Canada continues its fight for recovery during arduous times
The Canadian oil and gas industry’s recovery from the prolonged recession has been slow and painful. With prices recovering at a snail’s pace, it has taken longer than expected to reverse the negative momentum built up over the past three years. Adding to the malaise is increasing political uncertainty, as British Columbia takes a sharp, anti-pipeline turn to the left, and questions linger regarding the implementation of federal and provincial climate change policies.
In response, industry has been reticent to hike spending, and is, instead, acting with caution, letting oil sands leases expire and shelving projects that require large capital investment. There are some positive signs, however: results are improving; prices have increased from a year ago; spending is creeping upward; drilling is increasing (Fig. 1); and land sale purchases are up substantially, compared to 2016’s dismal results. However, unemployment remains a problem, particularly in Alberta, where concerns remain that rehiring thousands of specialized workers may be difficult, as so many have left the industry altogether. Since late 2014, as many as 100,000 Canadians, either linked directly or indirectly to the oil and gas business, lost their jobs.
The unfortunate side effect of rising prices has been a commensurate increase in the value of the Canadian dollar, compared to the U.S. greenback. For companies exporting oil and gas to Americans, getting paid higher-valued U.S. dollars means collecting a premium for every molecule of energy shipped south. At this point in 2016, the Canadian dollar was trading around the 77-cents mark. But it recently topped 80 cents for the first time in more than two years.
Regulatory affairs. Market access also remains a concern for Canadian producers. Despite securing approval from the U.S. after President Trump’s executive order early this year, the future of TransCanada’s much-maligned Keystone XL project remains in question, with the company casting doubt on proceeding with its construction. It will make a final decision on the project by the end of this year.
In British Columbia (B.C.), the new, coalition provincial government is composed of two parties that mounted an emphatic anti-pipeline campaign. Specifically, they have targeted Kinder Morgan’s expansion of the TransMountain pipeline, despite it already securing all necessary approvals. The project is also supported by the Canadian federal government, and in Alberta, which has been impacted heavily by the lack of export capacity. The fact that a federally regulated expansion project—using existing rights-of-way, with all approvals in hand—remains a target, clearly demonstrates the hysteria and misinformation that is widely prevalent in the so-called “debate.”
In late July, Canada’s Supreme Court issued two decisions on consultations between the National Energy Board (NEB) and Indigenous groups. One approval—for seismic testing in Nunavut—was overturned because the NEB failed to consider treaty rights. The second decision was favorable to the federal regulator, as the NEB’s approval of Enbridge’s application to reverse the flow of a pipeline in eastern Canada was upheld.
The application for TransCanada’s C$15.7-billion, 2,800-mi Energy East pipeline is in limbo after the NEB suspended hearings last year amid controversy and violent protests. The project proposes to transport approximately 1.1 MMbopd from Alberta and Saskatchewan to the refineries of Eastern Canada and a marine terminal in New Brunswick.
Lack of market access is an enormous cost to the industry, and to Canada as a country, with producers forced to sell Canadian oil into the U.S. at a discount that has reached $10/bbl at times. With 3.5 MMbopd exported to the U.S., the lost revenue is projected at $35 million/day.
Further muddying the waters is federal Bill C-48, which would prohibit tankers carrying more than 12,500 tonnes of crude from stopping at any port or marine installation on B.C.’s coast, from the tip of Vancouver Island to the Alaskan border. The implications of this bill are potentially enormous to projects like Enbridge’s Northern Gateway pipeline, which would have shipped crude to
Kitimat, B.C., and is within the area specified in Bill C-48. Northern Gateway was formally rejected by the federal government in November 2016.
M&A activity. In turbulent times, there are typically many deals to be had and made, and 2017 is testament to that. The country’s M&A activity in 2017 has been highlighted by a quartet of deals in March worth more than C$32 billion, meaning that 2017’s total value is already the largest since 2014.
The top deals in the first half involved Alberta’s oil sands, led by Cenovus Energy’s C$17.7-billion acquisition of ConocoPhillips’ 50% interest in the Foster Creek Christina Lake Project, and most of ConocoPhillips’ Deep basin conventional assets in Alberta and B.C. It is the largest since CNOOC Ltd. acquired Nexen Inc. in 2013. The deal more than doubles Cenovus’ production to 588,000 boed. Cenovus also recently announced a divestiture program, targeting several non-core assets that may bring in up to $5 billion.
