Murray Gingras

Edmonton Journal: January 2019: “The carbon levy has become a political punching bag for politicians and journalists that want to win votes and sell newspapers. This is very unfortunate as the levy — which has been in place for almost two years now — hasn’t damaged the economy or cost jobs.” Joshua Buck

https://environmentaldefence.ca/wp-content/uploads/2018/12/Alberta-Carbon-Pricing-Report-EDC.pdf

Buck arrives at these conclusions by considering economic data for 2017, what they found was that in 2017 key economic indicators, including gross domestic product (GDP), weekly earnings, and the unemployment rate. What they found was that in 2017 Alberta grew at a rate of 4.9 per cent, wages were up, and unemployment was down. Conclusion? The carbon levy did not hinder Alberta’s economy.

I am inclined to agree with this view. What about you?

U.S. crude oil production exceeded 10 million barrels per day (b/d) as of November 2017. That was the first time since 1970 that monthly U.S. production levels surpassed 10 million b/d. Steadily increasing oil and gas production in the USA has been a factor in the lowered price of oil (since about 2015). Strictly speaking, one would not view American output as over-production (they still need to import oil to meet their needs). But that level of production takes enough of a bite out of the volume of oil sold that OPEC decided to increase their production, thus lowering profits of the expensive-to-produce North American hydrocarbons.

The lowered prices have not affected the USA production, which averaged 10.93 million b/d in 2018, but is has been a gut-punch to Canadian production and particularly to our most voluminous resource, heavy oil. With the differential considered, it is difficult to imagine what world price is needed to make Alberta work again.

Here is a graph of US oil prices. Alberta did pretty well from 2000 all the way to 2015. The 2009 drop did slow things down for a year, but that was short lived as oil returned to $90 / barrel.

What price do you think we need to see Alberta’s oil and gas sector come to life again? What if the differential were not so large a gap? What if we had a market for Natural Gas, which we sell well below its world value? What factors and considerations have I not mentioned?

The wine embargo is on. The rhetoric flies. Fingers point to the provincial NDP and the federal Liberals. Fair enough. That is what they agreed to when the formed a government. Interestingly, though, the lack of pipeline capacity can clearly be traced to the Provincial Conservatives under Ralph Klein’s leadership.

Let’s go back in time. I first started working in the McMurray area and on it’s Geology in about 1998. At that time, industry in the area was comparably modest. Suncor and Syncrude were the only big players in the area, with normally producing approximately 180,000 bbl/day of crude oil. At that time, licenses were already approved to double the output of both operations (Syncrude North Mine and Suncor Millenium projects). Also approved in the late nineties was CNRL Horizon, Suncor Aurora, Shell Muskeg and early in the 2000s what would become Esso Fort Hills. By the year 2000, approvals were in place to increase the area’s production by 10 fold!

Anyone involved back then will remember that McMurray heavy oil was below the radar of most environmental groups. There was very little controversy regarding the heavy oil, in fact, until the initiation of all of these projects (practically simultaneously) led to a hyperactive period of large-scale development throughout the McMurray area. One has to wonder why the Klein Tories failed to identify the need for a pipeline when they were approving these projects? And, it is my opinion that a pipeline project in 2003 would have passed without any of the controversy that has occurred today.

The long and short? The government has an important role to play in predicting infrastructure needs. And the Tories were simply too blinded by the money of the super projects to simply recognize what was right in front of them. What fools.

Let us know your thoughts on Astrid Art’s Caribou lecture.

The new presidency of the United States of America allowed for some cautious optimism for western Canada’s oil and gas sector. Among the most immediately asked questions was whether Keystone XL would become approved. Well, it did not take long for President Trump to take a page out of Christy Clark’s playbook and suggest that of course Keystone XL will be approved – for a “big, big chunk of the profits or even ownership rights.” Well, I suppose from the USA (and BC) point of view, that makes sense, but one has to wonder about the viability of what amounts to export taxes on Alberta crude. After all, production costs for oil in Alberta are already higher than most competitors. In Alberta we mostly exploit (1) smaller conventional oil or gas reservoirs, (2) large heavy oil reservoirs that often require steam or heat to encourage the oil to move through the rock, and (3) low permeability (tight) reservoirs that need expensive fracture completions to become productive. This is all in a fairly well regulated landscape.

President Trump, on the other hand, stands in determined opposition of environmental restrictions and seemingly plans to eviscerate the Environmental Protection Agency. If this happens USA oil and gas producers will drastically reduce production costs. Bear in mind that production costs in the USA are already lower than Canada’s: this is owing to the fact that labor is cheaper in the USA and that their infrastructure is commonly better established and in denser networks. What the heck, throw in Texas’ recent oil discoveries and we have every excuse to get a little edgy about the viability of our oily resources in the north. The question is how does Alberta stay competitive? Do we find new markets? Reduce production costs somehow? Focus on LNG to Liquid?

Tell us what you think!

Murray

It only took two years for Alberta’s technology-leading oil and gas industry to go from representing the backbone of Alberta’s economy to being a “sunset industry”. Perceptions are a funny thing. Two pivotal changes brought on this malaise. First, horizontal drilling and fracing (i.e. fracking or fracting) technologies enabled a very large increase in USA oil production. Secondly, OPEC flexed its production biceps and reminded world economies that it is they who dictate the price of oil (for now).

