The Canadian Oil Sands
In our last article we discussed the dismal future of the Oil Sands and of the companies that extract oil from the Oil Sands. Because producers in the Oil Sands can’t get world prices for their oil, and can’t ship the oil in sufficient quantities to the USA, the newest schemes involve building pipelines to the West coast to be able to load tankers and ship the oil overseas, or to ship gas to the West coast in order to liquefy and then ship the gas.
Never mind that by the time any of these projects get completed, the entire energy situation world-wide will have changed, and the demand for these products will not exist.
Consider This Scheme of Liquefying and Exporting Natural Gas
Sometimes one has to shake one’s head wondering at just how smart the CEO’s of some of these companies are. The basic premise of companies promoting these schemes, is that buyers in the Far East and Europe will pay far higher prices for natural gas, so we should build pipelines, we should build liquefying plants, and we should build port facilities to meet this demand. Of course all of this massive expenditure will be met by raising money from investors on the premise that these facilities will be providing and selling natural gas for decades to come and at high prices.
Natural Gas Supply for Europe
The fallacy of this theory is obvious. Let’s start with Europe. Currently Europe depends for a significant part of their natural gas being produced in Russia and shipped by pipeline from Russia to Europe. This supply is very expensive, travels through politically sensitive areas and disruptions can and do easily occur, and further Russia uses this supply as a political weapon. All this makes it sound quite reasonable for Canada to meet this demand and compete with Russia in this market.
When one examines the situation a little more closely, the obviousness of this market becomes somewhat cloudy. To start with, if natural gas can be found and produced so easily and so cheaply in the USA, do you really think that nature only provided the USA with this resource? Of course not. The rest of the world is just a bit behind the USA in the implementation and discovery. Vast amounts of natural gas will become available elsewhere, and in many elsewheres.
So this situation of the supply of natural gas to Europe will change quite a bit in the near future. New discoveries will be made in many places, and new supply will occur from central Asia and elsewhere. In our next blog, we will describe a company that is doing just that – building a natural gas supply in central Asia and shipping it to European and Chinese markets. Russian dominance of this market is not a sure thing in the future.
Then regard what is happening in the central republics of Asia and in Mongolia . Both of these areas are in closer proximity to the Asian and to the European market, and both are ramping up production. The European demand will be met by cheaper and closer supply. Compare the cost of liquefying and shipping gas from Canada to Europe, with the cost to Europe of obtaining gas from these other closer sources.
Canada will be left with expensive and massive underused infrastructure. Liquified natural gas will meet the same lack of demand as oil from the Oil Sands.
Consider the Current Asian Demand for Natural Gas
Most of the countries in the Far East currently need greater supplies of natural gas, especially China and Japan. The price of natural gas there is far higher than in Canada. The argument supporting these Canadian pipelines and liquefying facilities rests on Asian demand.
This rational is equally flawed. Firstly there are pipelines currently being constructed by Chinese interests to bring newly discovered natural gas from the central Asian countries of Kazakhstan, Tajikistan & Uzbekistan directly to China. Compare this to the far greater cost of sending Canadian liquefied natural gas to China.
Mongolia and Inner Mongolia (in the northern part of China) are current hotbeds of exploration. In Mongolia there is massive development of gold and copper deposits that are currently facing difficulties with interests in government who want a different share of revenues. As development continues, these issues will be settled, exploration will continue and expand because it is economically beneficial for all parties, and natural gas will become an equally important export of these regions also. Once again, proximity and cost will allow these regions to be very competitive with Canada’s proposed exports.
The Price of Natural Gas in Asia is Artificially High
A new report released this week from the International Energy Agency (IAE) sheds some light. The price of natural gas is very high in Asia. Japan and other area nations are importing gas at prices as much as 5x North American prices. The price is roughly $3 in North America and roughly $15 in Japan. Is it realistic to expect this will continue?
Changes are Coming
Singapore is now opening up its gas market to allow more competitive pricing, which the IAE remarks is a very important and first step towards freer gas trade in Asia. These Asian markets are tightly controlled by monopolies or tightly regulated by governments. Over 80% of natural gas supplied to the region is priced in direct comparison pricing to the price of oil with gas priced roughly at a 6:1 ratio to the price of oil. There is not a universal wholesale price as there is in North America. In North America the current ratio of gas to oil is roughly 30:1.
This cannot continue indefinitely. As pressures mount, and as gas supplies become more and more abundant, this exorbitant price paid in Asia for natural gas will come under increasing pressure. It is only a matter of time before the price of natural gas falls in Asia. Now consider the cost of Canadian firms building pipelines, building infrastructure, building liquefaction plants and then shipping the liquefied natural gas to Asia.
If you believe the future looks bright for these endeavors, I have some bridges to sell to you.
The Effect on the Canadian Currency
What all this means, is that Canada’s economic prosperity is slowing down, and will continue to do so.
The New Ascendency of the USA
The cheap energy that fueled the great prosperity in the USA has returned. The great financial meltdown of 2008 has wrung much of the excess out of the labor market, and caused so much pain that people are desperate for work. Unfortunately for those workers, but fortunately for the prosperity of the USA, productivity is climbing rapidly in the USA.
Cheap energy and cheap labor means that economic powerhouse called the USA is set to roar again. If you want to climb on this bandwagon, buy USA stocks.
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The views expressed in this blog are opinions only and are not investment advice. Persons investing should seek the advice of a licensed professional to guide them and should not rely on the opinions expressed herein. This blog is not a solicitation for investment and we do not accept unsolicited investment funds. Larry Cyna and/or the CymorFund may have positions in the shares of companies mentioned.
