oil industry

All I Want for Christmas is an Energy Policy

Posted on by roymacmullin

“The world’s energy system is at a crossroads. Current global trends in energy supply and consumption are patently unsustainable — environmentally, economically, and socially. But that can — and must — be altered; there’s still time to change the road we’re on.”

Is this statement from a mad eco-blogger off his meds?  Or is it perhaps from the supposed terrorist guy that Obama pals around with, Professor William Ayers?

No it’s just the 2008 World Energy Outlook released by the International Energy Agency (IEA).  The agency is the energy advisor to 28 member states, mostly the industrial world.  Typically, the agency has been very optimistic but recent reports have sounded alarm bells and are very somber in tone.  The base case of the IEA shows all liquids production rising to 106 million barrels per day in 2030, which is lower than the previous production forecast of 116, absent any policy intervention.  It also shows a one third increase in coal usage.

The report has been sandwiched between a lot of bad news such as the world’s present economic meltdown, the collapse of the GM, Chrysler and Ford, and global warming and has not received the attention it deserves.  The remarkable thing is that oil is directly involved in all three.

Here’s how…
Jeff Rubin, chief economist for CIBC, argues that “In the past, oil shocks have triggered global recessions by transferring billions (or now trillions) of dollars of income from OECD economies with typically very low savings rates to OPEC economies with typically very high savings rates.”  He also speculates that “If the global meltdown is all about defaulted subprime mortgage debt, a global recovery will have to wait until we see a bottom in US housing prices.  But if the global recession is primarily about the recent oil price shock, then the subsequent halving of prices from $147/bbl to little over $60/bbl now, and not a pick-up in Cleveland property values, is the real road to recovery.”

Earlier this year GM’s president Rick Wagoner admitted the obvious, “These higher gasoline prices are changing consumer behavior and rapidly.  We don’t think this is a temporary spike or shift. We think it is permanent.”

Previously, I had indicated that bankruptcy troubles at GM and the others would happen in 2009.  It now appears that GM may run out of cash before Christmas.  After the US provides a $50 billion bailout package, then Canada will be expected to come up with $5 billion as part of retaining our portion of the integrated industry in Canada.  That’s how the branch plant economy works.

It will be amusing to see how PM Stephen Harper will spin his free market principles into a capitalism bailout package. To maintain a veneer of capitalist philosophy, the taxpayers of Canada should receive an equity share in return for their $5 billion contribution.  The US government, as the larger contributor, would get most of the pie.  After all, the existing shareholders of the automakers haven’t held their management accountable for their actions and the companies are presently worthless.  Isn’t that how it works?

Oil didn’t kill GM directly alone.  Poor management over the decades failed to control costs or recognize the end of the oil era and adapt with appropriate vehicles.

The last of the three symptoms is global warming, which is caused by the burning of fossil fuel such as oil or coal.  The IEA report indicates that converting to alternative renewable energy or conservation will be costly but provide savings in energy.   For example to cap at 550 ppm would cost $4.1 trillion but saving $7 trillion in energy.  To reduce to 450 ppm would cost an additional $9.3 trillion between now and 2030 but return savings of $5.8 trillion.

Another big issue noted in the report is the rising depletion of existing oil fields, which is presently 6.7% on average.  The world must find new output of 30 million barrels a day by 2015 to maintain existing levels of production.  That’s the equivalent of three Saudi Arabia’s.

Increases in fuel demand and emissions will occur in non-OECD countries such as China and India.  In contrast, the US demand for oil has actually decreased in the first eight months of 2008 by 5.4% or 1.1 million barrels per day, when compared to 2007.  That’s the equivalent of almost four refineries the size of the Irving complex in Saint John.  It is likely that Barack Obama will aggressively move on reduction of US oil dependence in the coming years.

What we aren’t doing very well is attacking the disease instead of the symptoms.  The disease is addiction to oil.   Curing the root problem would require an energy policy that is integrated with our industrial objectives and public works expenditures.  Does New Brunswick have such a plan that is related to the real world of the IEA?  Well, we do have the self-sufficiency plan which it is rooted in the past and the dream world.

