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Welcome to Oslo, Alberta!

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.

On the Sustainability of Cheap Oil

To a Professor of Geology, and as someone with little training in Economics, the feasibility of cheap oil is difficult to fathom. Much of western Canada’s oil is barely economic at $50 USD/bbl: this includes McMurray Formation Ultra-Heavy Oil, Clearwater Formation Heavy Oil in parts of the Cold Lake Field, Mannville Group heavy oil in Saskatchewan and eastern Alberta, and tight oil and gas in Triassic measures of British Columbia. Some of Alberta’s oil is downright expensive, such as Steam Assisted Gravity Drainage (SAGD) projects in McMurray, which can have costs of production near $90/bbl (see note 1).

Two months ago Business Insider published a chart that showed the projected 2020 levels of production along with the mean operating costs of various oil plays. These included Canadian Oil Sands ($74/bbl), North American Shale (Fracing) plays ($62), Ultra Deepwater ($57), various onshore and offshore locales ($43 to $57), and onshore Middle East ($29). The median cost of production within the next 5 years should be close to $55 per barrel, suggesting that low oil prices will, in the future, result in immediate production decreases and prop up the price of oil at least near the $60/bbl range. (see http://www.businessinsider.com/markets-chart-of-the-day-december-29-2014-12)

So, how does oil even fall below production costs? I suppose the answer is that oil production has a lot of momentum. There is no quick response available to producers to check oil production as prices drop. The reasons for this are variable and include a technical necessity for production (e.g. a steam operation is a several-year engagement and once the steam is in the ground, the resource has to be produced before the steam condenses), maintaining shareholder confidence, and feeding downstream operations. It is worth noting that 2 of the fasted growing oil producers over the past 5 years are the United States (47.5%) and Canada (23.1%) (see http://www.businessinsider.com/us-energy-production-boom-charts-2014-12). Not only has North America destabilized oil production, the increases are from highly technical giant oilfields, where production cannot be immediately curtailed.

There is no doubt that producers do feel the pinch. In the Globe and Mail today (https://secure.globeadvisor.com/servlet/ArticleNews/story/gam/20150228/RBCDCOVERNORTHSEAFINAL), EnQuest CEO Amjad Bseisu was quoted “The North Sea was struggling even at $100 [U.S.] oil, I think we’re in a defining moment for the North Sea. We could either see precipitous decline or the industry will have to reinvent itself.”

In Alberta, there is a sense of unease, and although no one is set to jump off the cliff, it is a MUCH quieter place than it was one year ago. Forgotten in all this is that heavy oil (and other unconventional resources) in Alberta are 100-year resources. Our children’s children are likely to be mining and steaming oil from the Cretaceous rocks of Alberta (see note 2). We are in this for the long haul and need to be prepared for ups and downs in oil prices.

This leads us to our discussion. Students of Geoscience, how do YOU think that the price of oil can be better managed? Through production management? Flexible royalty agreements? More carefully managed expansion and development? If oil proce cannot be managed, what other things could be done to weather boom and bust cycles?

Notes:

1. The cost of SAGD production is extremely variable and has ranges between $30 and $95 per barrel. A number of factors influence SAGD optimization, including geological heterogeneity, reservoir thickness and continuity and saturation and viscosity of the heavy oil.

2. Not just the Cretaceous Measures, but unconventional tight resources in the Triassic, Devonian and Mississippian units.

Steam Chambers and Oil Leaks

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?

The Future of Earth-Energy Resources in Alberta and a Story of Alison in Blunderland

Recent cuts of the (Alberta) provincial budget have been portrayed by the government as the necessary result of falling revenues due to the bitumen bubble – not to mention low gas revenues. This caused me to consider the future of oil and gas revenues in Alberta. Can we expect high levels of revenue from oil and gas (and coal?) in the future?

One thing is certain: there is no shortage of oil deposits in Alberta. These are present as heavy oil, ultra-heavy oil and tight oil. Regarding heavy and ultra-heavy oil, Alberta has perhaps the most in the world. Consider that there is about 1.7 trillion barrels of the gooey stuff in the McMurray Formation, and another 500 billion barrels in the underlying Grosmont Formation. Well, we basically corner the market. For the record, we could add the Peace River, Cold Lake and Lloydminster heavy oilfields to that inventory. It is no lie to say that Alberta has about 2.5 trillion barrels of oil and heavy oil in place (not all of that is producible). These numbers are so large, I will not even bother discussing the tight-oil Bakken Formation.

Regarding gas, Alberta has LOTS of that, as well. There is deep-basin gas, for example in the Grande Prairie area, tight gas generally throughout NW Alberta (and NE BC) in the Montney Formation and un-estimated volumes of shale-gas in the Devonian Duvernay Formation. Not to mention shallow gas, coalbed methane and conventional gas. Way more potential production than all of Canada needs, and probably at least a 50-year supply of it!

