The Bird Lady

Scaly-breasted munia

In this Buddhist kingdom, you will often find a bird lady just outside the gate when you go to a large wat, or temple. Bird ladies sell freedom. They sell birds in tiny cages – cages scarcely larger than the birds themselves, and certainly not large enough for those trapped creatures to spread their wings. You don't get to keep the birds, however. For 20 baht (about 40 cents), you get to pull a pair of bamboo bars to release two birds into the wild. One bird is 10 baht, but six birds are 50.

Thailand’s bird ladies give a discount for volume. It is Ahsalahabucha Day, a Thai celebration of Buddha’s first sermon to his first five followers. I pay to release two birds, examining them before I set them free. They are scaly-breasted munias – twittering finch-like birds common on fields in flocks. If they reach maturity, their breast-plumage will take on its trademark brown and white scale-like pattern. My birds are fledglings, however; they are not strong, and their survival in the wild will be perilous. I wonder about this transaction. A woman holds for ransom two small creatures, and then they fly free. She now has a small amount of cash. But what does the purchaser have?

A practising Buddhist might gain some merit toward getting off the eternal Mandela of life, suffering and death. What I have gained, I am not sure. I do know, however, that it needs investigation. There is a metaphor here. Let’s follow it. Buddha’s first sermon enunciated the four principles of Buddhism – the Four Noble Truths. All things are a source of suffering, he taught. Because it can never be fully satisfied, desire is the cause of suffering. Freedom from suffering can only be obtained through the cessation of desire. Lastly, moderation between the extremes of sensualism and asceticism – “the middle way” – can eliminate desire and therefore suffering. With these teachings, he set off a chain reaction that transformed much of Asian society.

Twenty-five hundred years later, Asian societies whose kindness and gentility owe much to these ideas are rushing headlong into market economies, thereby beginning a different kind of transformation. They are responding to market economics so effectively that they are beating the creators of capitalism at their own game. As the pennant of capitalism moves across Asia, however, it is being handed to peoples for whom some of its fundamental ideas are culturally absurd. For example, many scholars maintain that capitalism arose out of the oldest known environmental mission statement: ''be fruitful and multiply, and fill the earth and subdue it; and have dominion over the fish of the sea and over the birds of the air and over every living thing that moves upon the earth.''

Control over nature is woven into the fabric of western society as a moral imperative. In the prevailing view in much of Asia, however, mastery over nature can be nothing less than illusion. Moreover, the motor of market economics is the idea that maximum consumption leads to maximum satisfaction. This notion is fundamentally at odds with Buddha’s concept of the middle way. Even so, it is common intellectual currency in the vast cities of Shanghai, Mumbai and Bangkok to describe these years as Asia’s Century.

In this century, goes the thinking, the mainland's nations will continue to bring people out of poverty at record rates. In this century, previously impoverished countries will develop consumer economies to rival those of America, Europe and Japan. The countries of Asia have already become the workshops of the world; in this century, they will advance that position.

Outside my windows are two miles of lush green fields which end abruptly at the foot of a range of jungled mountains – distant foothills of the Himalayas. I live in a provincial outpost in Thailand – an economically insignificant country in the Third World. My home is in the northern periphery of Southeast Asia – a clutch of nations that shelter more than half a billion souls. To the north is China, with its huge population; to the west, India with its equally teeming cities, towns and villages. Together, these mostly prospering countries host more than half the world’s population. Justifiably, they all want to continue to prosper, and their demands upon the planet are rapidly increasing.

In Asia’s Century, countless bicycles are giving way to motorbikes. Water buffalo are still yielding to mechanized farm equipment. Bangkok's legendary traffic jams tell the continent’s story of rocketing automobile demand. The economic growth in this region will lead to resource depletion on an extraordinary scale in Asia’s Century. Suppose, for example, each Asian begins to demand four barrels of oil per year instead of less than two barrels today – a big increase, but per person consumption still dramatically below that of the rich countries. Suppose also that production and consumption elsewhere do not change.

Using those simplistic assumptions, new Asian demand would soon consume almost all the oil the OPEC cartel now delivers to global markets. Inside and outside the Arabian Peninsula, the world’s great basins of conventional oil are in steep decline. Seen against the few thousand years since civilization began, a century is a considerable time. However, it is almost nothing when compared to the epochs since cellular life debuted on primordial seas and oceans.