Remember that the IEA are optimists and they say we have to dramatically change our approach.  The real situation is a lot worse than most can imagine.  Energy Minister Jack Keir, could we have an energy policy by Christmas?  I won’t specify what year because I don’t want to be disappointed when I look in my stocking.

How do the Conservatives rate on Energy Policy?

Posted on by roymacmullin

Political campaigns are remarkably like war.  Lots of resources and blitzkrieg attacks disorient the other side.   To re-phrase von Clausewitz – “politics is war by other means”.   And it’s starting to get rough out there.   Political opponents are demonized (scary, not ready to lead, etc. ) so that any tactics are permissible.

But let’s look at energy policies.  What are the leaders of each party thinking about?

Stephen Harper is a master tactician of the political game.  Some say he’s got control issues or perhaps he just uses “enhanced management tools.”  He spots weakness and dive-bombs the opposition with attack ads, campaign or no campaign.  Take no prisoners is a description that comes to mind.  Hey, who knew that Karl Rove lived at 24 Sussex Drive? But you can’t argue with success.  He’s had the opposition on the run for some time.

Energy costs are the sword of Damocles hanging by a horsehair, and will have serious consequences for each of us.  However, this is not apparent when viewing the Conservative website. Of the eight key priorities on the Conservative website, energy doesn’t make the list.

Our PM has been using short-term tactics and guerilla warfare to build support and destroy enemies.  His long-term vision is less clear.  One of his greatest successes has been the fee on gas-guzzlers and the ecoAuto rebate.  The rebate was cancelled after the 2008 model year.  The relatively low program cost of $150 million couldn’t have been the cause of its demise.  Was it GM unfriendly and had to go?  Luckily, he retained the fee on gas-guzzlers.

His need to retain or increase his power will always trump good policy. The diesel tax cut is a good example.  Stephen is an economist and knows that lowering the price of a product encourages the use of it.  Two cents will lower the cost of fuel by 1.5%.  Since fuel is only one third of transportation cost, the actual reduction in product cost will be ½ of 1% if it’s passed on to consumers.  Since most food comes from the US, this only affects transport within Canada.  So, there’s virtually no effect on your head of lettuce from California.

If you own a diesel car, it will save you $24 a year. This policy will cost the treasury $600 million a year, have questionable results, but it will buy votes.

The National Energy Board recognizes that conventional oil is declining in Canada and that imported LNG will have to take the place of domestic natural gas production in coming years.  Export applications do not have to consider whether Canada has adequate natural gas reserves, as was the case before 1985. Only tar sand development, which has a low net energy output, is on the rise.  Should we be proud of the ecological fallout in Alberta?  Will other countries eventually ban the import of these products or penalize us for carbon output?

Does Stephen still believe that Canada is an energy superpower? What was his purpose to promoting this view of Canada’s energy resources?  Should Canada have a national security policy on energy with actual physical reserves?  Should there be an east-west pipeline through Canada?  What about an east west DC electric transmission line?

An important question remains unanswered: How will we heat our homes in the future at reasonable prices? Those with oil heat in the Atlantic Provinces are in for a rude awakening.  Quebec has cheap electricity and Ontario has natural gas, for the moment.  The votes of Atlantic Canada make little impact on the national scene.

Although the price of oil is now lower than its peak in June, it will rise again in the near future as world production starts a decline in roughly 2010.  The investments required to meet the energy challenges of the 21st century will take a significant number of years to achieve.  We should have started decades ago.

How will we get around as fuel becomes very expensive and is rationed?  How will our economy and jobs survive the shock of energy shortages and prices?  How does Stephen feel about conservation of energy?  Ignoring the problem of peak oil doesn’t make it go away.

My rating given to Stephen Harper for a lackluster energy policy – F.    His lack of attention and understanding of important energy issues is counterbalanced by his desire to spend money on boondoggles like patrol vessels for the arctic.  And $490 billion over the next twenty years for the military to participate in overseas adventures with the US.

Will wood replace oil?

