will continue for the indefinite future.
Thus, the most likely outcome is heightened regulations that ensures such devastation never re-occurs. Potential regulatory changes could include a secondary well drilled in tandem with the primary well to contain spills in the case of another similar incident. Regardless, greater governmental oversight is a given, which means higher extraction costs. Higher costs will shift some development away from the Gulf, and have the U.S. searching for oil supply elsewhere. With Canadian production set to expand 1.9 million barrels a day over the next 15 years, we could easily fill that void.
The U.S. has an on-going goal to secure its energy future, and for right now, that means securing a reliable source of oil, which mostly comes from outside their borders. It is a fact that 85 per cent of global oil reserves are controlled by 10 countries, and the U.S. does not necessarily have access to all of them.1 Some (Iraq and Nigeria) are having difficulties in expanding their production because of war and conflict. Others (Iran and Venezuela) have political regimes which the U.S. would rather avoid doing business with. Another (Russia) already has China on its border making it, rather than the U.S., a more attractive long-term partner in oil production. Furthermore, of the top 10 oil-reserve holding countries, Canada is the sole region where oil resources are not owned by the State.
At 11.7 mmbd, the U.S. imported nearly two-thirds of the crude and petroleum products they consumed last year. Given that the U.S. consumption will stay elevated for many years, and knowing that they don’t have access to the majority of the world’s remaining reserves, the Gulf oil spill could help to improve American sentiment towards the development of Canadian oil sands. Recent rumblings by various state and federal government representatives to impose environmental restraints on imported crude may begin to subside. This is not to say that the environmental issues surrounding oil sands development are less than those related to deep water drilling, indeed, some would argue they are more severe. But, from an American point of view, it becomes a way for them to export that risk, while also ensuring their oil needs are met. Assuming we can manage our own environmental concerns, it means more investment, more oil production, higher government revenues, and a long-term source of high-paying jobs for Canada.
1By proven reserves, the top ten countries in the world are, in order: Saudia Arabia, Canada, Iran, Iraq, Kuwait, Venezuela, United Arab Emirates, Russia, Libya, and Nigeria.