Next up was Canadian Natural Resources’ (CNR) C$11.1-billion purchase of a 60% stake in the Athabasca Oil Sands Project (AOSP) from Royal Dutch Shell, pushing CNR’s production over the 1.0-MMboed mark. The assets included the Muskeg River and Jackpine oil sands mines, a 70% stake in the Scotford Upgrader and Quest carbon capture and storage project, the thermal in-situ project at Peace River/Carmon Creek, and the Cliffdale heavy oil field. This deal also included both CNR and Shell paying C$1.6 billion, each, for Marathon Oil Corp.’s remaining interest in AOSP—prior to CNRL’s purchase of the Shell assets—to complete the larger purchase.
Expenditures. Spending is inching forward in 2017, a sign of some optimism. In the first quarter, spending was up just over 5% from the first three months of 2016, according to Statistics Canada. But given how low expenditures were last year, it is not a ringing endorsement of the hoped-for turnaround. In addition, the Canadian Association of Petroleum Producers (CAPP) warns that oil sands spending is expected to fall again this year, to C$15 billion, 56% lower than the $34 billion shelled out in 2014.
Some of Canada’s biggest producers, such as CNR, Husky and Cenovus, have announced mid-year capex reductions, despite showing better year-over-year financial results. Others, like Suncor, have increased spending.
The downturn has spurred innovation with oil sands operators, as the need to reduce costs became imperative. Cenovus, for example, believes that it may save up to C$2 billion annually on diluent purchases, once it commercializes a partial upgrading process that it has been testing for the past three years. Additionally, Meg Energy Corp. says it may save $4 billion to $5 billion with proprietary technology developed at its Christina Lake project.
Meanwhile, Nexen continues to struggle. The upgrader at its Long Lake facility was shut in, perhaps permanently, this April. It recently was charged by Alberta’s provincial regulator for a 31,400-bbl pipeline spill in July 2015. The investigation into an explosion at the upgrader that killed two workers in early 2016 is ongoing.
Land sales. The clearest signs of recovery for the Canadian industry are in land sale totals and drilling numbers. Land sales, which indicate the industry’s interest in future development, have recovered substantially from last year’s dismal totals. Through the first six months of 2017, according to Daily Oil Bulletin records, spending in Western Canada was C$276.57 million, up 245% over the $80.18 million collected in first-half 2016, but still well below the record set in 2006, when governments took in $2.66 billion.
Alberta once again led the way, taking in 65% of the total amount, $180.13 million, up 182% over the $63.77 million collected in 2016. Spending in B.C. has recovered dramatically, with parcels in the Montney area leading the way. Through six months, the province took in $70.28 million, for an astonishing increase of almost 1,600% over the paltry $4.2 million collected through first-half 2016. Interest continues to increase, as the July 26 land sale brought in more on its own, $84.73 million, than the entire first half. The highest annual total in B.C. was $609 million in 2010.
Saskatchewan totals also have recovered, hitting $25.94 million at the halfway point of 2017, 115% higher than last year’s six-month total of $12 million.
Drilling activity. First-half drilling numbers are up substantially in year-to-year comparisons, with 3,345 wells drilled, compared to 1,413 in 2016—up 137%, according to Daily Oil Bulletin records. Of the total drilled in 2017, 60% targeted oil. Overall, meters drilled increased 122%, indicating the trend toward longer completions has lessened for the first time in many years.
According to data provided by CAPP, there were 4,603 new wells drilled last year—a 16% decrease from the 5,486 wells drilled in 2015. More than 36 million ft were drilled. The CAPP figures also include more than 146,000 ft drilled at nine offshore wells. Overall production in Canada amounted to 3.683 MMbopd, including more than 2.412 MMbpd from oil sands.
Canada’s service industry associations are both bullish on drilling for the remainder of 2017. In June, the Canadian Association of Oilwell Drilling Contractors revised its Western Canadian forecast upward, predicting that 6,892 wells will be drilled this year, up 2,177 from its original forecast (released last November), and up 69% from the 4,072 wells drilled in 2016.
Meanwhile, the Petroleum Services Association of Canada has revised its forecast upward twice since its original prediction last November, and now projects that 7,200 wells will be drilled, substantially higher than its original figure of 4,175 wells.
So far, government agencies in the larger provinces have not embraced the more bullish outlook, as shown in the data they have provided to World Oil, Table 1. Their projections are more in line with CAPP’s last forecast of 5,415 wells.
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