Life exploded onto the planet during the Cambrian period of geologic time, beginning 540 million years ago. Its organisms were the raw material for the first oil. Now the world’s most widely traded commodity, oil supplies about 95 per cent of all transportation fuels and 40 per cent of the world's commercial energy. Think of the ages since life and oil began to form as if they have been ticking by on the face of a grandfather clock, starting in the earliest moments of the morning.

It was not until early afternoon that dinosaurs evolved and began to roam. They dominated Earth until seven minutes after nine in the evening. While oil has been developing on this imaginary clock for almost 24 hours, the petroleum industry – now the world’s largest business – did not emerge until five hundredths of a second before midnight. Yet on the stroke of twelve, the last of the world’s conventional oil will be gone. That will be the case whether production lasts for another hundred years, or two hundred.

 We are clever apes indeed, but we cannot replace half a billion years’ accumulation of this vital energy. During the few hundredths of a second since we began consuming oil, we have become much wealthier. Indeed, our wealth is now so closely linked to oil consumption, and our lives are so dependent upon it, that Daniel Yergin’s magisterial history of the industry defined contemporary humanity as Hydrocarbon Man. As Hydrocarbon Man becomes wealthier, we eat more fish – mostly from the world ocean that gave rise to life itself.

 Consider the consequences. A recent letter to the respected scientific journal Nature rattled the academic and environmental communities when it described the results of a lengthy study of the world’s commercial fisheries. This dry report concludes that 90 percent of the raw mass of predatory wild fish in the world’s oceans has disappeared in the last half century. They have been fished out.

Even so, radar and satellite finding techniques and other tools are making the industry’s fishing arsenal more effective. Thus, the entrapment of species is intensifying, not diminishing. Will the world’s fishing fleets soon be trawling empty seas? In a widely quoted statement, the two authors – both academic marine biologists – made no secret of their concern. “From giant blue marlin to mighty bluefin tuna, and from tropical groupers to Antarctic cod, industrial fishing has scoured the global ocean,” said one. “There is no blue frontier left….This isn't just about one species. The sustainability of fisheries is being severely compromised worldwide.” Added the other, "These are the megafauna, the big predators of the sea, and the species we most value. Their depletion not only threatens the future of these fish and the fishers that depend on them, it could also bring about a complete reorganization of ocean ecosystems, with unknown global consequences."

Such stories make human societies seem like cancers on the body of the planet – clusters of cells gone wild, gobbling resources at rates that threaten the very systems that make life possible. But the image is flawed: the death of the creature does not spell the death of creation. During the last half billion years, there have been several great extinctions – geologically brief periods in which countless species suddenly died out. But life always went on, and it will.

We need nature, but nature does not need us. The difference between the extinctions of the present era and those of the ancient past is that today’s are being driven by species rather than act of God. For the first time since the paleontological clock began ticking, one species has grown strong enough to threaten much of the planet.

This is the case for humanity as the bird in the bamboo cage. Who is holding that cage? Call her Earth Mother. Call her Gaia. Call her Bird Lady. The cage she holds is one of our making. As far as I can figure, the base price we will have to offer for our freedom is an exit from the treadmill of ever-greater consumption – abandonment of the notion that greater consumption for greater satisfaction is the proper engine of growth.

Such an idea was sustainable during the millennia in which personal consumption was small relative to the richness of the planet’s wealth. This is no longer so, and soon Asia’s rapid growth will force the issue. To be sprung from our cage, we must collectively endorse the notion of wise consumption in the interest of greater well-being.

What form that will take, I do not know. But as those moments of crisis arrive, I am sure Asia will have the upper hand. If this is Asia’s Century, it is not only because the continent has comparative economic advantages – among others, cheap labour, land and infrastructure – compared to the rich world. It is also because these nations have a living history of modest consumption. They have cultural traditions that make it relatively simple for large numbers of people to quickly shift back into a subsistence economy: such behaviour saved Thailand after the currency crisis of 1997, for example. In addition, many Asians hold deep-rooted beliefs sanctifying moderate consumption in the interest of a life of greater depth and substance. The fourth noble truth is one such idea.

