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How Alberta Could Counter Low Oil Prices

by John Brian Shannon | December 28, 2015

Through no fault of their own, the Alberta government headed by Premier Rachel Notley is facing economic crisis due to the lowest global oil prices in years, and with lower prices ahead it goes without saying that Premier Notley and her new government need to either (a) cut spending or (b) boost government revenue.

If boosting government revenue is chosen, economists know there are only three ways for provincial governments to boost revenues;

  • Raise taxation revenue
  • Raise non-taxation revenue
  • Transfers from the federal government

Let’s forget about putting any more holes in the Alberta economy via increased taxation as the province’s economy is under enough stress since the oil price crash.

Let’s also rule out the return of higher oil prices as oil prices are settling in for a long term run in the $30.-50. per barrel range. Why rule that out?

Simple. Millions of barrels of formerly sanctioned Iranian oil are about to hit the market, hard

For nearly a decade, Iran was sanctioned by Western nations and able to sell only small amounts of oil in the global marketplace. But the sanctions didn’t stop Iran from continuing to develop its oil industry, nor did it stop Iran from buying every spare oil tanker and storing their crude at sea, and in thousands of oil storage tanks on land until sanctions ended.

All of which is about to hit the global oil market.

‘Ready to Ship’ is perhaps an understatement as the sanctions scored a direct hit on the Iranian economy, consequently the country is very motivated to resume normal trade.

And let’s not forget the ‘wellhead price’ of oil in all of this

At the Alberta oil sands, the average extraction price for a barrel of crude oil is $56.20. That’s the average price. At some locations the extraction price can surpass $90./bbl.

In Saudi Arabia, still the world’s largest single oil producer, the wellhead price ranges between $14./bbl and $24./bbl (for #3-4 crude) and they can stand $40./bbl oil prices indefinitely. The Saudi producers don’t care how much the oil speculators are making, as long as the price remains somewhat over $24./bbl, they’re seeing profit.

But in Iran… wait for it… the wellhead price ranges from $1./bbl to $21./bbl and they have the world’s fourth-largest proved oil reserves.

Cost of oil production

Cost of oil production (Due to sanctions at the time this chart was created Iran wasn’t included in the data) Image courtesy of Der Spiegel

Most Alberta oil may be best termed #4 (sour) on the pH scale, tar sands oil can only be called #4.5 or #4.75 and all Alberta crude oil is so sour that it must be blended with liberal amounts of Saudi #3 (sweet) or West Texas Intermediate before any refinery will accept it.

Much of Iran’s oil is of the #3 (sweet) variety, but unlike the situation in other oil-producing nations where most of the #2 (sweet) crude oil was extracted long ago, Iran ranks a close 2nd to Saudi Arabia in proved reserves of #2 crude oil — a perfect match to blend with Alberta’s sour crude.

Therefore, plenty of sweet and cheap-to-produce Iranian oil is about to arrive on the scene and I wouldn’t be surprised to see oil dipping to $28./bbl for a week or two once Iran’s oil exports begin impacting the market.

With the foregoing in mind, let’s look at three ways to boost the Alberta economy:

1. Alberta can still retain its ranking as an energy superpower in the coming decade of depressed oil prices by adding hundreds of wind turbines to the many wind corridors in the province

The  Highway 2 corridor starting at the U.S. border heading north to Edmonton (and perhaps as far north as Athabasca) consists of rolling farmland with excellent wind potential. Any Albertan can tell you about the year-round winds native to that corridor, although they may not refer to it as a ‘wind opportunity’ in the same glowing terms as a wind turbine salesperson might…

Wind Farm Installation in Germany

Typical Wind Farm Installation in Germany. Image courtesy of Phillip May.

Farmers can benefit by allowing wind turbines to be installed on their land.

Each wind turbine requires one acre of land (including service road) which makes that land unavailable for crops, therefore, utilities typically lease the land at $4000. per year/per unit.

Some farmers may allow five, ten, or any number of wind turbines on their property.

And good for them! They lose the ability to grow crops or graze their livestock on a fraction of their land, but unlike cash crop income, the wind tower lease payments are guaranteed regardless of the drought or flood situation.

And that non-weather-dependent annual revenue helps to stabilize farm income.

GE Space Frame Tower

GE Space Frame Tower is a complex metal frame covered by fibreglass fabric. Image courtesy of GE.

The typical wind turbine produces 1 MegaWatt(MW) of clean electricity and cost about $1 million apiece, although the newer (and more costly) wind turbines produce 2 MW.