Posted on by roymacmullin

The cost of oil is rising and will continue to rise. At what price do we say enough is enough and abandon oil as a home heating fuel? That’s a decision that each person has to make. Do governments have a role to play in ensuring warm homes via reasonable heating choices in Canada? Most of us would say yes.

Governments may be still unaware of the nature of this emergency. They can recognize hurricane or flood damage. If there were no fuel it’s would be easy to understand. But rising prices can be tricky. Is it a permanent condition? How bad will it get? The funny thing is that world oil production hasn’t even started to decline yet. It’s just a little less than demand. Imagine when the real decline starts. So let’s talk about our vulnerabilities.

80% of homes in PEI, 25% in New Brunswick and roughly 65% of Nova Scotia use oil as the heat source. Approximately 1.3 billion liters of fuel oil are burned each year in Atlantic Canada. At last years price of 91 cents, that was $1.2 billion. At present day prices of $1.43 / liter, the new bill is $1.86 billion, a difference of $660 million. Next year, who knows? If families locked in a good price last fall, the sticker shock will only hit them later this year.

Over the next few years there will be a large-scale migration from unaffordable oil to other sources of heat due, as peak oil becomes a reality. There will be a burning platform with people diving to another fuel. The key question is what the alternate heating source will be and what are the implications of this massive shift?

First of all, we should realize that the limited Enbridge network will provide little relief outside of portions of Fredericton, Moncton and Saint John. Unfortunately, Efficiency NB hasn’t existed long enough to make a dent in the efficiency levels of our antiquated housing stock. Elizabeth Weir and Enbridge recently announced that they are contributing $2250 / $7,000 towards a $10,000 per person conversion program from electric heat to natural gas.

To put our oil refugee’s plight into perspective, 1.3 billion liters of fuel oil is equivalent to 11.5 billion kWh’s or 11 times the annual usage of Saint John Energy. It is 61% of the output of NB Power’s system. The peak that it would create on the Atlantic grid would be 2500 MW or more, which is equivalent to four new Lepreau 1 units or 2.5 units of the new AECL 1000.

Looking at a wood alternative, we would have to cut 2.8 million cords of wood to replace this volume of oil. To compare, the existing residential usage of hardwood in New Brunswick is roughly 500,000 cords each year.

But what about New Brunswick? My guess is that 60,000 homes are heated with oil. Assuming an average usage of 2500 liters per home, that’s 150 million liters or $214 million out of NB consumers pockets annually at today’s price. The replacement of this energy by electricity would require 1.4 billion kWh’s, from a power station of 420-Megawatt capacity, which is similar in size to the Belledune coal station. Note that this oil is consumed in the winter causing a large peak load. The cost of Belledune plant was $1 billion, if I remember correctly.

Francis McGuire, chairman of NB Power’s board indicated recently that even if the private sector doesn’t build Lepreau 2, then NB Power could proceed on it own by 2022. Has NB Power considered where New Brunswickers using oil heat are going to jump when the price of oil is $250 a barrel? Last time, it was towards NB Power. How would NB Power make up for the kWh shortfall? By burning heavy oil at Coleson Cove at a loss?

Jack Keir, Minister of Energy, has been suggesting Lepreau 2 as an economic development tool leveraged by private investment. Are the promoters presently waiting for government to meet some conditions? It’s a moot point as its completion date is too far into the future for application to the present problem.

Using wood as a solution requires an additional 332 thousand cords to be harvested annually to displace the New Brunswick fuel oil requirement. This shouldn’t be a problem with mills shutting down. Pellets and briquettes can use softwood that is compressed to provide the same heat density of hardwood, with less moisture content.

Wood heat could very quickly meet the requirements of a conversion program. The reduction of oil purchases of 943,000 barrels would retain $137 million a year in the New Brunswick economy as opposed to sending it offshore. Over the years, this would be the equivalent of investing over a billion dollars in the local economy. If Efficiency NB extended their offer of $2,250 to oil heat customers converting to wood, it would go a long way toward alleviating the problems of oil prices. The cost of the providing stoves would be $135 million (60,000 x $2,250), probably spent over a number of years.