By contrast, in the rich world there is little sense of the large gap of irrelevance between consumption and happiness, despite a wealth of academic findings about the relationship between the two. Psychology says happiness does not appear to depend significantly on external circumstances such as wealth, which many economists define as the ability to consume. In the world’s most consumptive nations, happiness levels today are no greater than they were fifty years ago. Indeed, in some cases the contrary may well be the case.

Westerners have consumed greatly, but not wisely. My children still live in Canada, a resource-rich country whose small numbers have lived abundantly off Earth’s wealth for centuries. I worry because they will inherit a world from which so much of nature’s bounty has been drained. Because Canada and the other rich countries have lived so well for so long, their children have no collective memory of times or traditions in which greater consumption was not society’s primary economic goal, and may have great trouble adapting to a globe without many of the riches which always before have been so easy to exploit. Will they fledge into a natural world so impoverished that even the option of small cage versus perils of freedom is unavailable?

August 2003

Colossal Chore

 

Even government computers are strained by oilfield waste

This article appears in the May 2009 issue of Alberta Oil Magazine

by Peter McKenzie-Brown

The story of petroleum is a story of waste.

Consider the volumes involved: At perhaps 3.5 million barrels per day, Canada is the world’s seventh-largest oil producer, and at 16.9 billion cubic feet per day, the third-largest natural gas producer. Add in the gas liquids and related products and the sheer volume of fossil fuels that flow out of the Canadian soil starts to become astronomical.

And these numbers measure “spec” oil and gas – products that are clean enough for pipeline transport. Consumers rarely consider the huge amounts of waste created as the industry brings its output up to spec.

At every stage, considerable volumes of waste need to be treated. Consider the sources of upstream oilfield waste. Seismic surveys, wellsite construction and drilling produce wastes ranging from bush cuttings to rock chips to drilling and fraccing fluids. Production wastes include salty byproduct water, gunk in tailings ponds, contaminants like carbon dioxide and hydrogen sulfide, and soil contaminated with sulfur. Once a plant needs to be decommissioned or a well shut in and abandoned, the producer creates more wastes that need to be carefully managed.

How much waste is involved? In Alberta, the Energy Resources Conservation Board regulates oilfield wastes. After a lengthy explanation of the limitations of the board’s computer system, Susan Halla, a regulatory manager, says, “We’ll be able to give you exact information in 2011.” In the meantime, she won’t even guess.

Even when detailed data are available, it will be incomplete. The reason is that most wastes from oil sands mining operations are not considered oilfield wastes. They are classified as “industrial wastes” and regulated by Alberta Environment rather than the ERCB.

Petroleum waste only begins in the “upstream,” exploration and production side of the industry. Once spec products flow through the pipeline into the “downstream,” refining and distribution processes produce wastes of their own. Like waste from oil sands mining, they are classified as “industrial wastes” and regulated by Alberta Environment.

By far, however, the largest volumes of physical waste occur in the distant downstream end of the petroleum products life cycle. Many items – plastics and chemicals, say – end up in landfills and dumps, unregulated incinerators, beaches and worse. Equally important, consumers burn natural gas and refined products to generate energy, thereby yielding carbon dioxide, nitrogen oxides and a variety of other unsavory incidentals. As emissions, however, they are technically not considered “wastes.”

The seriousness of upstream waste management did not become clear until the 1980s. An ERCB chairman of the era, the late Vern Millard, once explained, “We used to think Earth could absorb any amount of human waste without a problem. It has now become clear that it can’t.”

In an effort to obviate official regulation, the old Canadian Petroleum Association – the forerunner to today’s Canadian Association of Petroleum Producers – created an industry-wide voluntary code of waste management practices. Although regarded as a good stop-gap measure, the CPA guidelines didn’t last. Governments soon took over the job of regulation.

The ERCB’s role in waste regulation began in the mid-1980s, when the industry began to recognize that oil could be recovered from oily leftover materials in tank bottoms, separator sludge, flare pits and so on. Facilities known as reclaimers began to emerge in active oil- and gas-producing areas. At first, the board’s regulation of these facilities was aimed at making sure volumes of recovered oil were accounted for properly. Spurred by the federal government’s 1986 proclamation of dangerous goods transportation regulations, though, the board became heavily involved in oilfield waste management, regulation and inspection.

