Meta-report on Potash takeover

Felix Salmon pulls together what he likes to call a report report report on the Conference Board of Canada's report on various Potash Corp takeover scenarios, and the media's coverage thereof. The punch line is that

A successful takeover of Saskatoon-based Potash Corp could slash the province’s revenues by at least $2 billion over the next decade while having little or no net effect on employment, according to a report commissioned by the province.

... but a takeover by Sinochem would be far worse, with potentially foregone tax revenues of more than $10 billion over the next ten years.

Potash Corp's CEO has been doing a lot of talking, but I find it impossible to believe that a Sinochem bid could ever be politically feasible, so unless another multi-national bidder emerges, he won't be independent for much longer. That said, the market is still trading higher than BHP's $130/share offer price so a critical mass of people does seem to believe someone else - or another higher bid from BHP - is still out there.

The Oil Drum series on Canadian oil sands

The Oil Drum has now posted the second part of its series on the Canadian oil sands (parts one, two). In my view it's overly dismissive of some of the environmental charges against oil sands, but is nevertheless highly informative and useful for anyone interested.

One chart I liked (I had been searching for a good version) was this from CERA on well-to-wheel emissions for different types of crude. Oil sands come out not much dirtier than other oil sources.

CERA is chaired by Daniel Yergin (of The Prize and of recent Peak Oil notoriety) and is a highly knowledgeable, well-respected, and middle-of-the-road energy firm, so I trust their numbers on this to be pretty robust.

China dealwatch: oil sands

China keeps up its terrific pace of resource-related deal-making with a big investment in Canadian oil sands. It's welcome news, from the perspective of the Canadian Globe and Mail:

A major Chinese energy company has delivered a jolt of confidence to the oil patch with a $1.9-billion investment that marks China's biggest entry into Alberta's oil sands.

In a deal that many took as proof of the oil sands' continued attractiveness to deep-pocketed investors, Calgary-based Athabasca Oil Sands Corp. sold a 60-per-cent interest in two of its undeveloped projects near Fort McMurray to the international unit of PetroChina Co. Ltd.

The Globe and Mail notes that the valuation is quite bullish:

For many, however, the Athabasca deal was notable for the value it assigned to oil sands assets, whose worth has been debated ever since Total made a hostile bid for UTS earlier this year that analysts said ascribed no value to its oil reserves. Analysts calculated that PetroChina will pay just over 60 cents a barrel for Athabasca, which marks a return to some of the valuations seen in 2007 and 2008, and implies a value for companies like UTS that is roughly double their current trading price.

Environmental Capital has a hypothesis on why China would invest, given the lack of infrastructure to pipe the crude across the monutains to the Pacific Coast, where it could be shipped to China.

In the meantime, the Athabasca projects might give PetroChina a chance to refine, as it were, its technical expertise with heavy oils—the projects will use the same technology as found in some Chinese domestic projects.

That makes sense to me - China is on a shopping spree not only for foreign resources, but also for the skills that will allow it to fully exploit its own natural endowments.

The latest Peak Oil spat

A reader has asked for me to weigh in on the recent Peak Oil spat; in truth I was meaning to do so, but the commentary has piled up and I felt increasingly intimidated by the task of commenting on it. But here's an attempt at a quick synopsis:

To warm up, on Monday, Daniel Yergin (author of The Prize, the best book about oil I've ever read) wrote a piece in FP saying basically that Peak Oil fears are overblown because the combined response of technology and demand will adjust the world to declining conventional supply.

Then, main provocateur Michael Lynch published an NYT op ed calling Peak Oil "a waste of energy" and making the aggressive claim that oil is destined for $30/bbl in the long term.

The response was quick and furious; not one but two point-by-point rebuttals from The Oil Drum, as well as one by Morgan Downey (the author of the best book about oil I haven't finished reading yet, Oil 101 - I got diverted but it has received great reviews from very credible sources). And from the complete other end of the spectrum, Climate Progress took Lynch to task, going so far as to offer a bet:

Here’s my bet to Lynch. Let’s take the average price of oil from 2010 to 2015. For every $1 a barrel it is below $40, I’ll pay you $200, if you pay me a mere $100 for every $1 a barrel it is above $40.

That should be a no-brainer since I am giving him 2-to-1 and spotting him $10 a barrel off of what he says the right price is.

As I've mentioned before, I fall somewhere in the middle - I think $30/bbl is implausible, but the combination of 1), massive unconventional reserves (oil sands in Canada and Venezuela, deepwater in Brazil and who knows where else) that can be produced at a cost around $50-100/bbl, and 2), the power of high prices to destroy demand and incentivize development of alternative energy sources makes it unlikely that prices will settle much higher than $100/bbl in the next decade. Now, there may be volatility and prices spikes driven by supply shocks - we may have one coming, in fact, as the current recession has slammed exploration capex - but these will only last as long as it takes to deploy additional capital like it was deployed in 2007/2008.

(There is the chance that major geopolitical chaos could result in sustained higher prices, but that isn't the mechanism Peak Oilers are betting on.)

Peak Oil is many things - a mathematical tautology, an effective gimmick:

But regardless of the holes in Hubbert’s theory, peak oil, the gimmick, still serves to remind us that some day the oil will be gone, out of our reach, or most likely of all, extraordinarily expensive. Peak oil, as a way of understanding the real costs–political, economic, environmental–embedded in oil production regardless of the day’s market price per barrel, needs to live on.

... but I do not see it as a rigorous analytical argument that justifies energy alarmism in the short term.

China is the ants, West is the grasshoppers

Via The Oil Drum, Dr. Stephen Leeb opines that resource scarcity means commodity-rich countries (the "BRACCs", Brazil/Russia/Australia/Canada/China) are the soundest long-term investment. Not sure I would go quite that far, but I do like this quote on China's recent pursuit of resources:

China has been stockpiling commodities, particularly oil and iron ore. Unlike Americans, the Chinese think long-term. Rather than worry about next quarter or next week, China plans decades in advance – and it has over a billion people to house, clothe, feed, and transport to work each day.

Buying resources makes perfect sense if you have even a broad idea of the resource crisis that's approaching. The problems we have today may seem big, but at least they can be solved by money. The coming resource shortage cannot. China's method of using money to accumulate resources is now one of a few possible answers. As the fable goes, they are the ants, and we unfortunately are the grasshoppers.