So: there is no problem with resource availability. The limitations are infrastructure to get the products to market (both oil and gas) and the technology to exploit those resources. I see those coming in the future. Despite BC’s intransigence regarding a pipeline to the coast, it is in Canada’s best interest (yes Canada, not Alberta) to get the product to market. Regarding oil, pipelines WILL come and new means of partial upgrading at the well-site are on the horizon (lighter product is easier to pipe to market). So the future should be just fine.

The pity is that this is the same government that is whining about the bitumen bubble that would have seen this coming, had they listened to economists. The same government that permitted unfettered development of the oilsands from 2000 to 2008, so that we now have more bitumen than we know what to do with (also causing many other infrastructure problems in the process). The same government that refuses to look at royalties from the oilsands as part of the budget-solving equation. And now, here we are: cutting services and education. This is, in fact, a story about poor resource management and stewardship. It smacks of lazy government policy that lacks a vision of the future. It reveals the lack of ability our government has in consulting with the large number of talented Albertans working in industry and academe who have seen today’s issues coming. It is the result of an arrogant government that thinks it always knows best in spite of abundant evidence that it lacks any real talent.

Note to Premier Redford: regarding education cuts, we will probably need our economists, geologists and engineers once those pipelines are finished, so let’s not get too carried away.

Maybe I am over-reacting. Students: what do you think?

Pipelines Again

Lately the oil news in Alberta has centered around the price differential applied to Alberta oil and heavy oil. In simple terms, I suppose that supply exceeds our ability to move the resource out of the province. This has renewed the debate regarding pipelines to the USA and across BC to reach Asian markets. Recent developments seem to indicate that pipelines to Oklahoma may become a reality in a few years: for example Nebraska’s Governor Heineman notified Obama that he has approved the proposed Keystone XL crude oil pipeline’s new route across the state.

http://www.ogj.com/articles/2013/01/nebraska-governor-approves-keystone-xl-pipelines-new-route.html

BC seems a bit more intransient in their position. Initially BC Premier Clark insisted on a royalty for this pipeline to be hosted in the northern part of the province. Then the situation evolved into a more complex beast regarding First-Nations interests and environmental concerns. Regarding the prior: ludicrous. A friend of mine—Astrid Arts, a geoscientist in Calgary posited “do we charge a royalty for their beer or lumber that crosses Alberta into the other 8 provinces east of us?” A cut of the Kokanee tax sounds fine to me! Kidding aside, Astrid made a fair point. Regarding the latter, fair enough. But consider that presently we are shipping bitumen by rail to Oklahoma:

http://www.cn.ca/en/customer-news-transport-market-bitumen-20120627.htm

And this is being considered for Alaska.

http://www.edmontonjournal.com/business/Group+wants+move+bitumen+rail+Alaska/7763076/story.html

Rail is not the most efficient nor—in my opinion the safest—way to move oil. There is no reason pipelines cannot be made safe. The technology is simple and the solution probably should revolve around appropriate monitoring and inspection of the pipeline.

However, other solutions come to mind. 1. Refine more product in Alberta. 2. Have a Provincial development plan for heavy oil resource that is an actual plan. 3. Take less money for the product.

What do you think?

Leave Nexen Alone?

A lot of fuss is being made over CNOC’s attempt to acquire Nexen. On the surface, this looks like the same, same-old. After all, some truly historical Canadian companies have been absorbed by international concerns. The once mighty Gulf Canada was purchased by ConocoPhillips. Dome, another solid Alberta outfit ended up with Amoco, which was purchased by BP. I have no idea who purchased Norcen (they gave me a scholarship when I was an undergrad)… maybe Husky? But then, Husky is Canadian (majority owned by a Hong Kong resident).  What about Canadian Hunter? They were one of the most innovative Canadian oil and gas producers of the last 50 years! They were gobbled up by Devon. So… what is the difference?

Well, as a Canadian, I can go purchase shares of ANY of the companies that own the above assets. I can still participate in their economic success. I can go to shareholder meetings and hold them accountable! Try and do that with CNOC. You will be disappointed. Do not ignore this issue. Write your MP and let them know that selling off Canadian companies and putting them out of reach of Canadian investors is absolutely unacceptable.

Tight oil better than heavy oil?

In southern Alberta, Saskatchewan, North Dakota and in Montana, tight oil production (from the Bakken Formation) is now approaching 1 million barrels per day. That is about 1% of world demand: not bad. Bakken production now challenges McMurray bitumen production, which is on the order of 2 million barrels per day and rising.