The use of EPA rated stoves ensures an efficiency of 70% and emissions that are less than 10% of previous generation stoves. In urban areas, the use of pellet or briquettes may have to be mandatory with round wood as a rural option.

We are at the beginning of an emergency, perhaps a low intensity war. This change from low cost energy to high cost energy will sap our resources, leave us poor and eventually cold. If we fail to adapt to the heating oil challenge as well as the other aspects of peak oil, we lose. Do you see the leadership that we need to ensure that we don’t freeze in the dark?

Peak oil and your wallet

Posted on by roymacmullin

If you have concerns about the price of oil these days, you’re not alone. With oil at $135 a barrel and rising daily, you are witness to a major life-altering event in the world economy – peak oil. Diesel fuel is now at $1.52 a liter, roughly 23 cents higher than regular gas. The high price of fuel in Europe over the years has led to the greater use of diesel engines in their new vehicles, in turn causing a greater demand and now a higher price.

A typical barrel of oil provides 73 liters of gas and 29 liters of diesel as well as other products. European refiners ship their excess gas to North America.

In New Brunswick, the total taxes on gas / diesel is 36 cents and 39 cents respectively, which is 27% and 25% of the total price at the pumps. The taxes consist of a federal excise, provincial taxes and HST of 13%.

If the price seems to be too high in Canada, you may want to try Venezuela where the price of gas is 3 cents a liter. A fill-up will cost you roughly $1.20. Hugo Chavez provides a subsidised domestic price, an off price break for friends such as Cuba and poor neighbourhoods in the US, but also sells at the world market price.
Saudi Arabia sells a liter for 12 cents. In England and France drivers pay $2.09 due to high taxes, with the Netherlands being one of the highest at $2.38 per liter. The tax policy is designed to stimulate energy efficiency in choices.

Stephen Harper weighed in on the debate this week saying that the federal government has no power to change world oil prices. He indicated that price relief would be limited to the existing cuts in the HST. For the average Canadian, this amounts to roughly $43 / year in reduced gas prices.

In another era, the 1961 national oil policy provided higher than world prices for Alberta producers while Eastern Canada had cheap Middle East oil. The policy ended in 1973 and after the OPEC oil embargo the government broke the link between the domestic and world energy prices giving protection to Canadian consumers. A further change was the National Energy Policy of 1981 following the second oil embargo. It appears that previous governments have reacted to public concern.

The present government is buying time for the status quo. Ultimately though, as the price of oil climbs to extraordinary heights, a number of things will happen. One, the value of the Canadian dollar will rise, perhaps to $1.15 US causing serious grief to industrial Canada. Secondly, the public outcry from gas at $2 or $3 a liter will force this government or its replacement to implement a number of steps to reduce dependence on oil.

Stephane Dion’s proposal for a carbon tax is the least of the worries facing the average consumer. The carbon tax is proposed as a revenue-neutral method to introduce a higher sticker price for carbon based fuel with the intended effect of increased efficiency of use and reduced greenhouse gases. Income taxes would be reduced to compensate for the change.

Prime Minister Harper portrays this as a tax grab. Very indirectly, he indicates that peak oil is here saying, “the world is using low-cost hydrocarbons more quickly than most people are aware.” Is there some information that you should be sharing with us, Mr Harper?

How are we to feel about a government which offers us no solution to the dangers of peak oil and an opposition leader who proposes a carbon tax, which is only a partial step towards a comprehensive solution? Would the words disappointment, sadness or anger describe our lost opportunities and money?

The price of inaction on oil conservation by world leaders has been astonishing. Oil consumers now pay $2.4 trillion dollars more than a year ago to oil producers. The additional cost to Canadians is $55 billion dollars per year or $1,700 per capita. That is equivalent to 10% of the federal budget.  Do you wonder why there is less money in your wallet?  The future will be even more expensive.

Stephen Harper is right to resist lowering the cost of energy as being short-sighted and counterproductive. There are many things that could be done to reduce our dependence on oil but our existing government has little interest in an effective off-oil and conservation program.  How long can we afford this type of incompetence?