Day or night, wind turbines produce reliable, clean electricity especially when situated in wind corridors and installed atop 100-200 metre towers. (Taller towers get better wind)

By selling GigaWatts(GW) of clean electricity to residents, businesses, industry, and via electricity exports to British Columbia, Saskatchewan, and to the northern United States, Alberta would retain its place as an energy superpower — regardless of the global oil price.

And we must always heed the words of Saudi Oil Minister, Ali Al-Naimi, “The Stone Age didn’t end on account of a lack of stones, nor will the Oil Age end on account of a lack of oil.”

The end of oil is coming. We need to begin planning for it. An energy grid that meets demand with 50% natural gas and 50% renewable energy and is strongly geared towards electricity exports is in our best economic and employment interests. The sooner we begin to walk that path, the farther ahead of other regional economies we’ll be.

Or, Alberta could drop the ball completely and become an energy importer from places like British Columbia, Saskatchewan, and the northern U.S. states. That might be a little too ironic for some Albertans.

Jobs created per energy type. Image courtesy of IRENA.

Power plant jobs created per energy type. Image courtesy of IRENA

A great way to create thousands of good-paying jobs in Alberta, not only installer jobs but wind turbine and tower manufacturing jobs, is by negotiating with wind turbine manufacturers, and separately, wind tower manufacturers, to build assembly plants in Alberta.

If all the stars aligned, the province could become the defacto capital of Canada for wind turbine and wind tower manufacturing.

And the province has the potential to become an important centre for wind power technologies, by providing the proper funding to the Northern Alberta Institute of Technology (NAIT) and the Southern Alberta Institute of Technology (SAIT).

There isn’t a reason good enough to prevent Alberta from installing 1000 wind turbines per year within its provincial boundaries AND selling another 1000 wind turbines and towers per year to other jurisdictions in Canada. That’s just the Canadian market, and quite separate from the true north strong and free there’s a big windy world out there.

More jobs, guaranteed income for farmers, cleaner air via clean electricity generation, a better economy due to massive electricity exports and higher tax revenues… what’s not to like about wind power in Alberta?

2. Natural Gas as a baseload energy fuel

Due to historical factors, such as the historically low cost and low technology required to produce heat and electricity from coal, (and also due to the low price of massively-subsidized nuclear power) natural gas became a sort of ’boutique’ fuel used to produce power at so-called ‘peaking’ power plants.

Henry Hub gas price to January 2016.

Henry Hub gas price to December 2015. Prices are projected to continue dropping. (At less than $2.00 natural gas becomes competitive with coal-fired power generation) Image courtesy of Plattts

Whenever the coal or nuclear power plants couldn’t meet peak demand, say during summer afternoons when every air conditioning unit was working at maximum capacity, peaking power plants could quickly ramp-up to meet peak demand.

Natural gas power plants can ramp-up or down in minutes, as opposed to coal-fired power generation or to nuclear powered generation, which can take hours or days to ramp-up or down.

With much lower natural gas prices (below $2.00 on the Henry Hub index as of 12/28/15) a huge window of opportunity exists for non-centralized natural gas-fired power generation to enter the energy market as an equal player instead of as a pinch-hitter.

Due to ever-stricter clean air standards and the concerns surrounding global warming, and the obscene water usage of coal-fired and nuclear power plants, natural gas looks to replace coal and nuclear saving billions of subsidy dollars in the process.

Water usage by type of power plant.

Water usage by type of power plant.

Use a cleaner fuel for a cleaner burn

Modern natural gas-fired power generation releases less than half the amount of CO2 as compared to coal-fired power generation.

And that’s just the story on Carbon Dioxide emissions.

It’s the other emissions that are the real problem with coal-fired power generation; It’s things like airborne mercury and heavy metal vapours, sulfur dioxide, oxides of nitrogen and particulate (smoke, ash, and soot) that are the real nasties.

Then there are the thousands of tons (Alberta only) or millions of tons (globally) of fly ash that must be transported and safely buried annually, far from aquifers.

The good news is that natural gas burns up to 1,000,000 times cleaner than brown coal (lignite) and up to 10,000 times cleaner than the cleanest-burning grade of coal (anthracite).

“Each stage in the life cycle of coal—extraction, transport, processing, and combustion—generates a waste stream and carries multiple hazards for health and the environment.

These costs are external to the coal industry and are thus often considered “externalities.”

We estimate that the life cycle effects of coal and the waste stream generated are costing the U.S. public a third to one-half of a trillion dollars annually.