The Bakken Formation has garnered less environmental attention than the McMurray deposits, and is an attractive resource from that point of view. However, it is a play that requires fracing and locally comes under scrutiny ( http://video.cnbc.com/gallery/?video=3000041249 ). The McMurray, on the other hand is a whopping huge deposit that promises steady cash flow and stability, but is either mined (see attached) or steamed ( http://www.conocophillips.ca/EN/tech/sagd/Pages/index.aspx ).

As usual, excellent choices! What do you think of these options?

Fracing / Fracking: cost of inexpensive energy?

First, to avoid confusion, I am using the term fracing as a derivative of fracturing, as it applies to induced fractures in subsurface boreholes. I think it is commonly written as fracking, but that just doesn’t seem right. Where does the “k” come from?

The media attention on fracing has become overwhelming. Many people who live near fracing operations are worried for contamination of their land or water. There is at the very least anecdotal evidence that fracing has “gasified” nearby water wells. However, industry has taken the general position that fracing can be (and is) done without any serious risk to local water supplies or the environment. Some scientists have echoed the same thing (see: “Fracking risk is exaggerated” http://www.newscientist.com/article/dn21341-fracking-risk-is-exaggerated.html). But who trusts scientists, anyways?

I recently attended a lecture by Professor Karlis Muehlenbachs, a geochemist-colleague here at the University of Alberta (see the article “Fracking Contamination ‘Will Get Worse’: Alberta Expert” at http://thetyee.ca/News/2011/12/19/Fracking-Contamination/ ). He presented a point of view that was – to say the least – enlightening. Based on several years of research and thousands of chemical analyses from oil and gas wells in Alberta, he is able to show that gas routinely crosses from one geological unit to another. This leakage may primarily occur right alongside the well-bore, but in cases where fracing is more intensive (e.g. coal-bed methane), leakage is expected. Broadly speaking, the amount of leakage may be small or large (it is not really known) and it is unclear how much shallow aquifers are  influenced by this contamination, but it certainly provides food for thought. I think we need to know this.

Professor Muehlenbachs further pointed out that there is an assumption that people who are against fracing are worried about ground-water pollution. Sometimes, however, when a person says “I am against fracing” they mean “I am against the endless industrial traffic associated with fracing operations” or “I am against the noise associated with gas production facilities”. Maybe they simply mean to say that they do not trust industry. Certainly the issues surrounding fracing are more complex than gas in well-water.

There is good with bad. New fracing techniques, along with horizontal drilling, are technologies that are largely responsible for staving of a North American (read USA) energy shortage. Just 10 years ago, there was a lot of uncertainty regarding American energy independence, and now the USA is looking like the Saudi Arabia of natural gas (400-800 trillion cu ft)! Canada will probably be shown to have similar resources, but this is not yet well established. That is a lot of gas. Although neither side (industry versus concerned locals or environmental groups) seems prepared to admit it, leaky wells may be the cost of energy stability and keeping oil and gas affordable. Okay: who would want to admit THAT? I think it is true, however.

I turn the conversation over to you. How important is low-cost energy to you and your lifestyle? IS the cost of doing business reasonable? Can fracing be regulated so that it is safer? (see “Calgary-based energy companies welcome new fracking standards?” at http://www.calgaryherald.com/business/Calgary+based+energy+companies+welcome+fracking+standards/6076346/story.html )

Natural Gas: Utopia’s #1 Resource?

Shale gas and other forms of tight gas are starting to become real alternatives to crude oil. Look at the Annual Energy Outlook (2011), published by the US Energy Information Administration (EIA): they more than doubled their estimate of technically recoverable shale gas reserves in the US, to over 23 trillion cubic meters from 10.0 trillion cubic meters ( see: http://www.eia.gov/forecasts/aeo/er/pdf/0383er(2012).pdf ). That is a lot of gas! If you consider that there are many initiatives to liquefy natural gas, so that gas can be used as a replacement for diesel (for example), is this the way forward?

On the plus side, natural gas is inexpensive, abundant and widespread, and if anything gas is likely to be substantially underestimated in it’s abundance! We could go on living the swinging lifestyles that we have become used to due to the availability of “cheap” crude.

There is a downside. The burning of NG still releases abundant CO2 into the atmosphere. Sure, it is cleaner, but it is not clean. Also, there are environmental concerns regarding fracing and infrastructure intensity, too. Finally, if we pursue natural gas, will this not just mean we more or less stop pursuing clean energy?

T. Boone Pickens, an American resource expert and former CEO of Chevron (among other things) has for several years put forward arguments for the embracing of natural gas. His angle is focused on energy security for the USA. But, he understands the issues. Those interested should search the multimedia and consider his arguments.

What do YOU think?