Dion can lead on energy

Posted on by roymacmullin

There was a big difference between the Saint John and Moncton municipal elections. Saint John voters were not happy and it showed in the polls. The people voted for change of style and substance. Can Ivan Court, as the new broom, sweep clean? Does he have the vision and backbone to accomplish his daunting tasks? As an optimist, I’d like to believe so. However, we have been disappointed too often in the past, with Shawn Graham being the latest example.

Dieppe voters also threw out the old mayor, whom some considered as arbitrary with overspending tendencies. The new mayor is Jean Leblanc, a local businessman, with an interest in public service. He promises open government with past secret contracts being brought to light if legally possible. It will be interesting to follow the paths of the new mayors of Dieppe and Saint John who have similar intentions.

In Moncton, there was no great dissatisfaction with city government other than the normal concerns with property taxes levels. In my case, running for councillor at large with two well-known and respected incumbents was near suicide. Readers of this column were familiar with my message that I brought to the citizens of Moncton: our economy is based on an energy supply that is starting to decline and that has serious consequences. The law of supply and demand indicates very high prices and economic disruption. Our municipal governments need to educate and lead citizens through the coming difficult times.

I was delighted to received 4100 votes and am greatly appreciative of that confidence. Unfortunately, the incumbents received more votes, so I now have more time to write this column, which I enjoy greatly. It is easy to make mistakes in a campaign, as Obama or Hillary would tell you. My mistakes, and there were a few, were part of the learning process. The part that I enjoyed the most was “mainstreeting”, talking to people about my vision and how we could change the future.

Near the end of the campaign, the Times and Transcript indicated their choices of who they thought should win. On the Saturday before the election, they published a picture of each candidate with checkmarks on their favourites. So much for a level playing field from the print media.

But I have been ignoring the energy file while on the campaign trail. Oil has risen to $126 per barrel. Goldman Sachs predicts $200 by the end of the year. So does OPEC. The American government is again pressuring the Saudis to open the tap and if they could, they probably would. The Saudis have been spending large sums recently to try to build spare capacity and combat depletion. The average price at the pumps in the US is $3.70 per US gallon. At 3.7 liters per gallon, that’s only $1 per liter. Canadians would be happy with that price.

We had a remarkable statement from Stephane Dion on “peak oil” this week. “The peak oil era is happening and we need to prepare our country to win in this economy… We need a strategy in the coming years that will make us less dependent on fossil fuels,” according to a CTV news report on his speech.

The Liberal leader has finally found a major issue where Stephen Harper is vulnerable. People vote with their pocketbook and the rising price of gas has the population steaming and looking for answers. The PM’s insistence that Canada (really Alberta) is an energy superpower is at odds with the facts. Our conventional resources are declining and that low quality resource called the tar sands, have a dubious future from an environmental and net energy point of view.

Here in New Brunswick, the price of gas and diesel just went up 5 and 9 cents per liter respectively. If you’ve been watching the “energy policy” of the Graham government, it consists basically of the energy hub – supporting construction of a new refinery and a second Lepreau to be in service by 2016. Is this a job strategy or an energy policy?

Does Minister of Energy Jack Keir still believe that “peak oil” is a long way off and that we will adjust to it without any problems? If so, he’s more of an optimistic than most. Perhaps Stephane Dion should give him a call and the two Liberals can get on the same page.

Can OPEC save the world from oil addiction?

Posted on by roymacmullin

The word “cartel” has been used to describe OPEC, a union of some oil producing countries. Perhaps a better word would be “association” as the effectiveness of this “cartel” over the years is questionable.

From a low of $10 in 1999 to over $100 a barrel today, price stability has not been one of its success stories. There are good reasons why this has happened – The close relationship between the Saudi Arabian and US governments, and the lack of a long-term vision and solidarity of the member states. There are recent indications that OPEC is becoming more effective and gaining more respect.

