When the BC NDP was in Opposition, its leading voices warned it was a bad bet to spend taxpayers’ money to secure liquefied natural gas projects for the province.
In 2015, then finance critic Carole James called the BC Liberals’ LNG plan “the wrong direction for a government to go.” Around then, Michelle Mungall, destined to be energy minister, characterized the sitting government’s wooing of LNG “the big sellout of British Columbia.”
And current Environment Minister George Heyman warned, “We are creating significant environmental catastrophe, significant health issues and we are going to cost the economy of this province, this nation and the world billions of unnecessary dollars.”
That was then and this is now. Which is to say there seems even less reason for the BC NDP government to be granting the LNG industry big tax breaks, subsidies and friendly regulations while siding with it on pipeline controversies.
Why? Because hydraulic fracturing — the method used to extract methane gas for LNG export — has gone from boom to bust. Which means LNG derived from fracking looks worse for taxpayers daily, a lousier bet even than when New Democrats urged extreme caution.
Fracking came on stream more than 15 years ago during a period of high oil prices and cheap credit. But the industry then tanked global prices for oil and methane with rampant overproduction in North America. With $40 a barrel oil, the industry can no longer pay its bills, let alone generate a profit. Natural gas prices sit at all time lows also due to fracking.
As a result, companies that frack shale rock for oil or gas continue to burn through more cash than they generate, says a new report by the Institute for Energy Economics and Financial Analysis released earlier this month. An analysis of 34 fracking firms in Canada and the United States found that they spent $3.3 billion more on drilling and other capital projects during the second quarter of 2020 than they earned. These losses reflect a long and dismal track record for the disruptive technology of fracking and horizontal drilling.
Even before the pandemic, the industry delivered a decade of negative free cash flows due to the high cost of fracking technology in an era of volatile oil prices.
As the report notes, the shale revolution may have succeeded in temporarily boosting tight oil production in the U.S. and methane production in British Columbia, but the costly and tremor-causing technology “has failed as a financial endeavour.”
Of the 34 firms analyzed, five are Canadian companies that operate in B.C. or Alberta, such as Arc Resources (it lost $45 million in the second quarter of 2020) and Crescent Point Energy Corp.
“I’d say that the Canadian companies have similar trends to the U.S. frackers,” said Clark Williams-Derry, the report’s senior author, in an email to The Tyee.
“The companies that report in Canadian dollars are generally smaller companies and they’re a smaller sample, so it’s hard to compare apples-to-apples. But from March 2014 through Q2 2020, the companies in our sample that report in Canadian dollars had aggregate negative free cash flows of $5 billion.”
Companies with negative cash flows often sell off assets, lobby for government subsidies, dip into cash reserves or go bankrupt.
In the last year Canadian firms have cut their capital investments by two-thirds in order to stay solvent. Others have capped production below what’s possible.
“Cutting capital investments has been good for free cash flow in the short term, but doesn’t offer a particularly good long-term outlook,” added Williams-Derry.
North America’s fracking industry has collectively lost $29 billion since 2019, says the report.
If global oil and gas markets stabilize sometime in the future (and smart analysts are not forecasting that scenario soon), the IEEFA report “expects that cautious investors will continue to view fracking companies as high-risk enterprises with a terrible track record, weak financial fundamentals and an unproven, speculative business model.”
In recent years, Premier John Horgan’s NDP government has substantially increased subsidies to fracking companies. Such support caused Andrew Weaver, when he was leader of the BC Greens, to stand in the legislature and cite — with derision — BC NDP members’ own words against fracking and LNG when they were in Opposition.
The same increased LNG subsidies make fracking a pocketbook issue for this election. Those subsidies come out of taxpayers’ pockets.
According to a recent report by Stand.earth, fossil fuel subsidies totalled $998 million this year and will surpass $1 billion next year. That’s almost double what the BC Liberals spent on supporting the shale gas industry in northern B.C.
Meanwhile, bankruptcies continue to plague the industry across the continent. The Texas law firm Haynes and Boone foresees “a steady stream of oil and gas producer bankruptcies.”
In recent months, a number of large companies such as Total, ExxonMobil and Royal Dutch Shell have written off billions of dollars as the pandemic and the push to reduce emissions have stranded high-cost assets with large carbon footprints, such as the oilsands and fracking projects.
In its latest annual report on global energy, BP Energy Outlook advises that annual global oil consumption (100 million barrels a day) may have peaked due to lower energy demand caused by the pandemic lockdowns, and the growing need to combat climate change. The BP Energy Outlook warns that it is unlikely oil demand will surpass 2019 levels and that global energy demand could decrease or level off over the next three decades.
Given that oil underpins more than 90 per cent of global GDP, that decrease signals dramatic economic upsets and contractions. Maybe even the toppling of states (see sidebar).
Analysts generally agree that forecasting prices and oil demand has become increasingly difficult due the pandemic as well as industry’s crisis with overproduction, poor-quality resources and high debt loads.
Marco Dunand, chief executive of commodities trading company Mercuria Energy Group told the Wall Street Journal, “This has never happened in history, where people couldn’t predict with such a magnitude where the demand could be in three-to-four months’ time.”
The pandemic has unsettled the global oil industry by slowing down economies, changing travel patterns, relocalizing markets, and creating new study and work habits.
Art Berman, a highly-respected analyst, doubts “that we are on the cusp of either a global energy crisis or the end of the oil age. It is more likely that both supply and demand will fall in tandem as the global economy contracts.”
Berman, who was one of the first analysts to question the economics of fracking, does not foresee a normal recovery for either fossil fuels or the economy. In a recent presentation he notes that the pandemic has merely highlighted and accelerated the industry’s critical weakness: unfettered expansion into extreme fossil fuel sources based on high debt loads. He also explains that it took nearly five years for the market for refined petroleum products to recover after the 2008 financial collapse.
It’s within this context that all of Canada’s oil exporting provinces, including Alberta, Saskatchewan and Newfoundland are experiencing high debt, budget shortfalls and fiscal uncertainty.
A good question to ask of politicians this election is whether B.C. will learn from the mess engulfing those other provinces who hitched their fortunes to fossil fuels. And whether a prudent leader for B.C. shouldn’t be adapting to a new world where fracking’s fortunes are collapsing.
Sidebar: THE FOSSIL FUEL SLIDE COULD TOPPLE STATES, SAYS EXPERT
The collapse in demand and prices for fossil fuels happening precisely as the fracking industry finds itself groaning under debt poses a major fiscal challenge for petro states that banked their futures on rising oil prices, says a tracker of global commodities and their depletion.
The actuary Gail Tverberg suggests that some petro states might eventually go the way of the Soviet Union.
That petro state collapsed in 1991 due to a sustained period of low oil prices combined with decreasing production, which dried up revenue to the state.
The energy shock brought down a decadent regime and unglued a union largely cemented by oil trades.
At the same time overall energy demand in the Soviet Union dropped, inefficient industries failed and much of the country experienced extreme poverty for nearly a decade.
“We are likely to experience the collapse of central governments of several of the oil exporting nations, in a manner not entirely different from the collapse of the Soviet Union in 1991” Tverberg recently wrote.
Teaser photo credit: By Joshua Doubek – Own work, CC BY-SA 3.0, https://commons.wikimedia.org/w/index.php?curid=27296187