In 1990, Alberta began consolidating existing environmental acts and regulations into a comprehensive document that eventually became known as the Environmental Protection and Enhancement Act. This and other environmental measures slice and dice provincial wastes in a number of ways. They can be classified as oilfield wastes or industrial wastes, and those wastes can be hazardous, dangerous or not-dangerous. Alberta Environment regulates hazardous and industrial wastes. The ERCB regulates oilfield wastes.

As waste regulation evolved, it became apparent that reclamation or recycling services could no longer be permitted to operate without regulation. After all, they were reclaiming wastes that were potentially dangerous, and sometimes hazardous. Hazardous oilfield wastes include hydrocarbons with low flashpoints; highly acidic or alkaline chemicals; and such volatile organic compounds as benzene, toluene, ethylbenzene and xylenes, which collectively go by the acronym BTEX.

After these products had been defined as hazardous, the board gave the owners of the province’s reclaimer operations a simple choice. Transform their facilities into high-standard waste management facilities or, in the words of CCS Corporation’s Greg Dickie, “clean them up and shut them down.” Most chose to convert to quality waste management operations.

With oilfield waste facilities not allowed to handle hazardous materials, the province badly needed a large disposal facility. Accordingly, Alberta developed a “special waste treatment center” northwest of Edmonton at Swan Hills to deal with hazardous oilfield wastes and also carcinogenic PCBs, which are primarily a waste product from electric transformers. Owned by the province but operated by the private sector, Swan Hills is primarily a specialized, high-temperature waste incinerator. The oilfield wastes that require incineration there include spent filters, oily rags and specialized high-BTU wastes.

As the 1990s wore on, regulators developed rules covering everything from the construction of landfills to deep well injection of liquid wastes. Those rules and the constant changes to them are available in a glut of guidebooks, information letters, directives and interim directives – all of which have been posted online by the agencies responsible.

Practice Run

H2S re-injection a rehearsal for carbon storage program

This article appears in the May 2009 issue of Alberta Oil Magazine

by Peter McKenzie-Brown

Once an obscure part of waste management, the injection underground of unwanted gases will soon become a huge part of Western Canada’s business. The industry has had plenty of practice at disposing of nastier materials than carbon dioxide.

Oil and gas operations produce two kinds of acid gases – hydrogen sulfide (H2S) and carbon dioxide (CO2). The former is usually stripped from the gas stream and converted into sulfur. Tom Byrnes, a reservoir engineering manager at the Energy Resources Conservation Board, says the sulfurous impurity is sometimes just stripped from the gas and re-injected underground. “It’s usually an economic question. There may be small volumes of H2S in the gas stream, or the infrastructure [to strip out sulfur] may not be in place to make it practical.” In Alberta, the board regulates all disposals through disposal wells and first approved an H2S re-injection project in 1989.

Both of these acid gases are routinely stripped from natural gas for re-injection, as appropriate. “But the smaller the concentration of H2S or CO2 there is in the gas stream, the more expensive it is to get it out. It’s a problem of diminishing returns,” Byrnes says.

If H2S can have commercial value as a source of sulfur, CO2 is frequently injected into operating oilfields to stimulate production. This is not new. Carbon dioxide has long been used for enhanced oil recovery, to urge additional barrels out of elderly oilfields. One such project has been operating in the 50-year-old Weyburn oilfield in southern Saskatchewan for nine years.

The project uses a 330-kilometer pipeline to transport carbon dioxide captured at the Great Plains Coal Gasification plant, which manufactures methane from coal near Beulah, North Dakota. As it keeps oil flowing from this aging field, each year the EnCana-operated project disposes of about 1.5 million tonnes of carbon dioxide emissions. This is environmentally beneficial, since CO2 is both an acid gas that can acidify water and a greenhouse gas that can trap heat within Earth’s ionosphere.

