Canada and natural gas and fertilizer and get on it

From the BOE REPORT

Terry Etam

Is anyone else out there having trouble keeping up? A week ago I thought AI was the topic of the decade, either going to render humanity useless or lead to some sort of free-high-income ‘paradise’ where we don’t have to do anything at all. Kind of a big deal.

And yet this past week I’ve hardly heard a word about it. It must be all over. AI must have slipped us into the matrix so quietly and efficiently we didn’t even notice. 

But probably not. Nothing like a good old war to bump AI off the front pages, that and…oil prices up 25 percent in a single day (or wherever they are now). 

You all are here for energy news, which is not in short supply, because the internet is this week full of tens of thousands of brand new Strait of Hormuz experts, who moved on from being Venezuela oil experts a few weeks ago. Insta-geniuses are remarkably nimble with ChatGPT in the holster. 

Such swarming is unfortunate, because actually there is a ton of good information out there from true experts that have come to the surface. These experts have been there for a long time, but no one cared. And now they do. And some of those facts about the Strait of Hormuz are definitely attention-grabbing, well beyond oil markets.

But first, about those oil markets, which remain absolutely important because the price of oil drives everything, and US President Trump is as sensitive to oil prices as one can possibly be.

Thirty years ago, there was a mighty beast that lurked in the oil markets, mostly dormant, but sometimes not, and the beast was known as ‘geopolitical risk’. At the first sign of trouble in the Middle East, oil prices would jump by a significant percentage almost immediately, and just hover there nervously until whatever skirmish dissolved back into the weeds. 

For the past 15 years or so, markets got bored with that whole topic, and geopolitical risk was largely ignored, because the shale revolution flooded the market and held prices steady no matter what sort of bombastic goonery happened in the Middle East. In a period of remarkable growth, US oil production shot up dramatically, and seemed to be able to respond rapidly to price signal. Here’s a representative commentary circa 2015 that captures the spirit of the times, from the Strauss Center for International Security and Law: “The Shale Revolution may be changing some core structural dynamics in the oil and natural gas markets, in large part because shale production is believed to be more flexible and responsive to market conditions than most forms of conventional production. Shale production is more likely to be shut down when oil prices drop well below break-even points, and it can be ramped back up again more quickly than conventional production whenever prices rise. This is likely have significant long-term effects on the oil and gas industry…”

And it sure did. Until it doesn’t. 

Without a doubt, shale resources are capable of a lot of production, and actually increasing production as well. But not at the trajectory the world became used to. And, despite the fact that wells can now be drilled in astonishingly quick times, that speed isn’t enough to keep up with global supply shocks, because drillers don’t respond to price shocks the way they used to. 

A few decades ago, when Saudi Arabia was the true swing producer, they would jack the market around any which way they wanted to push price signals, and everyone believed them because they could and did rapidly shut in production to support prices, or do the reverse. Over time, they didn’t even have to actually take these actions; they simply said they would do it and markets reacted accordingly like a well-trained dog.

Shale drillers are different (as are most producers, not just shale). They respond to price signals; they don’t proactively manage them. And they have become a very skeptical bunch, not impressed by short term price fluctuations, not enough to go crazy with the drill bit anyway.

The Wall Street Journal ran an article on this very topic the other day called ‘Why American Frackers Aren’t Rushing to Pump More Oil’. Various quoted executives captured the mood: ‘ “What we’re doing today is nothing different than I did yesterday,” said Wes Perry, chairman of Permian driller PBEX. “We’re not running any new economics.” ‘

‘ “We don’t like to whipsaw these programs up or down,” ConocoPhillips Chief Executive Ryan Lance told analysts.’

‘ “Do you really want to sign a contract at $75 plus oil, or let’s just say $90, and by the time you sign the rig contract, get the rig out there 90 days later, oil is straight back to $50?” Said a managing partner of Formentera Partners, a US oil and gas producer.

The most common theme amongst producers is that they would need to see prices rise and stay high for at least several months, and also show some strength in forward markets so that higher prices can be locked in for a period of time long enough to help ensure well payouts. Until that happens, producers will generally just take the extra cash to fortify themselves, pay down debt, or return to shareholders. 

