What America’s Energy Blunder Means for Oil

By MoneyMorning.com.au

Here’s a quiz for you.

Can you name the top three countries by proven oil reserves?

The top spot may surprise you. It’s Venezuela.

The number two spot is more obvious. It’s Saudi Arabia.

What about number three?

You won’t get this one. But don’t feel bad about it. The energy industry has gone through big changes in recent years, and even bigger changes are on the way…

It may surprise you to know that the country with the third largest proven oil reserves is Canada.

That’s an impressive feat for a country often disparaged as being the 51st US state, and for its people’s fondness for putting bacon on pancakes.

But it turns out there’s more to Canada than meets the eye. With 10.4% of the world’s proven oil reserves, Canada is ahead of Iran and Iraq, which have 9.4% and 9% respectively of the world’s proven reserves.

So just how did Canada quietly go about achieving this top three position?

Canada’s oil ‘miners’

Canada derives its strong oil position from the Alberta Oil Sands.

Put simply the Alberta Oil Sands (also known as the Athabasca Oil Sands) covers around 141,000 square kilometres in Canada’s Alberta province.

The oil sands themselves are a thick bitumen located near the Earth’s surface. In fact, due to the density of the oil sands, the most effective way of ‘mining’ the resource is to dig for it in the way a mining company would dig for coal, copper or iron ore.

Once they have dug up the oil sands, they transport it to a processing plant where they separate the oil content from the rest of the oil sands, and send it for refining.

The current and future development of Canada’s oil sands and the US’s shale gas resources creates an interesting prospect for the world’s energy supply.

It’s not so long ago that North America — the US especially — was facing an impending energy crisis.

The US was at the mercy of oil cartel OPEC. The cartel controlled the supply of oil and played a big part in setting the oil price. During the 1990s and most of the 2000s the market closely watched these meetings.

Today, does anyone pay attention to OPEC? Not really. Can you remember the last time you read a news story about an OPEC meeting? We can’t.

(By the way, the last OPEC meeting was on 4th December last year. The next meeting is on 11th June this year. You can expect today’s Money Morning to be the last time you read about the OPEC meeting in June, as nobody cares anymore.)

Thanks to the oil sands and shale gas, the North American energy market is starting to look a lot more stable. Or it would, except the US doesn’t appear to be in any hurry to secure its energy future.

If the US doesn’t want it, China will take it

The US has huge potential and proven reserves of natural gas due to its shale gas industry. The reserves of shale gas are so huge that the US could become energy independent within 20 years.

That’s providing the shale gas reserves prove to be as lucrative and economical as expected. However, while the US may become energy independent on paper, it still needs an oil supply. It can get oil domestically from onshore and offshore rigs.

But it will still need to rely on OPEC producers for the balance of supply. That’s what makes the US government’s decision not to prioritise the Keystone XL pipeline from the Alberta Oil Sands fields to refineries in Texas all the more surprising.

Legal challenges have held up the proposed pipeline due to its path through key farmland in Nebraska. In the old days, the Canadians may have just bided their time, not wanting to annoy their powerful neighbour to the south.

But things are different today. Today the US isn’t the only big energy buyer. That’s why the Canadian government is considering an alternative proposal. Rather than a north to south pipeline, the Northern Gateway Pipeline would stretch from Bruderheim in east-central Alberta to Kitimat on the coast of northern British Columbia, some 1,178 kilometres away.

The expected buyer of the crude oil will be growing Asian economies, in particular China.

Canada’s pain could be an oil investor’s gain

It’s not hard to see why the Canadians are so keen to monetise this huge proven resource. As we said at the top of this letter, the scale of the Alberta Oil Sands means that Canada has the world’s third biggest proven oil resource.

Estimates are that the Oil Sands contain 168 billion barrels of heavy crude oil. In dollar terms, according to Bloomberg News, failure to monetise this resource in one way or another could cost the Canadian economy CA$632 billion in foregone growth.

And seeing as the US currently accounts for 97% of Canada’s oil exports, any delays by the US will only make the Canadians more keen to sign a deal elsewhere…perhaps with China, which currently only takes 1% of Canada’s oil exports.

So, where are we going with this?

Well, it just goes to show how quickly markets can change. There’s a huge ‘stash’ of oil in Canada waiting to find someone willing to refine it and use it. But it needs the pipeline.

At first glance that may seem to be bad news. But it also creates opportunities elsewhere. For instance, in areas which don’t have infrastructure problems. That’s something resource analyst Jason Stevenson is closely looking at now. Already this year he has looked at several Aussie and overseas energy opportunities.

The bottom line is that regardless of what’s going on in the world of macro-economics and politics there will always be a demand for energy. That means there will always be the need for energy explorers and producers to find and finance new projects.

With the fall of OPEC’s influence, and new technologies making oil exploration possible in previously inaccessible places, other markets are looking to take up the slack. You can rest assured that if Canada drops the ball on its attempt to become an oil exporting giant, there are plenty of other markets primed to take Canada’s place.

The oil sector looks set to be one of the key resource opportunities for investors this year.


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By MoneyMorning.com.au