Karl Moore : This is Karl Moore of the Desautels Faculty, Talking Management for The Globe and Mail. Today I am in Calgary, Alta., where I am sitting with Adam Waterous, who is the global head of investment banking for Scotia Capital, the investment banking part of Bank of Nova Scotia , and is also the president of Scotia Waterous, which is one of the leading firms in the world for M&A [mergers and acquisitions]in the oil and gas business. Good morning, Adam.
Adam Waterous : Good morning, Karl. Nice to see you.
KM: Yesterday I spent some time with Jeff Rubin, who is the former chief economist of CIBC [World Markets] on a big book talking about peak oil [ Why Your World is About to Get a Whole Lot Smaller: Oil and the End of Globalization ] What is your view on peak oil? Have we hit it or is it an illusion?
AW: It's an excellent question. There is 'physical' peak oil, and then there is what we describe as 'economic' peak oil. Peak oil in its strictest sense is, from a given basin, when do you start to go into decline? So, as you may have talked about yesterday, the United States, I think, went into peak oil decline, peak physical production, in the early seventies. That's the United States oil.
If you want to look at, for instance, natural gas in Canada, then we've actually been in decline since early 2000-01; we're actually in declining production. So it depends on which hydrocarbon you're looking at and what kind of basin you're looking at physically.
Economic peak oil is trying to identify what price can you maintain production in a given basin. Put another way, if you spend enough money you can actually start increasing production. But again, it gets very, very expensive. So in the case of oil in Canada, we actually are going to be able to increase production of oil in Canada. So we are certainly not in peak oil in the Canadian sense.
KM: But that includes the tar sands.
AW: That includes the oil sands, so that's my point. While we will be increasing [production] it's going to be at a much higher cost. That cost, depending on what the project is and what kind of time frame you're looking at, maybe's $70-$80 a barrel is effectively the full development cost to be able to do it. So what you are seeing in Canada, in terms of very high cost [to]increase production, you are seeing in different parts of the world. Most obviously in places like offshore Brazil, deep water Gulf of Mexico, where the economic cost for bringing on new barrels is not far off from what it costs bringing on new barrels in the oil sands; meaning these are very expensive projects. So the marginal costs of these new barrels are extremely, extremely high.
So while you may have the ability to build an increase in production, it's going to be increasing production at a much different price environment than we've seen in the past. So, it's a long way of saying, I would generally speaking agree with the theory behind peak oil in that the cheap barrels have largely been found and the new barrels are going to come from much more expensive sources. If you look at marginal supply economics, the world's going to have to get used to much more expensive hydrocarbons going forward.
KM: Jeff talks about $200 [U.S.]a barrel in the next four to five years. Does that fit with your view of the market?
AW: I would say that forecasters make soothsayers look good. I think going out on a limb and saying exactly where the prices will be like in four to five years … at $200 a barrel, that's obviously an aggressive target. Is it possible? It could be, it could be.