While EnCana’s Weyburn project is profitable in its own right, most industrial operators would find it economically prohibitive to strip CO2 from industrial processes for sequestration down disposal wells. Those economics changed profoundly last July when Alberta Premier Ed Stelmach announced a $2-billion commitment of government assistance to advance carbon capture and sequestration (CCS) technologies in the province. Provincial authorities are now sifting through a dozen applications for funding, and will announce the successful projects as decisions are made.

Alberta’s involvement follows a gestation period of deep study, including a provincial policy paper which observed that “Alberta has a unique opportunity to implement carbon capture and storage to substantially reduce our greenhouse gas emissions. CO2 emissions can be captured where they are produced, transported and stored in geological formations (such as depleted oil and gas reservoirs, coal beds and deep saline aquifers) that may be located hundreds of kilometers away.

Ultimately, CO2 capture and storage technologies provide the province with the greatest potential to substantially reduce greenhouse gas emissions while, at the same time, retaining our ability to produce and provide energy to the rest of the world.”

According to that policy paper, Alberta is counting on CCS to meet 70 per cent of its long-term greenhouse reduction targets. If the five provincially subsidized projects – likely to cost a billion dollars each–all go into operation, they would collectively reduce emissions by up to five million tonnes annually. That is likely just the beginning for large-scale underground carbon sequestration projects in the province.

While five million tonnes annually of sequestered CO2 may seem like a large number, it’s barely a whiff of what’s possible. Over four decades, Alberta’s greenhouse gas emissions plan targets a 200-million tonne cut in emissions, but only compared to a do-nothing scenario. That volume is a bare indication of the huge volumes of waste – solids, liquids, effluents and emissions – generated by one of the world’s leading petroleum producers.

Waste to Wealth

Cleaning up after fossil fuels is a thriving enterprise, recession or not.

This article appears in the May 2009 issue of Alberta Oil Magazine

By Peter Mckenzie-Brown

Oil and gas fields, like homes, never stop generating trash. The difference lies in the volume and nature of the rubbish. From exploration through production and eventual abandonment of wells and plants after fossil fuel reservoirs deplete, energy waste management has grown into an industry in its own right.

Common oilfield wastes include oceans of brackish “produced water” that flow to the surface in volumes measured in millions of barrels and have to be separated from oil then put into safe disposal. There are other oil-contaminated materials that can be solid or liquid. The process of completing wells alone generates respectable volumes of drill cuttings and other solids that can no longer be left lying around.

Over the last 25 years, waste regulations have become steadily tougher, encouraging growth of a disposal business that has outlasted boom-and-bust cycles of energy prices and spread across the countryside in tandem with exploration and production operations. Since 1998, the number of producing wells across Western Canada has more than doubled to about 226,000.

Deepwell Energy Services is considered a small newcomer in the field but already has four facilities in Alberta, including a large new waste treatment facility south of Calgary, near Claresholm. Last year, the company acquired a 50 per cent interest in a water disposal facility near Midale, Saskatchewan, as the celebrated Bakken oil drilling play expanded across the southeastern reaches of the province.

Built upon assets that have been around for a while, three-year-old Deepwell organized itself as an income trust and went public just before a federal government decision dubbed by investors as the Halloween Massacre of 2006 to start taxing trusts in 2011. “Everyone in the trust system is now trying to figure out how to reorganize,” says Bob Ritchie, a veteran of more than 25 years in the industry who was Deepwell’s president until March 23.

The biggest players in oilfield waste have already made their moves: Newalta Inc. has reverted to the traditional corporate model. With the help of a large hedge fund sponsored by investors from the United States as well as Canada, CCS Corporation turned itself into a private company in 2007. For its part, Deepwell is using a five-year transition period allowed by the government to decide upon its next move.

Licensed to deal only with “upstream” exploration and production materials, Deepwell typifies the independent specialist in oilfield waste management operations. “It’s up to the producer to characterize and classify their wastes. Our facilities can accept a lot of waste streams, but some materials are not on the list of acceptable materials,” Ritchie explains. Lubricating oil used in exploration and production machinery, for instance, has to go to another specialist as a refined product. Production companies are responsible for tracking and reporting their waste streams to Alberta’s Energy Resources Conservation Board.

The watchdog agency keeps a close watch on waste disposal. “All our Alberta sites are ERCB-approved,” Ritchie says. “We use compacted clay liners, concrete berms, groundwater monitoring, water run-off and run-on systems – it’s all self-contained. The facilities are inspected quite often and very rigorously. It’s completely random. ERCB inspectors are out there at least once a quarter.”