Many of these so-called externalities are, moreover, cumulative.

Accounting for the damages conservatively doubles to triples the price of electricity from coal per kWh generated, making wind, solar, and other forms of nonfossil fuel power generation, along with investments in efficiency and electricity conservation methods, economically competitive.” — Harvard Medicine | Full Lifecycle of coal

As for matching up with wind power, there isn’t a better partner than natural gas-fired power generation. In perfect harmony, natural gas can ramp-up and ramp-down on a minute-by-minute basis to meet Alberta’s electricity demand and can add capacity to electricity exports.

3. Promote Alberta Tourism in a Massive Way

Until now, provinces like British Columbia, Ontario, and Quebec have dominated the Canadian tourism market. And millions of tourists visit British Columbia without ever knowing about the jewel of a province next-door. That must change in 2016.

BC and Alberta must become partners in attracting tourists by launching complementary tourism campaigns in foreign countries — making it seem to prospective tourists that there are so many reasons to visit Western Canada that they decide to visit both provinces and forego travelling anywhere else.

In what other country can you take a cruise ship to a major cosmopolitan city like Vancouver, golf in the morning, ski in the afternoon, enjoy fine dining at night, then hop onboard a scenic VIA RAIL train to Banff, Alberta?

There you can enjoy ice-skating, snowboarding and cross-country skiing or nature hikes, and of course, more fine dining.

Fly-fishing in Alberta.

Fly-fishing in Alberta. Image courtesy of TheRealBanff.com

Don’t forget fly-fishing on the Bow River. Or golfing in Kananaskis Country? Maybe dig up some dinosaur bones near Drumheller.

How about taking in some of the many festivals in Edmonton or Calgary?

Or stay at a working ‘Dude Ranch’ in Bragg Creek rounding-up cattle and wearing your best cowboy hat.

Horseback riding in Alberta

Horseback riding in the Alberta Rockies.

Each $1.00 spent to boost tourism typically returns a minimum of $6.00 making investments in tourism de rigueur for governments wanting to provide jobs and increase government revenues.

Compared to energy megaprojects which take years to ‘break-even’ investment returns from tourism typically happen within 24 months.

Banff, Alberta in Winter

Banff, Alberta in Winter

Of the easiest and surefire ways to stimulate the Alberta economy, this is likely it.

Tourism requires a relatively small annual investment, a medium-sized commitment from the government, and features a 6-to-1 payback within two years. Not bad.

Although not as large as other segments of the Alberta economy, tourism pays back quickly and requires only moderate effort on the part of the government.

Snowboarding Alberta.

Image courtesy of Travel Alberta

I hope Premier Notley makes tourism one of the first priorities of her government in 2016 — even as she works out longer-term and higher reward arrangements to secure a better energy future for Alberta.

Related Articles:

How to make lower oil prices work for the environment

How to make lower oil prices work for the environment | 01/12/14
by John Brian Shannon John Brian Shannon

Oil prices crashing in 2014. Image courtesy of Newstalk770.com

Oil prices crash in 2014. Image courtesy of Newstalk770.com

As oil prices continue their dramatic slide, the U.S. and Europe could use a bit of progressive energy policy to put some political pressure on North Korea, Iran and Russia, while adding some momentum to the adoption of renewable energy.

All that the U.S., Canada and Europe needs to do to punish North Korea, Iran and Russia over recent political disagreements would be to ratify a unified carbon tax of (for example) $20.00 per tonne of CO2 emitted — which rate is about half of the externality cost of CO2 emissions.

A carbon tax would cost the worst polluters like coal (heavily) medium polluters like oil (somewhat) and natural gas the lowest fossil polluter (much less)

Especially over the long term this kind of taxation would depress oil demand and make other energy somewhat more attractive by comparison, thereby lowering coal and oil production and profits for Iran and Russia.

I’m certainly not proposing a level of subsidies equal to that enjoyed by the fossil fuel industry which will top $600 billion dollars globally for 2014

I’m merely proposing that the (tiny, $20/tonne) carbon tax revenue be used to fund renewable energy projects where they make economic sense, for (reactive) carbon damage mitigation and proactive energy efficiency programs.

In the grand scheme of things, the additional cost of approximately $1.00 per barrel to the price of oil via a ($20 per tonne of CO2) carbon tax is inconsequential when the per barrel price has fallen by $40.00 per barrel in the past 12 months.

