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Anticosti, the SEA, and Profitability

January 6, 2016

3-minute read

Late last month a governmental study was released, ordered by the Quebec's strategic environmental assessment (SEA) on Anticosti. It attempts to estimate the profitability of oil and gas drilling on Anticosti Island despite there being no proof at the moment that there are enough fossil fuels in the area. Since I've been working on the topic, I was impatient to see how the various government department representatives evaluate the financial situation regarding fossil fuels on Anticosti. Here are a few observations on the report, which has gone mostly unnoticed.

Firstly, the report considers that the profitability of fossil fuel drilling on Anticosti goes through shale gas and not oil. Indeed, to be profitable, the potential estimated at 43 billion barrels of oil (p. 10) will need to be produced as follows: 77.5% natural shale gas and 22.5% shale oil (p. 15) over a 75-year period.

According to the scenario that the report considers "optimized" (p. 15), a small portion of the island would contain the totality of all 4,155 oil wells and would have an estimated profitability estimated at 80% or 86% depending on transportation scenarios (p. 3).

The government projections assume that the total production of 11,683 billion cubic feet and 584 million barrels of oil over 75 years, which will generate between $164 billion and $203 billion in revenue (38% of which would return to the government).

To produce and to transport all this natural gas, there are two options: creating a natural gaz pipeline or using factory vessels which can liquify natural gas on the spot. Infrastructure and operation costs are available in the table below.

Secondly, when looking at these projections, the production would bring in to state benefits ranging between $360M and $380M annually, representing between 0.34% and 0.36% of the estimated 2016-2017 revenue budget (p. D.5). In addition to being rather small, this proportion will necessarily diminish more or less year after year, since royalties will remain rather constant, but the state's revenues will increase slightly.

Obviously, this overview does not take into account the spending and investments that the state will need to pay for in order for the project to take form. In short, the revenues lined up for the state are of little interest.

Another point: I'm sceptical to see the report use Brent prices as benchmark to evaluate oil revenues. It's worth pointing out that the near totality of exports on the North American territory are traded in the United States and priced according to WTI as benchmark. Hence, by choosing Brent prices over WTI prices, the report is overestimating the economic benefits of drilling for oil on Anticosti.

In the study, the price of a barrel of Brent crude oil is estimated at US$90.28 for 2020 and US$122.17 for 2045. Considering that the US Energy Information Administration (EIA) estimates that WTI will only reach US$73 in 2020, the Quebec government's projections are $17.28 over per barrel between 2020 and 2045 (according to the report's methodology), which is far from trivial.

Furthermore, despite our best efforts, it seems impossible to estimate oil prices over a period longer than 30 years, and even less so for a 75-year period. Especially if we consider that the current political climate seems to suggest that politicians all around the world will set their minds on drastically decreasing carbon emissions produced by human activity. Therefore, the costs of polluting fossil fuel drilling are especially uncertain for years 31 to 75 in the scenarios provided.

Finally, a concern which often comes up in issues related to fossil fuel production is that supporting Big Oil will "create or maintain X amount of jobs". It is certainly logical that investments will create jobs. However, at the moment, each million dollars invested in the oil industrie creates 6.2 jobs. In contrast, each million dollars invested in renewable energy or energy efficiency creates around 15.1 jobs. If Quebec is going to invest, it should instead aim to create green jobs rather than to support an industry that will slowly but surely come to disappear.

As for jobs that will be "maintained" by these investments, they are usually jobs in refineries or in natural gas distribution. These jobs are not endangered: companies like Gaz Métro and Valero are here to stay. Therefore, it would be very bad public policy to invest in a sector to maintain jobs that are already here to stay.

In short, I don't think that funding fossil fuel drilling on Anticosti is the jackpot we are told it could be. It would be much more interesting for the state to work towards "recycling" these industries and to push them towards greener avenues: it would produce greater economic and environmental benefits.

Bertrand Schepper is a researcher with IRIS, a Montreal-based progressive think tank. 

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