Deepwell vice-president Brian Johnson describes how the company deals with basic waste streams in its Alberta facilities. “We purify produced water as much as we can, then inject the cleaned-up water down our disposal wells,” he says. These are drilled into secure underground formations of porous sedimentary rock capped or surrounded by harder stone, in structures that can be used as natural vaults for permanent storage.

Crude oil waste that has value is also scoured out of industry equipment. The material comes “from such sources as tank bottoms we clean up and dry up and either credit back to our customers, keep for our own account, or do a bit of both,” Johnson reports. The recovered oil must satisfy standard quality specifications before it can be put into pipelines. Cleaned-up solids like sand used in well “fraccing” or fracturing operations are shipped off to sanitary landfill sites.

While Deepwell is a small player in the sector, CCS Corporation is big. It has 48 facilities across Canada, from northeastern British Columbia to Manitoba, plus operations in Louisiana and Texas. Greg Dickie, a senior manager, reports that CCS deals primarily with dangerous materials.

“Wastes coming into our facility are called dangerous because they have a flashpoint, and they have a flashpoint because they contain hydrocarbons. The ERCB defines oilfield wastes, and there’s a clear line between hazardous wastes and dangerous wastes, and between dangerous wastes and not-dangerous wastes, and they fall within different jurisdictions,” Dickie says.

Hazco, a CCS subsidiary, operates a network of industrial landfills, bioremediation facilities and hazardous waste transfer stations. Hazardous wastes are regulated by Alberta Environment and mostly treated at the special treatment facility near Swan Hills. “Our business is to recover hydrocarbons from the wastes and then deal with the byproducts,” Dickie says. “The solids go to landfill, while the liquids go to deepwater disposal. We separate oil from water at our sites.” CCS also has terminals. “We are connected to a pipeline. We receive a producer’s oil, clean it up and send it through the pipeline.”

As economic recession slows down drilling and development across Western Canada until energy prices and bank credit make comebacks, is waste still a growing business? The consensus among the specialists is yes. At Deepwell, Ritchie says: “Last quarter we saw a downturn in exploration activity, and that is not likely to be good for the industry. Having said that, we do get a significant portion of our business from production, and production tends to continue even in a low commodity price environment.”

At CCS, Dickie says: “Up until most recently business was growing – right through 2008, in fact. We believe our industry will continue to grow even as the conventional industry begins to deplete. The types of services we offer through our operations are services that assist people in cleaning up, remediating and managing depleting assets. We believe our business will continue to grow even if the oil industry has the occasional decline.”

In the long run, conventional oil and gas production are in decline in Western Canada as geological reservoirs deplete naturally. Does that mean there will be less oilfield waste?

At Deepwell, Johnson isn’t so sure. “The lines between conventional and nonconventional production are beginning to disappear,” he says. “More and more effort is being put into making unconventional wells produce economically. As we use more unconventional resources, there will be greater volumes of waste. It is a growth sector.” He adds that as fields age, they tend to produce more water, and the need for water disposal will continue to grow.

Dickie sees additional opportunity within areas where there is still some infill drilling to be done. “As the percentage of oil in production goes down, the percentage of water and other materials, including emulsions and some solids like silts, goes up. That’s where our facilities become valuable to producers,” the CCS executive says. Emulsions or streams of mixed liquids and solids need to be treated as oilfield wastes.

Much water is also produced with some of the newer oil discoveries including Saskatchewan’s Bakken formation. Sometimes the water is used to maintain reservoir pressure. Sometimes it’s simply re-injected into a deep rock formation, to prevent surface- and groundwater contamination. Whatever the case, the volumes are increasing, and the job of getting rid of the stuff is requiring more effort.

At the ERCB, regulatory manager Susan Halla flags another reason the waste management business is going to continue to grow. Reading from the regulations, she describes oilfield waste as “an unwanted substance or mixture of substances that results from the construction, operation, abandonment or reclamation of a facility, wellsite or pipeline.”