The oil age started with discoveries in 1859 and will be effectively finished by 2059, a period of only two hundred years. Even if we go along with the optimists and give it another 50 years, perhaps to 2109, the era of abundant oil will have only been a blink in the history of mankind.

A common human quality around the world is to search for peace and prosperity. Those with a long-term view can see dark clouds on the horizon. Unfortunately, the coming years will be a time of war and deprivation unless we find an efficient way to reduce our usage of oil and transition to other forms of energy in a calm and well planned sequence. Lately, oil has risen to $110 a barrel but still provides great value to customers. There are some preliminary indications that price has slowed the growth of oil usage. One of the contradictions of life is that a lower price of a product makes life easier but will lead to increased usage.

In the case of oil, do we still have the option of wasting this resource on SUV’s, poorly planned communities, and huge homes? How will our morality be judged when we utilize a valuable resource and leave nothing for future generations – our children, grandchildren and beyond? Can we find a way to decrease our usage to a “sustainable” level?

The nature of capitalism is to utilize all resources that are available without regard for the longevity of the reserves. We only have to look at the fish stocks in the world’s oceans to understand the dangers of uncontrolled harvesting. In the same way, we need a method to reduce the volume of oil usage such that efficiency is encouraged and the resource will last for centuries instead of decades.

Good long term planning is generally undertaken at the nation-state level. We would like to think so. In certain cases involving multiple countries, the United Nations can be useful. However, in a case as delicate as the price of oil, there is some doubt that the UN could act effectively when the short-term effects on multiple states, including the US would be negative.

The only group with the necessary tools is the Organization of Petroleum Exporting Countries (OPEC). To undertake such a mission would require vision and solidarity on the part of its members. It would also require an education campaign on why decreasing production is an environmental necessity – to reduce CO2 and to provide long-term resource planning for future centuries, avoiding “generational injustice”.

A reasonable target might be a reduction of 1% of the daily production of roughly 86 million barrels of liquids. This means that a cut of roughly 860,000 barrels a day would come from the OPEC members.

While OPEC would cut production, OPEC members would not lose overall revenue as the price would drift upwards to $150 a barrel or perhaps higher on a transitory basis. Obviously, rationing by price is not the ideal solution as those least able to pay are forced out of the market. The ultimate goal is to drive efficiencies into and wastage out of energy processes. At some point, countries will realize the necessity of cooperation in energy use by rationing on a country by country basis.

Why should OPEC be asked to show leadership at this particular moment?

First, the world is addicted to oil and no effective remedy is presently underway. Both OPEC and non-OPEC countries are the suppliers of the product going into the world’s veins. As addicts, we will exhaust the supply and future generations will be deprived and impoverished. Reduction of oil supply is the only sure way to ensure that CO2 levels will decline.

Secondly, OPEC is the only organization that has actually cut supply in the past, admittedly for much different reasons, in 1973 and 1979. There are excellent prospects for success today as little surplus supply capacity exists, public support for environmental initiatives can be found and a 1% reduction is a fairly mild cut.

George Bush is now playing the “economic” card to place blame on OPEC if they don’t raise production levels and therefore cause an economic slowdown in the US. Luckily, King Abdullah and other OPEC spokesmen aren’t buying into the guilt fantasy. George’s management of the US economy speaks for itself. Deficit spending due to tax cuts and an expensive war in Iraq are just the tip of the iceberg.

We all need OPEC to put a heart de-fibrillator on the speeding world economy and restart it at a slightly lower rate. Would this be an act of brotherly love for the planet and its inhabitants? Absolutely.

The price of oil has to remain high on a permanent basis if we are to find productivity or technological solutions to our energy problems. Countries who prosper will be those who use oil wisely and with more efficiency.

What’s on New Brunswick energy horizon

Posted on by roymacmullin

We hear about people making choices between food and heat and that is not good. NB Power recently advised that December’s colder weather would generate higher bills.  But what about the long-term outlook for energy prices?  Will it get better or worse in the coming years?  It’s important that we all stay warm during these cold winter nights this winter and into the future.