Crude oil price from Dec 5 2013, through Dec 5, 2014

Crude oil price from Dec 5 2013 — Dec 5, 2014. Image courtesy of www.infomine.com

The cost of a $20 per tonne of CO2 carbon tax at the gas pump?

The price of fuel at the pumps would increase by approximately $.03 per US gallon. The accumulated carbon tax revenue stream could be used to fund ongoing zero-carbon energy solutions and energy efficiency programs.

By slightly increasing the cost of fossil fuels via carbon taxation as the per barrel cost of oil continues to fall, natural gas with it’s lower carbon footprint would surge, renewable energy adoption would increase, and the West would show real progress and concomitantly lead the world towards a cleaner environment.

To summarize:

By initiating a small $20.00/tonne carbon tax we would reap the following benefits:

  1. Lower oil revenues for Iran and Russia/increased energy costs for North Korea.
  2. Relative to oil and coal, an increased demand for (the infinitely cleaner) natural gas.
  3. Gives both non-polluting renewable energy and energy efficiency a mild subsidy boost.
  4. Cleaner air and year-on-year lowered health care costs.
  5. Lowered acid rain damage to concrete infrastructure — ‘concrete spalling’ and a lower level of agricultural crops damage.
  6. Preserve rising domestic electric vehicle and hybrid/electric vehicle sales and the related jobs.
  7. Adds plenty of energy jobs to the economy via ongoing year-on-year (carbon tax funded) renewable energy manufacturing and installations.

And I get that Russia and Iran would eventually ramp-up their natural gas production to counter the lower oil price. But it would be very inconvenient for their economy over the next 24 months.

We all breathe the same air, and reducing our high-carbon-fuel use benefits us all (natural gas, instead of oil — renewables, instead of coal) no matter where it is being burned on the planet.

When we use energy policy as a judicious diplomatic lever, that too, can be a benefit.

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Natural Gas, Friend or Foe of the Environment?

Natural Gas, Friend or Foe of the Environment? | 24/10/14
by John Brian Shannon John Brian Shannon

While Natural Gas has been touted as the ‘bridge fuel towards a clean energy future‘ three major drawbacks have caused concern in recent months. The first is, of course, the negatives surrounding natural gas fracking which has been well covered by the media and I’m not going to repeat all that has been said on that account.

Rather, I will concentrate of the largely unreported issues of massive methane leaks escaping natural gas well heads, called ‘fugitive emissions’ and the practice of ‘flaring’ at natural gas wells.

Over a 100-year timeframe, methane is about 35 times as potent as a climate change-driving greenhouse gas than carbon dioxide, and over 20 years, it’s 84 times more potent.

Natural gas drilling could emit up to 1,000 times the methane previously thought, possibly significantly increasing the greenhouse gas footprint of the production of natural gas, the study shows. — Climate Central

There’s no doubt that natural gas has the capacity to be a cleaner fuel than coal and the various fuels that can be obtained from crude oil such as gasoline and diesel. But it isn’t.

So, what’s the problem?

The problem is two-fold. Problem number one is methane leakage at natural gas wells, and problem number two is the ongoing practice of natural gas flaring at well heads, distribution centres and gas processing facilities.

Methane emissions from improperly sealed natural gas wellheads, combined with natural gas flaring near well heads, dramatically lowers the advantage of ‘clean’ natural gas as compared to ‘dirty’ coal and crude oil.

Natural gas as a means to produce electricity is being hailed by the Intergovernmental Panel on Climate Change as the fuel that can act as a “bridge” between carbon-heavy coal and zero-carbon renewables, helping to reduce humans’ impact on the climate. 

The idea is that burning natural gas involves fewer greenhouse gas emissions than burning coal. The IPCC in its Working Group III report says natural gas as a bridge fuel will only be effective if few gases escape into the atmosphere during natural gas production and distribution. —

Natural gas has the potential to be 1 million times cleaner than coal or crude oil based fuels if gas industry best practices are employed. But the present situation is so bad that (low carbon) natural gas airborne emissions are almost on par with (high carbon) coal and crude oil airborne emissions — once you factor everything into the equation.

A typical natural gas drilling rig. Credit: EPA

A typical natural gas drilling rig. Photo Credit: EPA

Why not properly seal the well heads?

Cost. Many gas drilling and extraction companies would like to hermetically seal their well heads to lower the death and injury rates of their workers due to raw gas exposure, to enhance overall gas recovery, decrease the waste of an incredibly useful fuel — and to lower emission levels thereby enhancing the reputation of gas as a 21st-century clean energy solution.