I am the first to admit that the economic upside-down cake in Alberta gives me pause. But, I do have to ask, is oil and gas really a sunset industry? Many Canadians seem to think that hydrocarbon energies from the Earth represent a practically Neanderthal technology that will readily and soon be replaced. However, if the past tells us anything, it is that this is an unrealistic statement. I was a teenager in Alberta in the eighties. Back then Alberta’s oil and gas economy had fallen on rough times, having been staggered by the National Energy Program that was coupled to lower world prices for crude oil. I was taught that oil and gas were never going to recover in Alberta because we were out of economically recoverable resources. I was heartily discouraged by Alberta geologists from even choosing Geology as a career!

All that changed as Alberta’s heavy oil deposits became economic. For nearly 20 years, from 1995 to 2013, Alberta’s resources became again the backbone of its economy and an important contributor to Canada’s economy. Now it is about 20 months into a serious downturn and one can watch as an entire province (or country!) jumps off of the ship. I think it is crazy.

Consider this. Alberta still owns the largest exploitable volume of oil in the world. Yes, it is heavy oil, but OPEC’s reserves are shrinking at a far faster rate than Alberta’s. The day when it is Alberta that holds the cards is only decades away. What are the wild cards in that deck? One would think that it is how far technology can advance alternative energies such that they rival the economic position of oil, and I suppose that if civilization is waning and there are no growing economies for the next 20 years, everyone is in trouble.

Let me know what you think. Is Canadian Oil and Gas finished?

My Petroleum Geology students have gotten into the spirit of the Provincial Budgeting season, and many of our EAS 364 tweets have involved comparisons with Norway. You know, that Norway $1,000,000,000,000 oil trust fund. One of the better articles that was tweeted was written by CBC’s Susan Ormiston. Therein she noted “They [the Norwegians] are lucky and Norway was smart. So smart that decisions made decades ago to bank the taxes from rich oil fields are now paying for their future at a time when oil-rich Alberta faces a multibillion-dollar deficit.”

A part of me is happy to agree with the idea that taking greater royalties and higher levels of corporate taxation. But, there are major differences between Alberta and Norway that suggest it is not as simple as Alberta doing it the Norwegian way. For example, nobody ever mentions that Norway’s level of personal (income tax) taxation is about the highest in the world. And one beer costs $20 (I am not kidding). Their non-oil cash-flow is a large part of what allows Norway to divert oil revenue straight into the bank.

There is also a great difference in profitability in Alberta versus Norway. In Alberta, the resource is commonly low yield and widely dispersed, so infrastructure is not always concentrated and the resource generally low-grade. Also, heavy oil is differentially (i.e. lower) priced. And to make matter worse, the heavy oil is quite a bit more expensive to produce. So… you can raise royalties on heavy oil, but not nearly as much as you can with light offshore crude.

Finally, some of Alberta’s producer’s are on royalty breaks aimed at encouraging start-ups and to help capitalize the infrastructure required to produce heavy oil. Really, there is far less room to move than people believe. Long-story short: if you want to live like Norwegians, you need to pay taxes like Norwegians. I don’t think there are very many Canadians keen on that idea.

A major issue for producers of Alberta heavy oil relates to one of the foundational technologies for producing the viscous fluid, which is using steam to extract the oil. This is a multidimensional problem. First the production of steam requires a source of water and access to subsurface and surface waters is being carefully monitored and throttled by the Provincial Government of Alberta. Another consideration is that using steam to produce heavy oil is energy intensive, and that contributes to the premise that heavy oil is dirty oil. More pressing recently are the mechanics of how steam is used to produce heavy oil.

Steam has a dual role. The most obvious is that the heat substantially lowers the viscosity of heavy and ultra-heavy oil. For example, the viscosity of McMurray Formation “oil” can be similar to that of smooth peanut butter. Think about that: oil producers need to move a fluid similar to peanut butter through the very small pore throats in the reservoir sandstone. When heated by steam, however, the viscosity becomes so low that it is similar to that of water. This brings us to the second role of steam, which is that a steam chamber must be allowed to develop. A steam chamber is a heated zone of the reservoir that is in part occupied by steam. The chamber not only heats the rock and oil, but it also expands the reservoir, due to steam pressure. This is important, as the dilation of the reservoir expands pore throats and fractures, improving the overall permeability within the steam chamber: this allows oil to flow even better. And therein is the problem. The expansion of the rock and fractures in some cases leads to steam and oil leaving the reservoir and migrating into rock formations above the resource. In extreme cases, the steam can arrive at the surface. This happened near the Ells River in the Athabasca area and the steam release was explosive, producing a large crater in the process.

A current example of resource escaping the oil reservoir due to steam drive is the CNRL Primrose leak. See:

http://business.financialpost.com/2014/03/11/cnrl-pulls-application-to-resume-steaming-near-site-of-primrose-bitumen-leak/?__lsa=434c-80f2

http://www.theglobeandmail.com/report-on-business/industry-news/energy-and-resources/why-an-accidental-leak-should-send-shivers-up-big-oils-spine/article16929877/

In this case, it is still a little unclear how the oil made it to surface. But, there are only two feasible explanations. One is that the oil escaped upwards through fractures that were dilated by the steam pressure. Another is that the steam chamber intersected an older and forgotten well bore drilled by another oil company in decades past. The difference is not trivial, because the presence of fractures suggests that the whole play area cannot be developed with the steam pressures used prior to the leak. Lower steam pressures can be used but oil recovery is reduced. It is also fair to say that if one does not know where all of the previous boreholes are, you are left with a similar problem.

Objectively speaking, Alberta literally has a trillion of barrels of oil that, under the present technology absolutely require steam to be removed from the Earth. That is a century’s worth of oil production. So, you can see the problem, the steam is heavily linked to Alberta’s economic well being.

What would you do?