So we are in a new world order, where OPEC is pretty much tapped out as far as being able to ramp up energy prices at will, and the world’s largest producer only reacting to prices and not managing them as OPEC did when in its prime. 

What’s scary this time around though is the reappearance of the beast, geopolitical risk, and this time it’s not messing around. (Best analysis I’ve found, one everyone should read, is here – a clear, concise explanation of the global machinery and strategies at play around Iran. This is not a US-bombs-a-country story. It is a geopolitical lynchpin to everything).29dk2902lhttps://boereport.com/29dk2902l.html

There is a reason so much attention is being focused on the Strait of Hormuz situation. It is not just a pinch point for oil supplies, a huge amount of other materials flows through there as well. This region is a major transshipment alley between Asia and Europe. 

If energy people, and Alberta, and Canada, take one thing out of the Hormuz situation it is this, and it is a very big deal, possibly as big as it gets, and the solution is obvious and the right thing to do:

One third of the world’s supply of nitrogen fertilizer passes through the Strait of Hormuz. The reason so much fertilizer originates in that unstable part of the world is because of access to cheap natural gas. This is little else more relevant to Canada than that.

Are you listening politicians? Danielle Smith? Tim Hodgson? Mark Carney? It is possible that the world will be in a very desperate need for fertilizer soon, and there is no better place it should come from than Canada, with our pathetically low natural gas prices. 

No, creating businesses is not the government’s business – getting out of the way, is. Clear the regulatory detritus! Canada can shine in a remarkable way, not just from our resources, but from…feeding the world. Even more than our awesome farmers already do. Politicians, put your crafty little heads together and clear the path. Stop chasing climate goblins and get to work.

Of course, none of those key governmental people are reading this. But someone is that knows someone that knows someone that can force these facts into their field of view, along with Alberta’s perpetual low gas price environment. 

And also of course, there is no way Canada could develop a fertilizer industry in time to deal with this crisis. Possibly the current situation resolves itself, and there is peace in the Middle East forever more.  You may calculate the odds on that at your leisure.

What the current situation in both Iran and Ukraine is teaching us is that modern warfare is a new kind of  asymmetric – major upheavals that are very hard to eradicate can be triggered very cheaply. Bad actors can render key pinch points like the Strait helpless with relatively cheap and hard to detect drones or drone boats. The current imbalances are stark, where $3 million missiles are used to shoot down $40,000 drones. (This has always been the case; a handful of terrorists responsible for the 9/11 terrorist attack have added who knows how much to global travel bills ever since in the form of enhanced airport security costs. Or look how the October 7 attack, at a cost of almost nothing, has roiled the world and now cost probably trillions. Terrorist acts are the epitome of cost asymmetry. But this current situation is all new in the sense that we can see that a third of the world’s nitrogen fertilizer supply can be cut off in this way.) If Canada has an ounce of strategic thinking capacity, it should be a gaping global security hole that this country could be in a relatively unique position to fix. AECO gas is a global outlier in terms of being so bad (for producers) but potentially great (for industrial users), if we don’t boat anchor any industries with unnecessary regulatory and climate costs.

Here’s a thought a little more blunt to help get their attention: Eight billion people do not survive without a healthy global fertilizer industry. The industry is built on affordable natural gas. Canada has vast quantities of natural gas, cheaper than almost anywhere in the world. Is that bullet-pointy enough, politicians?

There is no better way for Canada to regain relevance; the building blocks are there and ready to go, the people and technology same. Chasing Chinese EVs is ideological nonsense; building the world’s biggest fertilizer industry should be Canada’s number one priority.

At the peak of the energy wars, The End of Fossil Fuel Insanity challenged the narrative of imminent fossil fuel demise, facing into the storm. And now everyone is coming around to this realization as well. Read the energy story for those that don’t live in the energy world, but want to find out. And laugh. Available at Amazon.ca, Indigo.ca, or Amazon.com.