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I had a front-row seat for the collapse of the newsprint
industry while working for the Canadian pulp and paper industry from 1994 to
2016.
Some of you may remember the typical weekend newspaper: a
slab of paper weighing a couple of kilograms and filled with advertising
inserts, classified ads, editorial content surrounded by ads, ads at the bottom
of every page, you get the picture. Ads everywhere. Where I live the Wednesday
paper was also an advertising-filled slab. All that paper, generically called
newsprint, had to come from somewhere, and a lot of the North American supply
came from Canada with its abundant forests and water.
Then came Craigslist and Kijiji. The classified ads, which
were a large portion of that weekend paper, started migrating online; soon I
could find every 5-year-old, blue Honda Civic 4-door with a manual transmission
within 50 km of my postal code, sorted by price and mileage. No longer did I
need to get up at the crack of dawn on Saturday to pore over page after page of
classifieds, only to find the car I wanted had just been sold.
This was a problem for the newspaper publishers; the price
of a newspaper at the newsstand covered the cost of the paper only. Not the
printing, not the delivery, and most certainly not the salaries of the
journalists and editors: all of this was paid for by advertising.
The inserts also started migrating online. These flyers,
often made with a coated newsprint-type of paper to make them glossier, weren’t
attracting the eyeballs. Then the ads surrounding editorial content started
shrinking, and finally the editorial content itself went online. Demand for
hard copies of newspapers plummeted.
So what happened to the Canadian newsprint industry? It
tanked as demand plummeted. At one time Canada produced up to 25 million tonnes
of different newsprint grades per year, most of it destined for the US; major US
publishers owned shares in Canadian newsprint mills in places like La Malbaie
or Kapuskasing. Today Canadian production is probably a couple million tonnes, if
that, and is still sinking; the publishers have all long sold their stakes in
Canadian newsprint facilities.
Here is how it played out. We’d see prices drop amidst
declining demand until one of the bigger producers couldn’t take it anymore and
shut a paper machine somewhere in a bid to prop up prices. A month or two
later, another shut in another mill town. Publishers got wise and bought up
large amounts of paper for inventory when the prices dropped so they didn’t
need to buy high-priced paper in the immediate aftermath of a mill shut, thus hastening
the next shut. Today the list of shuttered mills across Canada is huge.
Moving on to oil: There is a lot of talk of drilling for new
oil and gas, in spite of the environmentalists (and the IEA) saying we have
enough, we don’t need any more. Where do they think all that oil is going to
go?
Today something like 75% of the barrel goes to gasoline and
diesel. Another 5% or 8% goes to other transportation fuels and other energy
uses: jet fuel, marine fuels, the railways and stationary combustion for things
like steam generation. The last 18% or 20% goes to non-combustion uses, and there
will remain a need for these products in a post-2050 world: lubricants,
paraffin waxes, asphalt, and (at about 5% of the barrel) petrochemicals and
plastics. The newsprint example shows a possible future for the oil refineries
out there, if demand tanks for their major product (namely carbon-intensive
fuels): an industry in steady decline, with a refinery shut announced every few
months or so. The only difference is that the oil and gas people have some
clout with governments, and will likely soak up a whole lot of public money
before sinking; the decline of newsprint rarely made the front pages of
national newspapers, and governments barely noticed.
One additional subtlety here is the fact that a lot of
petrochemicals actually come from natural gas wells, not petroleum. As I’ve
mentioned in the past, natural gas is an organic molecule, called methane, with
only one carbon atom (CH4); but gas wells usually deliver heavier
organic molecules as well, such as ethane (two carbons, C2H6),
propane (three carbons, C3H8) and butane (four carbons, C4H10).
The collective name for these molecules is one of my favourite oxymorons,
“natural gas liquids”. So are they gas or liquid? The answer is yes, depending
on temperature. At room temperature and pressure, they are all gasses. The
so-called wet gas coming direct from the well is cooled and the heavier
molecules turn to liquid as the temperature drops: first butane can be siphoned
off as a liquid, then propane and finally ethane. These are the feedstocks most
commonly used for three of the six basic petrochemical building blocks, namely
ethylene, propylene and iso-butylene.
Heavier organic molecules, those with six carbons and up,
tend to be liquids at room temperature and pressure. (As you get into molecules
with 100 or more carbon atoms, you are into bitumens and asphalts that are
solid at room temperature and pressure). You might be familiar with octane; at
eight carbons, this is a main component of gasoline. The other three basic
chemical building blocks for petrochemicals are the so-called BTX trio:
benzene, toluene and the xylenes, based on the six-carbon molecule heptane. And
while there are paths from natural gas to heavier molecules such as benzene,
and from oil to lighter molecules such as ethylene, it is likely that only the
heavier portion of petrochemicals will continue to be made from oil in a
post-2050 world, for the benzene molecules, lubricants, asphalts and other
small non-combustion markets.
So why would the industry want to drill if their major
product is going away? Arguably the goal is to be the Last Man Standing in a
race to the bottom. Some oil will still be needed, if only for the
non-combustion uses described above.
It turns out that I am not alone in thinking this way; an
investment analyst’s note brings up the same concerns (click here).
The analysis addresses four assumptions presented by the oil and gas companies
to justify continued or increased drilling. They are:
- Petrochemical
demand is set for strong growth;
- Petrochemicals
will support oil demand;
- Petrochemical
yields can be increased at scale;
- Existing
refining infrastructure can be repurposed.
Each is discussed and shown to be full of “yes, but” issues.
For instance, increased moves to reduce, reuse or recycle will lead to a
decoupling of GDP growth from raw material consumption, thus putting a dent in
the demand for new petrochemicals. And from my experience in the pulp and paper
industry, I would say that it is very expensive and time consuming to repurpose
heavy industry assets to make something different, even when the new product
appears, to the layperson, to be very similar to the existing product. While
conversions of newsprint machines to cardboard have become common, not every
papermachine is easily converted and there are plenty of pitfalls along the
way.
So I am personally only a little worried about the “Drill,
baby, drill!” crowd. If it all works out and we all shift to electric vehicles,
no one is going to want the product, no matter how cheap, and the drilling will
stop amid a glut of oil. (The natural gas story will be a somewhat different.) The
trick is to stick to our electric cars even if oil is dirt cheap!
Unless I have missed something totally obvious. I would of
course be interested in your views.