Based on that definition, the industry creates wastes at all stages of operation – from construction to decontamination and reclamation. So there will be wastes to manage whether an operation is in the stage of development, oilfield decline, closure, abandonment or surface land reclamation.

Environmentalism is a growth force, says Ritchie, who saw the effects of public demand for cleaner industry first-hand as a project manager for TransCanada Corp. as well as during his tenure at the helm of Deepwell. “The movement to be environmentally responsible has continued to advance. Over time it’s likely to become more stringent, and that is actually likely to help us.”

It is a widespread industry consensus that western Canadian waste management regulations are among the most stringent in the world. “Over the last 15 years Alberta has been at the forefront of waste management, even compared to Louisiana and Texas. I don’t know of another regulator that has taken the same initiative as Alberta in developing waste management regulations,” says Dickie. Where CCS operates, “the ERCB is the leader. Saskatchewan and British Columbia are close behind, and Western Canada is at the front of the pack.”

At the ERCB, Halla stresses that Canadian regulators work with each other to make sure their regulations march in step. “We work with Alberta Environment to harmonize waste management practices within the province. We also have committees to harmonize practices in Western Canada, and also we are involved in national harmonization.”

Ritchie says there is momentum for improvements within the private sector. Annual inspections of facilities became routine at Deepwell, he recalls. “I think the whole industry has a heightened awareness of the need to meet or exceed regulations. Everyone is conscious of environmental stewardship. I see the whole industry trying to advance their performance.”

The Decoupling of Oil and Gas Prices

By Peter McKenzie-Brown

Energy forms are not created equal. Gasoline and diesel are great fuels for transportation, and at the moment there are few viable alternatives. Coal, on the other hand, is just dandy for generating electricity and smelting metals. Natural gas is terrific for space heating, powering electricity-generating turbines and manufacturing fertilizer and petrochemicals. Because of their different applications and their different energy densities, hydrocarbons have different relative prices. And until recently, they were priced in a band which reflected their relative values.

That band is now falling apart. Perhaps this is a sign of things to come - but not before the market experiences what commodity traders call a "short squeeze". The chart shows the price of oil compared to that of natural gas in North America. Until recently, natural gas prices traded in a fairly close ratio to the price of oil. Depending on the state of the industry, the ratios formed a band which ranged from 10:1 to 6:1. Here’s a practical example of how helpful those ratios used to be.

Petroleum industry analysts make their estimates of the future price of petroleum stocks based on their future cash flow – that is, the amount of cash they will have available from production. If they wanted to estimate the future net worth of an oil producer, for example, they would make a knowledgeable assumption about the price of oil in the coming year and an estimate of the company’s total oil production for the coming year. A bit of fifth grade arithmetic then enabled them to estimate the value of that company’s shares. To illustrate, let’s begin with four assumptions:

• First, the company under review will produce a million barrels of oil in the coming year. • Second, the average price of a barrel of oil will be $25. • Third the company’s cost of oil production will be $10 per barrel. • Fourth, the company has 15 million shares outstanding.

Given these assumptions, the company’s cash flow for the coming year would be $15 million, and cash flow per share would be one dollar. To get a good idea of the likely price of the stock in a year's time, we would then ask ourselves whether we thought oil stocks would be in a bull market then or a bear. If we were bearish, we would estimate the price at year end by multiplying that dollar of cash flow by three. If we were bullish, we would multiply it by five. So shares of the company in question would have an implied value of $3-$5. What if the company’s production consisted of natural gas rather than oil?

You can see on the chart that until recently, natural gas prices tracked the price of oil fairly closely – so much so that immutable ratios about the relative value of oil and gas seemed to exist. When gas prices were strong, a gas producer would only have to produce six times as much gas as oil (6,000 cubic feet of gas equals 1 barrel of oil) to be on equal terms with an oil producer. For example, to generate the same cash flow as the little oil producer I just described, in good times a gas producer would only have to produce 6 billion cubic feet of gas a year. If natural gas prices were relatively low, the company would have to produce perhaps ten times as much gas – 10 billion cubic feet per year – to have the same share price as our oil producer.

