Monday, August 29, 2011

A Numbers Game

Photo from here; this article appears in the September issue of Oilweek
For Devon Canada's Cal Watson, coaxing maximum output from heavy oil and bitumen deposits is all about optimizing your operating metrics
By Peter McKenzie-Brown
For Cal Watson, it’s all about the numbers, but here’s one number he doesn’t mention. Devon Energy Canada is number 3 on the 2011 list of Canada’s Best Workplaces (those with more than 1,000 employees). It’s the third year in a row Devon’s been on the list, and it’s the only oil company to be found there. The numbers for this list are crunched by an international research and management consultancy.

The articulate and motivated vice president of thermal operations at Devon Canada is more concerned about other numbers: “In every measurable metric – land use, water use, air, operating expenditures, plant on-stream time, production – our focus and philosophy is to be a top-decile company.” He then cautions, “You can focus on one or two (numbers) and sacrifice the others. We aren’t willing to do that.”

You need to be wary of this kind of statement; it’s often the voice of a company delivering its “messages” to a reporter. Indeed, at the risk of presenting an unpardonable groaner you might say, “elementary, my dear Watson.” However, as we discuss the details of Devon’s Jackfish SAGD projects, it soon becomes clear that in the area of thermal operations Watson is serious indeed. The exciting part is that his numbers represent a sophisticated integration of production into a shrinking environmental footprint.

Background
Born near the heavy oil centre of Lloydminster on a mixed farm in Saskatchewan, fifty-year-old Watson seems almost destined to find himself operating in heavy oil and the oilsands. He earned his B.Sc. in engineering in 1985. On graduation he soon found himself doing reservoir engineering for Husky Energy – far and away Lloydminster’s largest oil industry employer and at the time the largest conventional heavy oil producer in Canada.

As part of a move toward greater centralization, after Husky’s acquisition of Canterra Energy he was transferred to Calgary in the 90s. His new assignments included more work in reservoir engineering (including duties in deep Foothills gas) and three years as a gas marketer.

He was then lured into the employ of Ulster Petroleum, a junior, but found his career buffeted onward by still more corporate acquisitions. Anderson Petroleum bought Ulster. Then Devon bought Anderson. He thus found himself working for one of the relatively few North American oil producers not headquartered in Houston or Calgary. Devon is based in Oklahoma City.

As these events unfolded, Watson began receiving promotions into managerial positions – Central and Southern Plains with Anderson; then, with Devon, combined responsibility for the Foothills Division and a highly technical reservoir engineering group. In 2008, he moved into thermal heavy oil. For the first time, he shifted from exploitation into an operations role with appointments as thermal heavy oil operations manager and, recently, vice president.

He focused on the interrelated issues of “increased operability and reliability.” To illustrate his concern, he notes that in Calgary “we take reliable power for granted because we are part of a grid. (In northeastern Alberta) you have one power line to a facility. The line goes down and that’s all you’ve got; the facility may need to shut down. We are constantly looking at ways to increase reliability. Improved reliability and operability are the fundamental building blocks of a more efficient process. They increase efficiency.”

Jackfish
As an operations guy, Watson found himself with responsibility for Jackfish 1 – a SAGD project that started steaming in August 2007 and began producing at the end of that year. For the first five months of this year, the project’s uptime was a remarkable 98%.

Designed to produce 35,000 barrels per day, in recent months for brief periods it has produced up to 37,500 barrels per day. Until that happened, did he actually think the equipment used in that project could exceed design capacity? Of course. “The equipment is subject to whatever SOR (steam/oil ratio) you can achieve. If you can get an SOR lower than 2.65, you have the opportunity to produce more barrels. The front-end capacity of our facilities is up to 50,000 barrels per day. If we can get the SOR down to the 2.4 range for example, we could certainly hit 40,000 barrels per day production.”

As always, it’s all about the numbers.

When Jackfish 1 went on production it quickly became a big part of the company’s production portfolio. At this writing, Devon Canada produces about 195,000 barrels of oil equivalent (BOE) per day. Jackfish production contributes about 18% of the total. Capital expenditures for the project (including start up) were $620 million – about $18,000 per daily flowing barrel. Today those numbers seem pretty bargain basement.

Consider, for example, that Devon’s sister project, Jackfish 2, involved capital spending of $1 billion. Jackfish 2 started steaming in May of this year. When production reaches design capacity next year, the facility will represent another big piece of Devon’s production portfolio. With Jackfish 2 on stream, Devon Canada’s total production will be 230,000 BOEs per day, and the combined Jackfish projects will represent 30% of the total.

The disparity in costs notwithstanding, Watson says the major components of the two Jackfish projects “are exactly the same. However, for Jackfish 2 we took 1,100 changes into the design – changes related to instrumentation and valving, for example, and measurement points.” Those changes were clearly not made to cut costs; their aim was to “increase operability and reliability.”

While capital costs are up, other expenses are down – notably fuel gas prices since Jackfish 1 went on stream. Even so, the company is constantly focused on better heat integration. “That means you conserve heat, putting it at the end of the plant where you can preheat the water going into the boilers. That way you need less fuel gas to generate steam; it gives you a better fuel efficiency number.”