Recently, I’ve been helping a Sussex based community group working on getting a wood briquette plant organized.  There are many of us who have a “warm” spot for wood heating with its link with our primeval past, and of course, its low cost.  It takes a little more work because of the physical weight of it. My domicile is heated with natural gas but in the past I have lived with electric, some wood, and oil heat.

Efficiency NB has been promoting the use of central heating systems that can use oil, natural gas or wood as the home heating source.  This policy related to oil has some serious negatives but is not entirely wrong.  On the positive side, oil burned at NB Power’s generating plants has a 35 to 40% efficiency rating, so using an oil furnace at home with an 80% rating burns less oil overall and is relatively good for the environment. However, in the past year, the price of oil has gone up from $55 to $100 a barrel, an increase of 81%.

Is this a significant event?  Yes, it signals a turning point in the world supply of oil.  Demand in China, India and the rest of the world is growing and the supply appears to be plateauing.  Typical economic theory would suggest that higher prices would bring additional supplies to market that would collapse prices.  After several years of higher prices, no supply relief is evident.  Analysts also see no combination of projects under construction that would provide abundant supply.  So the trend to higher oil prices appears very strong.  We are likely to see oil price increases making heating homes or generating electricity for heat prohibitively expensive.

Roughly 60% of New Brunswickers use electric heat, which has lower initial cost of installation, low maintenance, and relatively low cost of product – three important reasons for its success.   Government policy from the 1970’s until recently was to get Canadians off oil heat.  NB Power spent billions on a robust generation, transmission and distribution system capable of furnishing our electric heating needs.  The only problem was that a part of the generation was oil based.

Coleson Cove uses heavy fuel oil, which is also known as #6 heavy oil, or residual oil, or bunker C.  It is the leftover of the refining process.  NB Power uses roughly 5 million barrels a year that generates approximately 3.1 billion kWh’s, which is 17% of total sales.  In the current fiscal year they expect $60 a barrel and a total oil cost of slightly over $300 million.(up a hundred million)  Next year (08/09) could be $400 million as the hedging of lower prices ends and a barrel of heavy oil is closer to $80.

Electric heat comes on in the winter and it is necessary to use higher priced generation (Coleson Cove) to meet that extra demand when the power requirements goes from 1600 megawatts in summer to 3200 megawatt peak in winter.  So there is a correlation between the higher cost power and electric heat.  It’s not 100% but let’s take the worst case for an example.

Supposing a customer uses 15000 kWh of electric heat a year and this is mostly on the lower second block at roughly 8 cents per kWh.  This customer pays $1200 for the kWh’s. It takes 24 barrels of oil to provide these kWh’s, which at $60 is $1440 and at $80 is $1920.   NB Power does not even recover fuel cost.  Although an oversimplified case, we can see that $100 heavy oil would give 16-cent kWh’s just for the fuel without considering O&M or debt repayments on the plant.

It appears that NB Power will be spending $200 Million more each year on heavy oil.  Note that a $10 million increase in costs is 1% rate increase.  So we are looking at a twenty to thirty per increase in rates in the next two or three years.

We have a problem.  We spent $750 million to rebuild Coleson Cove with the expectation of cheap fuel.  Now, we can only get expensive fuel and it’s getting worse very quickly.  Pet coke will help a bit but a nuclear plant won’t be available until 2016 because all the workers will be tied up on the refinery project first.  It looks like we’ll be spending at least $2 billion extra on oil before 2016.  And maybe a lot more than that.

In my next articles, I make some suggestions on how we could work towards real energy self-sufficiency right now.

Diplomacy is a crude story

Posted on by roymacmullin

The first chapter of “Diplomacy for dummies” would explain how the world really works.  “Energy resources create excellent opportunities to make fortunes for big business.  Big business makes big money and will make substantial bribes to governments and politicians to grease the wheels of commerce.  Governments support these efforts with low royalties.  US governments go the extra mile and will send soldiers if required in case of pesky foreign governments.  As usual, the poor will always be shafted.”

One of the most intriguing exceptions to this rule is Venezuela (a pesky foreign government), where Hugo Chavez, as an extraverted socialist, has turned the standard dynamic on its head in recent years.

