petro-politics-Letting dwindling oil, gas go cheap

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Letting dwindling oil, gas go cheap
Apr 24, 2008 in the briar-wire by dave | No comments

By John W. Warnock
Leader Post

In early April, the international price for WTI crude rose to $110 per barrel. The price of gasoline was $1.23 for a litre. Both have since risen even higher. Oil corporations are reporting record profits. Land sales for exploration and development rights for oil are at an all-time high in Saskatchewan.

What’s happening?

At a recent conference in Washington sponsored by the U.S. Department of Energy, experts argued that the world production of conventional crude oil peaked in May 2005 at 74 million barrels a day. The gap to the current production level of 88 million barrels a day is now being filled by much more expensive and difficult to access non-conventional sources.

Of the remaining oil reserves, 77 per cent are controlled by producing countries with state-owned national oil companies (NOCs) where the privately owned international oil companies (IOCs) are excluded. Another 11 per cent of reserves are in countries with NOCs where the private companies have some access through production sharing agreements. Russia has six per cent of the remaining reserves and is re-establishing state-ownership and control.

Only seven per cent of the remaining world reserves of crude oil are in countries like Canada, where the IOCs have full access to the resource.

Thus the large private oil corporations are having a difficult time finding new reserves. Talisman, for example, has seen the price of its stock drop due to the fact that its reserves are primarily found in mature areas with declining supply and production.


As the industry moves to non-conventional sources of oil and gas, costs rise. In the 1990s, it cost oil corporations around $6 to extract a barrel of oil in western Canada. This has now risen to around $15. The average in the Alberta tar sands is now between $20 and $25.

The Western Canada sedimentary basin is a mature area for the production of oil and gas. Conventional oil and gas production peaked around 1972 and has been declining. The average productivity of an oil well in the WCSB has dropped from 33 barrels per day in 1994 to 18 in 2003. In 2007, the average oil well in Alberta produced only only 12 barrels per day. New gas wells are much smaller and quickly depleted. This is the major reason that the oil corporations are looking elsewhere for new reserves.

All around the world, oil-producing countries are raising royalties and taxes in an effort to capture more of the economic rent (monopoly profit) that is accruing to the industry. Even in libertarian Republican Alaska, the government is raising the basic royalty on oil from 22.5 per cent to 25 per cent and eliminating many of the key deductions and subsidies.

In Newfoundland and Labrador, in the offshore Hibernia field, the federal government gets 32 per cent of revenues and the provincial government eight per cent. In the White Rose field the federal government gets 33 per cent and the province 11 per cent. Under Danny Williams’ new royalty system for White Rose, the federal government will get 37.5 per cent and the province 25 per cent. Husky Oil and Petro Canada are rushing to invest there, hiring a new offshore rig which will cost them $1 million per day.

Petro-Canada complained when the government of Alberta decided to raise its royalties back to the 20-25 per cent range required under provincial legislation. It is moving its capital to Libya. It will pay a $1-billion “signature bonus” to the Libyan National Oil Company. All new developments will be 50-50 partnerships with the NOC. But, when it comes to sharing the oil produced, 88 per cent will go to Libya and only 12 per cent to Petro Canada.

In contrast to the general worldwide trend, recent governments in Saskatchewan have emphasized maximizing the return to the private corporations and minimizing the return to the people of the province. Between 1991 and 2007, the province collected only 17 per cent of the revenues from the sale of our oil. This is a dramatic change in policy since the 1970s and early 1980s, when our government collected over 50 per cent of the revenues.

The second basic policy is that Saskatchewan should export our oil and natural gas to the United States as fast as possible. In contrast to Alberta, there is no public debate or discussion in this province. We can thank the NDP for that.

Warnock is author of Selling the Family Silver published by the Parkland Institute and CCPA-SK.

© The Leader-Post (Regina) 2008