About 15 years ago, CBC Radio had an environmentalist as a frequent talking head. This fellow did not like the petroleum industry. He had anecdotes of all the atrocities committed by the oil and gas extraction. But he had little knowledge of how the petroleum industry actually worked.
One episode had him railing against oilfield waterflooding. According to him, the industry was extracting fresh water from rivers and lakes. Millions and millions of cubic meters. Millions. From rivers and lakes. Injected into oil reservoirs underground. To help push oil to the surface. Then the fresh water from rivers and lakes stays in the reservoir forever, contaminated by oil.
I wrote an email to CBC Radio. The email said that the petroleum industry does use water to extract oil. But nearly all of this water comes from the reservoir itself. Most oil wells produce both oil and salt water. When this mixture reaches the surface, it goes through specialized pressure vessels called separators. Natural gas leaves the top of the separator. The oil leaves the middle, and the saltwater leaves at the bottom.
There’s just too much salt water to leave at the well site. So, the petroleum industry injects the salt water back into the reservoir where it came from, pumping it through an “injector well.” As the salt water moves into the reservoir, it pushes oil closer to the “production wells.” In essence, the industry uses a waste product to help it find more of the useful product.
This process is called waterflooding. It has been widespread since the 1950s. To shame the petroleum industry, the talking head made it seem all this water came from rivers and lakes.
I didn’t get a response from CBC Radio. But that was the last time I heard this “expert” on their program.
Subsidies, Subsidies, and More Subsidies!
The internet is full of articles about how much the government is subsidizing the petroleum industry. In the original Medium of this article, I had a link for an anti-petroleum article, But that article has now been pulled. This article talked about millions and billions and trillions of subsidies. But it was dreadfully short of any details. Which oil company? Which country? Which project? When? Why? It seems to me that all these anti-petroleum websites are quoting from each other, with no one offering any details.
In my days in the petroleum industry, I knew of three big projects that were subsidized by the Canadian federal government: Canada’s second heavy oil plant (Syncrude), Offshore Newfoundland (Hibernia, Terra Nova, & White Rose), and Offshore Nova Scotia (Sable Island).
The timing of these projects was a decade after the oil shock of 1973 when OPEC rattled the world with high oil prices. There was political will in Canada to prevent a similar supply disruption from happening again — and these three projects seemed to fit that objective.
The petroleum companies told the government that the numbers were not there for them to develop these oilfields. If the government wanted these projects to go ahead, it would have to put some cash into them. After some intense negotiations, they came to this arrangement. My general recollection is that the Canadian government got a 25% equity stake in these projects while paying 50% of the costs. I would agree that we should call that the first 25% difference as a subsidy. But not the other 25%.
Did you notice I gave you a little story of how the petroleum industry was subsidized 40 years ago? I put in more details than all those hundreds of articles put together about subsidizing the petroleum industry. You would think those articles would put up similar stories — if there were such massive subsidies.
Here’s another angle to this story. This subsidy made possible the social/economic policy the government wanted to embark on. While the merits of this government directive are for another discussion, it is unlikely that Syncrude, Hibernia, and Sable Island would not have been developed — at that time. We should not assume the petroleum industry forced the Canadian government into this subsidy. The government had a social/economic objective. The petroleum companies had a profit objective — and the expertise to develop the resource. The two parties negotiated a deal that satisfied both of their self-interests. Those negotiations moved these projects off the ground to make Canada more energy self-sufficient.
While I did work on Hibernia, most of my time was in the conventional side of the petroleum industry. I did not hear of any subsidies for these wells, despite what hundreds of anti-petroleum articles may claim.
Since Syncrude, there have been about 15 other heavy oil plants built in Canada. Whether any of these had been subsidized, I cannot say. I suspect some of the earlier ones were subsidized; the later ones were not. The later plants were built with no big mandate for Canada to become self-sufficient in oil. If these plants were subsidized, then we had a very foolish government.
The conventional petroleum production has morphed into intensive fracking of oil and gas shales. I doubt any of these projects are subsidized. If the petroleum engineers and geologists had not seen profits with the new technology, these new fields would not have been developed. Instead, the anti-petroleum activists like to portray taxpayer dollars paying for these wells and the pollution they cause. The industry has no real investment in these wells. Right?
One of the anti-petroleum articles I ran across cited the International Monetary Fund as a credible source to verify all the subsidies given to the Canadian petroleum industry. Using the IMF’s name might entice credibility for the article as being true. But this sounds bogus to me: the IMF has a much different mandate than monitoring the Canadian petroleum industry. And given the IMF’s neoliberal agenda, I can’t see why it would want to put the petroleum industry in a bad light. Again, that particular article offered no details, just “The IMF said.” Probably linked to another article that said, “The IMF said.”