His primary goal appears to be increasing the standard of living for the people of his country. To do this has meant changing the status quo for the establishment of his country and the international oil companies (IOC’s). Not a very popular idea in many circles. Increasing control and nationalization of energy resources is not a new idea. Over the years, we have seen a similar process in Mexico (1938), Iraq (1960-72), Saudi Arabia (1950-80), Iran (failed attempt 1953, success in 1973), Libya (1970), Algeria (1971), Russia (re-nationalization 2003-05), Ecuador (2006), and Bolivia (2006) as part of the list.

This continuing desire of countries wanting to control their oil resources is based on:

  • Retaining a larger share of the profits from the resource to allow financial autonomy and to increase social benefits for their citizens.
  • The realization, that in most cases, the financial and technological requirements for oil development can be obtained without giving away the ship. The model of the multi-national oil major being able to dictate terms is less common today.
  • The knowledge that their resources are limited and that control over production levels to increase or decrease production according to national objectives is crucial.

The history of colonial powers such as France, England and the United States in matters of oil gives us many rather sad instances where the military or economic weakness of oil rich states have been exploited. The example of Iran in 1951 failing to negotiate better royalty rates with the predecessor of British Petroleum is typical. When Iran nationalized the industry, Britain blockaded the export of Iranian crude with British intelligence and the CIA responsible for a coup that toppled the government in an early example of “regime change”. The Shah of Iran was re-instated and did the bidding of both British and American interests through repressive government. The fall of the Shah in 1979 led to the hostage taking at the American embassy. Subsequent behaviour by the US during the Iran-Iraq war provided further fuel to the fire. Present day relations between the US and Iran is related to “blowback” from the covert activity of the early 50’s.

Back in Venezuela, a 2002 coup attempt temporarily removed Chavez and to supporters of Chavez appears to have some links to the US. It may be some years before the allegations can be confirmed. Based on a few of the known interventions by the US in the governance of Guatemala (1950’s..), Dominican Republic (1960’s), Congo (1960’s), Cuba (1960’s), Chile (1973), Haiti (1980’s), El Salvador (1980’s), Nicaragua (1980’s), Grenada (1984), Panama (1989), it appears to be a plausible scenario. Since 2002, the rocky relations between the US and Venezuela have become even more strained. Chavez is seen as a “socialist with deep pockets” and a serious risk to US control of Central and South America countries. Support from Chavez provides those countries with some choice in their economic and political policy decisions.

The balance of power in the oil industry is changing as well. At this moment, the percentage of oil under the ownership of national oil companies (NOC’s) is roughly 85%. IOC’s such as Exxon Mobil, BP, Total, Chevron, Repsol produce only 12 million barrels a day compared to the 85 million total world output. Big oil (IOC’s) claim that they are kept out of many areas where their expertise and money would mean higher production. This is true in some cases. However, the only place where it may change is Iraq, where the invasion has had as a principle goal the privatization of oil, and the entrance of American and British oil companies. Given the $1.3 trillion cost of the war to date and the failure of the Iraqi government to pass the oil laws demanded by the US, it is not a cost-effective way to stimulate privatization.

In the future, the amount of oil that will be available to the open market may decrease in addition to geological depletion. National oil companies (China) are making contracts with oil nations, offering them billions in loans, and development technology in exchange for long-term supply contracts. In the short term, that volume may be sold on the open market. However, when shortages appear, these volumes could revert to the home country. Given this case, those buying on the open market will be the hardest hit – an area like Eastern Canada for example.

Secondly, the growth of NOC’s may continue to increase at the expense of the international oil companies. The IOC’s have not yet adjusted to the change in roles and the best use of their technology in cooperation with the NOC’s is not in place.

As the price of oil rises, exporting countries may be satisfied with lower export volumes to conserve reserves and revenues for the long term, worsening the supply problem. What will be Canada’s national strategy to declining world production? It is not clear to those of us who are the most at risk (Eastern Canada). Perhaps we could all just act surprised when the going get rough?