Eternal Verities: For many years these ratios seemed to be eternal verities for oil and gas producers. Then, last year, the verities fell apart. Oil and gas decoupled. In 2006 gas averaged less than $6, while oil was $65. The 10:1 ratio had been breached. And the situation today? Natural gas on the NYMEX is $7, while oil is $96. That’s a ratio of more than 13 to one. The once seemingly immutable ratios have collapsed, and the gaps are widening. One outcome is that the shares of natural gas producers – especially Canadian gas producers – are in the toilet. The following chart of Rider Resources illustrates the disasters that befell investors in Canadian gas stocks during 2007. What does all this mean? On a continent and in a world facing hydrocarbon-related energy and environmental problems, the cleanest and most efficient form of hydrocarbon energy has become the ugly stepsister compared to its less secure and much dirtier competitor, crude oil. This is not a happy state of affairs – especially since the North American gas industry is in decline.

 Forecasters now commonly suggest that Western Canada's conventional gas production has peaked and will continue to decline. In the United States, reserves peaked years ago. The reasons are complex, but the practical reality is that the economics of gas production stink, especially in Canada. The $7 futures contract for gas on the NYMEX isn’t reality here. In Western Canada, our producers get $5-6 per thousand cubic feet for their gas, while the cost of finding and developing the stuff is in the $7-$9 range. Because of the strong Canadian dollar, a less attractive fiscal regime in Alberta, the lack of storage facilities and for other reasons, the Western Canada sedimentary basin is now the most expensive place in North America to find natural gas, and the least profitable in which to develop and produce it. This is the reversal of yet another verity. Until recently, Western Canada’s natural gas hunting grounds were among the most profitable and prolific in North America.

Greenhouse Gases: In a world nearing the crude oil peak, you would expect something like this to happen. The simple, cold logic of economics 101 implies that tightening oil supplies would send price signals which would identify the problem, spur crude oil exploration and make previously marginal resources profitable. The irony, though, is that in North America these events are taking place to a large extent at the expense of natural gas – an energy resource that can be used to fuel vehicles, generate electricity and fire industrial boilers. As we approach Hubbert’s peak, we are neglecting development of one of the few viable alternatives available, and one which, compared to all other hydrocarbons, contributes less per energy unit of the greenhouse gases that appear to be warming our planet. In a world where oil and gas prices have decoupled in this way, it may seem to make economic sense to bail out of gas producers like Rider Resources: Put your money into companies developing pollution-intensive resources like the oil sands. If you subscribe to peak oil theory, and if gas is relatively plentiful while oil isn’t, then the decoupling I described makes sense and is a long-term trend. It also means – and this is a serious environmental problem – that a world desperate for energy will focus investment on oil and coal (environmentally unfriendly) rather than gas (environmentally friendly.)

Medium Term: I believe this is probable over the medium term, at least, because of the growing importance of liquefied natural gas (shipped by boat from plentiful overseas reserves) in world trade. LNG will help keep North American gas prices relatively depressed, since it can be landed in the US for as little as $4-5 per thousand cubic feet. If that trade continues to grow, then the decoupling will continue. However, nothing moves in a straight line, and there is a strong case to be made for rapid upward adjustments in gas prices. Perhaps the ratio of gas and oil prices will soon revert back toward the mean - either because oil prices drop or (in my view more likely) gas prices climb. As the above chart of the natural gas exchange-traded fund (ETF) shows, US natural gas stocks may have just about hit bottom.

From an investment point of view, if natural gas prices are about to rise and you can anticipate when they will begin to make this move. You could make a lot of money by buying companies like Rider Resources (I personally do not own this stock) rather than avoiding them. Evidence that such a situation may be upon us can be found in this chart, which shows net positions in natural gas contracts. The net long positions held by the commercials and small speculators are so extreme that they suggest that a "short squeeze" could be in the offing.

 A short squeeze occurs when short sellers start to feel pressure from a rising stock or commodity - natural gas, in this case. Their losses increase as prices move higher. This "squeeze" places pressure on those holding short positions by forcing them to buy back their bearish positions in order to limit their losses. Short squeezes often result in dramatic price gains over relatively small periods of time due to this spike of buying pressure. If that's what's happening here, the commercial buyers (who tend to win over the long term because they better understand the market) and the small speculators seem ready to cream the large speculators. Stay tuned: This could be more fun than the Grand Ole Opry.