The reason companies won’t spend the extra ($100,000 on average) per well head (to fully encase the pipe in concrete slurry) is that shareholders don’t want lowered dividends. Nor do companies want to become less competitive as compared to the ones that don’t seal their well heads. To put this in some kind of perspective within the gas industry, some gas drilling/extraction operators have hundreds of well heads, while others only have tens of well heads.

At the end of it all, it turns out that improperly sealed natural gas wells and natural gas flaring are negating almost all of the benefits of super clean, natural gas — as compared to coal and crude oil sourced fuels.

Feel free to facepalm now.

Why not stop flaring at natural gas well heads?

Every natural gas well head must deal with pressure variables and with the normally-occurring contaminants found in natural gas. This is done onsite in a process known as flaring which is an incredibly toxic way of dealing with the problem of temporary pressure spikes and natural gas contaminants.

Flares burn off excess methane at an oil and gas field. Credit: Pacific Northwest National Laboratory

Flaring burns off untreated methane at oil and gas refineries, landfills, and other industrial plants. Flares are used to control release of methane into the atmosphere but recovery options are also available that capture methane for use as fuel. Photo Credit: Pacific Northwest National Laboratory

Contaminants in raw natural gas

Raw natural gas typically consists primarily of methane (CH4), the shortest and lightest hydrocarbon molecule. It also contains varying amounts of:

The raw natural gas must be purified to meet the quality standards specified by the major pipeline transmission and distribution companies. Those quality standards vary from pipeline to pipeline and are usually a function of a pipeline system’s design and the markets that it serves. In general, the standards specify that the natural gas:

  • Be within a specific range of heating value (caloric value). For example, in the United States, it should be about 1035 ± 5% BTU per cubic foot of gas at 1 atmosphere and 60°F (41 MJ ± 5% per cubic metre of gas at 1 atmosphere and 15.6°C).
  • Be delivered at or above a specified hydrocarbon dew point temperature (below which some of the hydrocarbons in the gas might condense at pipeline pressure forming liquid slugs that could damage the pipeline).
  • Dew-point adjustment serves the reduction of the concentration of water and heavy hydrocarbons in natural gas to such an extent that no condensation occurs during the ensuing transport in the pipelines
  • Be free of particulate solids and liquid water to prevent erosion, corrosion or other damage to the pipeline.
  • Be dehydrated of water vapor sufficiently to prevent the formation of methane hydrates within the gas processing plant or subsequently within the sales gas transmission pipeline. A typical water content specification in the U.S. is that gas must contain no more than seven pounds of water per million standard cubic feet (MMSCF) of gas.
  • Contain no more than trace amounts of components such as hydrogen sulfide, carbon dioxide, mercaptans, and nitrogen. The most common specification for hydrogen sulfide content is 0.25 grain H2S per 100 cubic feet of gas, or approximately 4 ppm. Specifications for CO2 typically limit the content to no more than two or three percent.Maintain mercury at less than detectable limits (approximately 0.001 ppb by volume) primarily to avoid damaging equipment in the gas processing plant or the pipeline transmission system from mercury amalgamation and embrittlement of aluminum and other metals — (from Wikipedia)

All of these contaminants are burned off during flaring. The problem is that it is a very incomplete burning cycle, one that is millions of times dirtier than the exhaust that exits your car’s tailpipe. Indeed historically, there have been many cases where people — or even large numbers of cattle or other livestock — living downwind of flaring stacks have died from breathing the partially burned gas.

Legislation is the obvious solution, but how?

If one state legislates against fugitive emissions from well heads and against the practice of natural gas flaring — all of the gas wells in that state will simply be capped and all gas-related economic and energy activity will cease within that state. That’s how competitive the gas industry is.

In North America, if the United States legislates against fugitive emissions and natural gas flaring, the flight of capital and natural gas companies to Canada would result in a huge economic boom for Canada and a dramatic loss for the United States. The reverse is also true.

The Only Solution is a Continental Solution

Therefore, there can only be one solution to the problem — and that is a continental solution to fugitive emissions and to natural gas flaring — whether this is done under the auspices of an amendment to the North American Free Trade Agreement (NAFTA) or as a standalone convention, it is high-time for such legislation to be passed.

It doesn’t need to be a policy masterpiece nor does it need to be technically perfect. It needs to stipulate one uniform standard that applies to all natural gas drilling/extraction/refining and transportation systems in North America.

Above all else, it needs to be done. Now.