Losing Our Energy Security

Keith Kohl

Written By Keith Kohl

Posted July 22, 2011

Energy security.

At one point or another, we’ve all heard this term…

We have much less of it now than ever before. Even scarier is the fact that going forward, our energy security will be increasingly unstable.

On Tuesday, I wrote about China’s thirst for Canadian energy — particularly the oil resources being developed in the massive oil sands deposits. On Wednesday, China’s largest offshore oil producer, CNOOC Ltd, announced it has agreed to buy Opti Canada Inc. for $34 million and $2 billion in debt.

Think about that for a minute…

Adding another $2 billion to the buying price means China has pumped more than $10 billion into the Canadian energy industry over the last several years.

This announcement is significant because it marks the first time China has actually bought a Canadian oil sands company outright. Past deals have involved interest in other company’s assets, or joint ventures with Canadian energy companies… but this was a takeover, pure and simple.

And while we didn’t mind much when Sinopec spent billions of dollars for a stake in Syncrude’s mining operations, the Opti Canada deal hit closer to home for us; it was a SAGD play.

We’ve mentioned before that Canada has been wary of this exact predicament. Officials have said time and again that they would block any move to completely take over their oil and gas industry.

Is this Canada’s chance to show their resolve?

Unfortunately, that’s not likely the case. Unlike last year’s deal between BHP and Potash Corp — which was blocked by the government — Opti Canada isn’t exactly a monster in the oil sands… not with only a $32 million market cap.

So why should we be worried about China stealing our energy security? Have we been blind to the real problem here?

The Peak Oil Problem that Started it All

We’ve known for more than forty years that our go-to source of fuel — cheap, easy-to-get crude oil — is heading down the backside of the Peak Oil curve.

Just so we’re on the same page, we waved goodbye to producing 9.6 million barrels per day in 1970. No matter how bullish we are on domestic drilling, it’s going to take more than a 2.8% year-over-year (from 2009 to 2010) increase to get us back on track.

We also know Peak Oil isn’t a problem reserved for the United States. Hopefully the send-off and thank you cards were enough, because the oil crunch is looming just ahead…

Even the International Energy Agency (IEA) is getting cold feet. Is there another explanation for why they would continue to threaten more SPR releases? The results of the first release are still in question, yet the IEA feels continues to say the door is open for similar moves in the future.

It’s like poking a lion with a stick; if we thought the OPEC was angry at the first release, imagine how they’ll react to another threat. This time, the OPEC’s decision to cut output won’t be so divided…

Back at home, our future energy security is paying the price. And believe me, we’re going to want Canada on our side going forward.


The Last Frontier’s Failure

We know we pick on Alaskan oil production often. But to be fair, it’s an easy target. Remember, Alaska is supposed to be our second-largest oil producing state…

The state’s production has plummeted 66% during the last twenty-three years. When discussing Alaskan oil, it’s all about the North Slope. That’s where the state produces 97% of its oil. The USGS cut its estimate for Alaska’s undiscovered, conventional oil reserves by more than 90%; the 10 billion barrels previously thought to be there have dwindled to a mere 896 million barrels.

So Long, and Thanks for All the Oil

We’re not the only ones who see Alaska’s hopes falling alongside production…

Even though Big Oil is demonized more often than not in the media, you have to give them a little credit. Big Oil isn’t stupid. These companies are jumping ship right now rather than be bogged down in Alaska’s Peak Oil woes.

While BP continues to clean up its latest “oops, sorry about that” spill — this time in Alaska’s North Slope (hey, at least it was only 4,200 gallons this time, right?) — others have simply packed up and bid adieu to the Last Frontier.

Chevron has been looking to sell its oil and gas assets in the Cook Inlet, where the company produces about 4,000 barrels of oil and 85 million cubic feet of natural gas on a daily basis. This includes their stake in two pipeline companies.

If nothing else, Big Oil’s exodus from the area is an example of where Big Oil is pinning our future energy security. In 2010, Chevron dished out a cool $3.2 billion to buy Atlas Energy, taking its first steps in the shale gas boom. They’re well aware that all the drilling in the world wouldn’t save Alaska from the land of lost production and field decline…

It’s only a matter of time before those Alaskan oil refineries are inputting more crude from Canada than from their own state — unless, of course, that oil already belongs to China.

Until next time,

kpk 7 21

Keith Kohl
Editor, Energy and Capital

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