A stunning new international analysis shows increasingly affordable wind and solar power and electric vehicles crushing oil on price and efficiency—even as Canadian fossil analysts continue to predict future growth for tar sands/oil sands production, and industry boosters tout their “marathon” effort to convince investors to take their product seriously.
“If you thought things were beginning to look bad for the oil industry,” headlined UK solar entrepreneur and advocate Jeremy Leggett in a slide show last week, “today they just got a whole lot worse.”
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Late last month, the Canadian Energy Research Institute (CERI) issued a scenario that showed growth in bitumen production from the Alberta oilpatch slowing down between 2018 and 2039—but still rising from 3.0 million to between 4.1 and 5.8 million barrels per day in the next two decades, based on annual growth of just over 2%. “We’re looking at demand for oil internationally, the cost profile for oilsands in Canada, and our assumption that three new pipelines will be built,” said CERI CEO Allan Fogwill, referring to the Keystone XL and Line 3 pipelines and the Trans Mountain pipeline expansion.
The Canadian Press casts that calculation as a step down from CERI’s 3% annual growth projection just last year. But with its focus on the Canadian industry’s recent cost-cutting efforts, there’s no indication in the CP story that the Calgary-based institute assessed the low likelihood of a future international market for any oil at all to be used as energy.
That thinking came primarily from French retail banking giant BNP Paribas SA, with its projection last week that oil will have to sell for the impossibly low price of US$9 to $10 per barrel if gasoline vehicles are to compete against electric cars, or $17 to $19 per barrel for diesel, reports the Institute for Energy Economics and Financial Analysis (IEEFA). Already—and alarmingly, if you happen to be a fossil—“wind and solar power can produce seven times more useful energy for cars, dollar for dollar, than gasoline with oil prices near current levels,” the U.S. news agency notes.
“Our analysis leads to a very stark conclusion for the oil industry: for the same capital outlay today, wind and solar energy will already produce much more useful energy for EVs than will oil purchased on the spot market,” wrote Mark Lewis, global head of sustainability research at BNP Paribas’ asset management unit. “These are stunning numbers, and they suggest the economics of renewables in tandem with EVs are set to become irresistible over the next decade.”
That will be a profound change from the “massive scale advantage” that oil holds over wind and solar today, supplying 33% of global energy in 2018 compared to 3% for the two leading renewables. “The economics of oil for gasoline and diesel vehicles versus wind and solar-powered EVs are now in relentless and irreversible decline, with far-reaching implications for both policy-makers and the oil majors,” the report states. “We think the economics of renewables are impossible for oil to compete with when looked at over the [business] cycle,” with only a tiny fraction of oil drilling in a position to recover costs, much less turn a profit.
“The challenge is on a scale that they have never faced before, and business-as-usual is simply not an option,” the bank adds. In light of that crushing economic reality, “we think the oil majors should be accelerating the deployment of capital into renewable energy and energy storage technologies and/or reducing reinvestment risk via higher dividend payouts to shareholders,” the bank adds.
BNP Paribas warns that the “century’s worth of delivery infrastructure” the fossil industry has in place won’t be enough to retain its current production advantage over renewables and storage. “Even if we add in the cost of building new network infrastructure to cope with all the new wind and/or solar capacity implied by replacing gasoline with renewables and EVs, the economics of renewables still crush those of oil,” the report states.
“Extrapolating total expenditures on gasoline in 2018 for the next 25 years would see US$25 trillion spent on mobility, whereas we estimate the cost of new renewables projects, complete with the enhanced network infrastructure required to match the 2018 level of mobility provided by gasoline every year for the next 25 years, at only $4.6 to $5.2 billion.”
“This really is seismic stuff, with huge implications for all the issues that depend on solar and other survival technologies accelerating faster, and the incumbency—Big Oil—fully retreating from its planet-wrecking, civilization-imperilling rearguard defence of oil and gas,” writes Ottawa-based Below 2°C, citing Leggett’s slide show.
In a separate study released last week, analysts at Fitch Solutions Macro Research reported a “major downward revision” in the oil prices fossils ultimately depend on to make money and draw investors, writes industry newsletter Rigzone. While Fitch previously saw average prices rising from $70 this year to $80 in 2021, the company now projects a threshold of $67 this year, falling to $61 over the next two years.
“The revision reﬂects a deteriorating economic outlook and a sharper than expected slowdown in oil demand,” Fitch writes.
All of which adds up to a more focused analysis than last week’s coverage in the Financial Post, bemoaning the investor apathy besetting Canada’s “unloved” tar sands/oil sands industry. “Operating costs have declined sharply in the last five years, but you wouldn’t know it looking at companies’ stock performance,” the paper writes in its subhead.
As Canadian fossils reported their second-quarter earnings over the last couple of weeks, “executives faced questions about why their stocks continue to suffer institutional investor apathy despite significantly improved costs and a better market outlook for heavy oil given production declines in places like Mexico and Venezuela,” writes reporter Geoffrey Morgan. “Despite the belt-tightening and efficiencies, major Canadian energy companies continue to trade near multi-year lows,” while “analysts say generalist investors have largely abandoned the sector to invest in tech.”
The Financial Post coverage emphasizes the 40 to 50% reductions in operating costs that tar sands/oil sands operators have delivered since the 2014 oil price crash, earning praise from IHS Markit Vice-President Kevin Birn. “I have been surprised at the degree to which they’ve delivered those reductions,” he said.
But Alberta fossils are also “driving the cash they generate into returns rather than plowing that money back into new growth projects,” the Post writes, just as BNP Paribas is now recommending.
“I call it utility-style oil,” Birn told Morgan.
But neither the cost cuts nor the cash inducements are bringing back the deep-pocketed investors who abandoned the tar sands/oil sands after the price crash. “Generally, broadly speaking, [fossil] energy is an unloved sector,” said Jennifer Rowland, a St. Louis-based oil and gas analyst for Edward Jones. “It just seems like the industry can’t win.”
Rowland, who keeps an eye on both U.S. and Canadian oil producers, also had a wider perspective on Canadian producers’ cost cuts: the tar sands/oil sands started out more expensive than most, she noted, and “it’s not like they’re taking costs out and everybody else is standing still.” In the end, Rowland said, it’s “just not fun right now” to be in the oil business or to be an analyst covering it.