Heavy Oil Investing News

By Duncan Sutherland - Exclusive to Heavy Oil Investing News

Market News:

Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.

Apologies to Winston Churchill, but this quote is perhaps the best measure of the rocky state of the global financial system. Also, trenchant historical references may boost my chances of getting a non-business journalism job if things go completely pear-shaped. Upgrader got down to brass tacks a couple weeks back, and the underlying problems have changed very little since.

To briefly summarize, with light crude futures oscillating around the hundred dollars per barrel mark, oil sands and heavy oil projects will offer much less return on investment than planned. As joblessness increases in the United States, further demand destruction is likely. Finally, the difficulty of obtaining credit makes it exceptionally difficult for small players to start new operations or continue financing pre-existing exploration or development that has yet to bear fruit. The illiquidity problem has already been affecting plans.

Things could (and will) change rapidly. Broadly, we can predict that three scenarios are possible. First, a well-constructed economic rescue plan is passed and implemented by the American government, and financial markets begin to recover. Such a situation would necessarily involve some pain and readjustment, but credit would become more available and demand would begin to be restored.

Second, a poorly conceived or executed bailout might prolong the uneasy roller coastering of the markets and make lending institutions even more mistrustful. This scenario would essentially see the conditions of the past month extend for several more.

Thirdly, either a bailout is not passed, or it is insufficient. A multinational and multi-sector slowdown, recession or even depression occurs. In such a situation demand for oil is sharply reduced, causing prices to tumble and making oil sands projects unprofitable.

These schemata should be thought of as more of a continuum than discrete and bounded possibilities. Regardless, worries about the economic sustainability of the oil sands are spreading. After a $5 billion bitumen upgrader project was shelved last week in Northern Alberta, a sense of unease is palpable.

International News:

The Globe and Mail has an article noting that legislation has passed the American congress that could potentially forbid US government agencies from utilizing oil sands due to their higher greenhouse gas emissions than conventional light crude. It is unclear how exactly this provision will affect the procurement practices of two of the world’s largest fuel consumers; the American military forces and the U.S. Postal Service. Though it surprises me to say so, I will defer to Sarah Palin for the final word on why this in unlikely to work.

Oil, of course, is a fungible commodity and they don’t flag the molecules, where it’s going and where it’s not, but the Congress knows our very hungry domestic markets need that oil first. So I believe, that what Congress is going to do also is not allow the export bans to such a degree that it’s Americans who get stuck holding the bag without the energy source that is pumped here; it’s gotta flow into our domestic markets first.

Words of wisdom indeed. Perhaps we’ll close with that.