Saudi Energy Policies Hurt Canada’s Energy Sector
By Reza Akhlaghi
Concepts & Thoughts
Toronto, Ontario—Canada’s controversial sale of armoured fighting vehicles to the Kingdom of Saudi Arabia to the tune of $15 billion was a display of strategic disarray in Canadian foreign policy under the government of the former Prime Minister Stephen Harper. The sale took place at a time of never-seen-before heightened regional tensions in the Middle East, where a decades-old American-led polity is disintegrating in front of our eyes. The sale accounted for over 90 percent of Canada’s military exports for the fiscal year of 2013-2014.
Throughout his tenure, Mr. Harper was an ardent supporter of Israel, a vocal opponent of Russian foreign policy. He also considered Iran to be the “greatest threat to world security”. Yet the sale of largest Canadian arms sales to the House of Saud took place in the midst of Saudi efforts to undermine global oil prices in order to achieve its geo-strategic objectives. Those efforts by the Saudis have impacted negatively high-cost energy markets such as Canada, results of which are now vividly on display in Alberta, Canada’s energy heartland.
A Quick Glance at Saudi Arabia
Saudi Arabia is perhaps the only remaining country in the world that takes its name from a ruling family. Its vast hydrocarbon resources feed much of the world’s hunger for energy, including that of many Western countries. It is an absolute monarchy founded upon religious principles of Wahhabi Islam, which is known for its harsh enforcement of social and cultural codes of conduct and for precluding freedoms of thought and individualism. Gender segregation in the Kingdom permeates every aspect of social life. Saudi royal family receives political legitimacy from its long-standing alliance with the Wahhabi religious elite, an alliance that is increasingly questioned by social-media savvy young Saudis, including the country’s increasingly educated women who are much less inclined than their parents to follow the dictates of the country’s ageing power structure.
Geopolitics Drive Saudi Energy Policies
Let’s take a look at Saudi energy policies over the past two years and their impact on Canadian energy sector and see what other factors could come into play over the next several months, and how Canadian energy companies should be prepared for them.
Over the past two years, due to geo-economic and geo-political reasons, Saudi Arabia has taken a number of measures that have resulted in market saturation of global oil markets. The disruption of the world oil markets over the last two years isn’t showing any signs of coming to an end as the Saudis continue to manipulate markets in the wake of destabilization in the region resulting from the U.S. invasion of Iraq, the Arab Spring and the recent U.S.-brokered nuclear deal with Iran, Saudi Arabia’s key regional and geostrategic rival.
Saudi Arabia is shoring up its strategic influence in the region and protecting its own energy security by flooding world markets with oil. This oversupply is driving prices down and other oil producing countries like Canada are feeling the macro-economic impacts of the lower price, a more than 40% drop between June 2014 and June 2015, according to Western Canada Select, the price index most Alberta producers receive for their oil.
While countries like Iran and Russia are Saudi Arabia’s high-value geopolitical targets, Canada is caught up in the ripple effects of the Saudi moves to consolidate its geo-political power. With oil prices dropping to $42.03 in March, the lowest since 2009 and an oversupply of two million barrels a day, oil producers in Canada are taking steps to ride out the slowdown by cutting output and halting further investment and development in the once-booming oil sands.
Further exacerbating the situation is the imminent flow of Iranian oil to the market as Tehran prepares to offload an estimated 35 million barrels of oil currently in Iranian tankers at sea. Iran also has the ability to increase production in its refineries by 500,000 barrels a day; a development that could take place over the next three months.
Saudi energy policies, driven by ideological and geo-strategic rivalries, chiefly with a resurgent post-nuclear Iran deal, are not likely to soften in the short term. Given the current outlook in the oil market combined with what appears to be a correction in China’s stock market and softening of its export-driven economy, Canadian service oil companies, therefore, can leverage their advanced technology and industry know-how in developing markets with under-invested or largely untapped energy sectors.
Here is a look at the context of policies and measures adopted by the Kingdom of Saudi Arabia:
IRAN: Sharp differences between Sunni Arab Saudi Arabia and Shiite Persian Iran over regional conflicts in Syria, Iraq, Yemen, and Tehran’s controversial nuclear program have pitted the two countries against each other with bitter results for the region. Fearful and critical of the expansion of Iranian influence, the Saudis decided to target Iran’s coffers by flooding the oil markets, applying downward price pressure to curb Iran’s ability to fund the regime of Bashar Al-Assad and execute its regional foreign policy goals. In light of the Iran nuclear deal, the Saudis are now concerned about the lifting of sanctions against Iran and the expected subsequent flood of investment into the country, both of which would enable Iran to more easily pursue its regional aspirations.
RUSSIA: President Vladimir Putin’s staunch support of Syria’s President Bashar al-Assad during the Syrian conflict has consistently drawn sharp criticism from the Saudis. And tensions have recently increased with the deployment of Russian military assets in Syria, but Riyadh has repeatedly asked Moscow to withdraw financial and logistical support from Assad to hasten the end of his regime.
CANADIAN OIL SANDS: With per-barrel cost of nearly $80, Canada’s tar sands once presented customers including the U.S. and potential clients like China with a viable alternative to Middle Eastern oil. The Saudi-led flooding of oil markets has managed to largely drive the oil sands out of the mix of energy supply as projects in Alberta face per barrel costs above current market rates. Weakening high-cost energy markets (i.e. Canada) helps the Saudis exert greater influence and gain bigger control over the direction of energy markets.
U.S SHALE OIL: America’s shale boom has added four million barrels a day of supply in the past few years, cutting the Saudi market share in the world’s biggest consumer of energy. Sensitive to price fluctuations, increased costs in the production of shale oil combined with slowing global demand have put enormous pressure on the shale oil industry in the U.S.
ALTERNATIVE ENERGY: Large-scale development of alternative sources of energy is a strategic threat to the petro-states of the Middle East. Depressed oil prices have always discouraged development of renewable energy and periods of high energy prices have boosted investment in alternative energy.
Seeking New Markets and Softpower
The continuation of geopolitical rivalries and sectarian tensions in the Middle East do not offer much of a rosy outlook for depressed energy prices, particularly in high-cost markets like Canada oil sands. The opening up of vastly untapped, underfunded, and technology-starved energy markets in places like Central Asia, the Caucuses, and post-nuclear deal Iran offer tremendous opportunities for Canada’s advanced, high-tech, and management savvy energy sector. These markets also offer an equally tremendous opportunity for Canada to increase its soft power abroad.