When Subsidies are not Subsidies
Sometimes my “petroleum subsidy” rabbit trails go in interesting directions. Too often, I see an economic activity being called a subsidy when it is actually something else. Here are some common yet incorrect calls on “subsidy.”
Royalties Too Low
Today’s laws have the oil and natural gas mostly owned by the governments that have jurisdiction of the area over the petroleum reservoirs. In order to allow the petroleum company to extract the oil and gas, the government gets a royalty on the production. Most royalties are set somewhere between 5% to 50% of total production. When the petroleum company sells the product, it sends the government the royalty payment.
When setting the royalty rate, governments try to maximize their royalty revenue. If the royalty is too high, petroleum companies have less interest in developing the resource. If the royalty is low, then development is more likely. So bigger royalty revenue is possible with a lower royalty rate. As well, oilfield activity provides more opportunities for local employment and business. Citizens like more earning options a developing oilfield can give them. The setting of royalties is an economic balancing act, which requires petroleum economists to figure out. The setting of royalties is also a political balancing act, and the politicians and economists figure out how to balance royalty revenue and jobs.
On the internet, we can find experts who claim that the royalty rate set by this country or that country is too low. The petroleum company always got too good of a deal; the government could have charged more. The difference between the actual royalty and what the expert says is often deemed to be a subsidy. But that is not a subsidy.
These same experts fail to acknowledge that there would be less development with the higher royalty rate. This is just Economics 101.
Exploration & Development License
Governments put up tracts of land (or offshore areas) for auction. Petroleum companies bid (usually a sealed bid) on these tracts. The successful bid gets the license for petroleum exploration and development.
The license has two basic features. First is the duration of the license. The petroleum company has a time limit to develop the resource. If it fails in this time frame, the tract is turned back to the government, which can auction it off again. The second is the size of the tract, which can range from 100 hectares to hundreds of square kilometers.
There is a strategy for acquiring licenses. Bigger petroleum companies prefer longer durations and bigger tracts. Smaller petroleum companies prefer the smaller tracts (less expensive to acquire the tract) and don’t seem to mind the shorter duration (they can quickly put together a development program). Most petroleum companies will acquire at least five licenses; they will direct their capital investment to the license with the best prospect for finding profit, leaving the other licenses for another day. And yes, the expiry date often affects their decision on which license to invest in.
Again, the petroleum economists will advise the government on how to set up the terms of the license to attract better auction bids.
And again, the internet has “experts” telling us that the price paid for petroleum licenses is much too low, which they then count as a subsidy. But this is not a subsidy.
The experts failed to mention that the license was put up for auction, so we should assume the successful bid was a reasonable reflection of the market value of the tract at that time.
Externalities
I first entered the Alberta oilfields in 1977. There was an attitude that workplace accidents were part of the risk that oilfield workers had to accept to get the big paycheck. In those times, the Alberta oilfields were killing about 40 oilfield workers a year, injuring many more.
The petroleum industry never assumed the direct cost of these workplace deaths or injuries. That was left for the government, the worker, and the worker’s family to bear the brunt of that sacrifice to find oil and gas for the rest of us.
This is called an “externality.” Basically, an externality is a cost not assumed by the profit-seeking entity. Externalities are introduced in many first-year economics textbooks.
But an externality is not a subsidy.
BTW, the Alberta government enacted many new regulations about oilfield safety, starting about 1985. Let’s just say that oilfield deaths might be five workers in a bad year. Safety regulations have improved in this industry.
Conclusion
In my previous articles in this series, I talked about the transition from fossil fuel to renewable energy, which we should have been embarking on since 1982. We are transitioning, but it is not part of some master plan. More like two left feet with one foot in a gutter.
My concern is that whenever we vilify the petroleum industry with faulty information and analyses, the industry uses these vilifications to delay the transition. They can go to the politicians and senior bureaucrats, point out the errors, and say “See, our opponents don’t know what they are talking about.”
In other words, the activists might have been making things worse, not better.
We need to question all anti-petroleum articles and activists. Are they being truthful? Are they being sensationalists?
We, the public, need a better understanding of how the petroleum industry operates. I hope this article has given my readers a better understanding. For sure, this article is a better primer of the petroleum industry than the several hundred anti-petroleum articles put together I have seen over the years.
But, more importantly, we need a different system of governance. Just so we can manage the petroleum industry — and most other industries — a lot better. All the beneficial changes I have mentioned in this series should have happened much sooner. The corporate world needs to be the servant of the people. Our current system has failed to get this subservience.
We need a different system of governance!
And like ranting about anti-petroleum activists who know very little about the petroleum industry, that different system is, unfortunately, also an unpopular opinion.
Published on Medium 2023