Fuel prices excluded, operating costs for these projects are only $7 per barrel of production. In addition, there are some economies of scale in having two similar projects 5 miles apart on stream at the same time. There is little sharing of labour at the field level. Each facility has 85 dedicated staff in its own camp. From a district level, however, the two projects benefit from shared services. Watson rattles him off: “Camp (the company will soon house most staff in a single camp), safety, asset integrity, transportation and procurement.”
 
Devon has plans to add Jackfish 3 to its oilsands collective; the company made its submission to regulators a year ago. Today the company is in the detailed engineering and design phase. “We have done procurement for long-lead items like steam generators and long-term contracts have been let,” Watson says. “The kit’s being built. We expect approval at the end of this year or in early 2012.” If all goes according to plan, the project would start steaming in late 2014 or 2015.

Staying the Status Quo
Throughout the technical part of our discussion, Cal Watson was upbeat and focused. However, when we turned to environmental questions something new entered the discussion. It was almost as though the issues became personal. We began by talking about water policy. “Our goal is to meet and exceed regulatory thresholds,” he says, and in this there is nothing new. Then he adds, “Staying the status quo means you are falling behind. Reducing our footprint out there makes a difference.” This seems real.

On Devon’s corporate website, however, there is an article about the company’s decision to use saline water for steam generation. I find the article a bit misleading, because it neglects to mention that using potable water really isn’t an option for SAGD projects. I put the question to Watson, who confirms that using “saline water has not been a significant problem for us at all.” But, he adds, “Water usage as a whole is a sensitive issue.”

According to Watson, when Devon began planning for the project CEO Chris Seasons challenged the design team “to come up with a design that would use no potable water at all. We sent our hydro-geologist out to drill for water and he came up with good source that was saline, so our design team looked for ways to remove solids, hardness, remove magnesium and calcium and do whatever else we needed to do to make it adequate for steam gen. From the beginning, we set our minds to doing that.”

To appreciate the challenge the company faced, consider that regulators define potable water as water with dissolved solids of 4,000 ppm (parts per million) or less. That is setting the bar high for potability – water for human or agricultural use. “We have a source that’s 6,500 ppm,” Watson continues. “Our facility works fine on that. We have also found a higher concentration source (on the property. We did a 6-week test with 12,000 and 14,000 ppm, and that worked just fine, too.”

While Devon may have had little trouble with using saline water, its peers have recognized the company’s efforts. On two occasions the company received water-related CAPP awards. One was a stewardship award for its use of saline water at Jackfish. The other was the CAPP President’s Award for its elegant water policy. This masterfully concise document presents comprehensive policy in eight bullet points.

Wolf Packs
CAPP also presented the company with an environmental performance award for reducing the width of access roads in forested areas and for using waste wood in road construction. Not only has the company has reduced its seismic right-of-way in the forest. The company mulches up waste from the cuts and puts the mulch back on the right-of-way. “In a year or two you can hardly recognize we were ever there.”

This is important because traditional seismic lines present wolf packs with a combination of fast pathways through the bush and line of sight to their prey. To level the playing field, Devon “is adding a saw-tooth every 300 metres to eliminate line of sight and narrowing the right-of-way. Going to hand-cut seismic takes away the ability (of predators) to move quickly through the bush.”

Devon plans to use “less than 15% of our leases during our development – never more than 15%,” according to Watson; “Our goal is to reduce that down. (We will do that through) progressive reclamation of seismic lines and well pads over the full life of the project. As the older pads start to decline, we bring on new pads.” Using that strategy, he calculates that each Jackfish project can “hold production flat for 15 years plus.”

He has other ideas for narrowing the footprint, one of which involves the use of solvent. “We want to try injecting it with our steam. Solvent could increase the size of the steam chamber when it mixes with the bitumen. If solvent enables us to expand the size of our steam chamber, that allows us in the future to push those inter-well spacings out, so we have to drill fewer well pads, or can drill longer horizontal wells and fewer of them.” It could also increase recovery, which is already 65%.

Like the oilsands industry itself, Watson is keenly optimistic about the growing ability of technology to mitigate the environmental impacts of oilsands production. “There are a lot of bright minds out there focused on creating technological advances that simultaneously reduce the footprint and increase production,” he says, citing horizontal drilling and MWD (measurement while drilling). “These have been huge technological developments – they mean we can lower our impact by drilling out as a crow’s foot.” Then there is “a ceramic membrane technology to improve fluid separation, (thereby presenting the) opportunity to develop much greater recovery.” He would continue, but this reporter’s mind by now is overflowing.

If Cal Watson has one big idea, what is it? Perhaps it’s all about numbers. While he provides endless detail about the Jackfish projects, to explain the challenges those projects are facing he constantly comes back to simple metrics – numbers that influence both production and the footprint.

Don’t forget: “You can focus on one or two (numbers) and sacrifice the others. We aren’t willing to do that.


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