Wednesday, April 06, 2011

The Big Five

Canada's top conventional heavy oil producers in profile. This article appears in the 2011 Heavy Oil and Oilsands Guidebook

By Peter McKenzie-Brown

The five largest conventional heavy oil fields are roughly synonymous with the names of towns and hamlets along Alberta’s border with Saskatchewan. In order, they are Provost, Suffield, Lloydminster, Wainwright and Hayter – no surprise there. However, when you list the five biggest conventional heavy producers a big surprise does surface. The companies are CNRL, Husky Energy, Cenovus, Baytex and…Northern Blizzard.

CNRL (121,000 barrels per day): The biggest Canadian oil company, Canadian Natural Resources is also Canada’s single biggest conventional heavy oil producer. Any one of its top 10 producing fields – two of them produce 14,000 barrels per day each; six produce 9,000 barrels per day each – would make most companies happy. As the company’s website explains, its “crude oil is produced from very distinct assets, using different recovery technologies that are tailored to fit each unique reservoir.” Like Husky, most of CNRL’s conventional heavy oil properties and production are centred on the border town of Lloydminster. The 10 largest of these properties, which individually produce from 4000 to 14,000 barrels per day, collectively contribute 80,000 daily barrels to Canadian Natural's production.

Those projects are being dwarfed, however, by the company's polymer flood operation at Pelican Lake/Britnell which, like the Cenovus property, began life as a cold production operation before converting to waterflood. The company expects production from this field to soon plateau at 80,000 barrels per day.

Husky: At 75,000 barrels per day, Husky Energy is just off the top of the conventional heavy oil hit parade. The pioneer in Canadian heavy oil production – the company has been involved in the area since the 1940s – nearly 80 percent of Husky’s heavy oil production uses primary “cold” production in the Lloydminster area, where the company has a land position of more than 8,000 square kilometres. The remaining 20 percent of Husky’s heavy oil production comes from thermal recovery projects – notably its Pikes Peak SAGD operation. Also located near Lloydminster, the Pikes Peak project is in Saskatchewan.

Cenovus (36,000 barrels per day): The middle company in the line-up is Cenovus. The company has two producing properties which between them account for all of the company’s heavy oil assets. One is at Suffield, which produces about 12,000 barrels per day through conventional methods. More interesting is the companies Pelican Lake property, which produces about 24,000 barrels per day using polymer flood.

Baytex Energy (29,000 barrels per day): Number four in the line-up is Baytex, which generates the bulk of its revenue from heavy oil. According to corporate publications, heavy oil accounts for more than 60% of production and more than 70% of oil-equivalent reserves.

In some ways, Baytex is the odd man out in its conventional heavy oil production. Like the other companies, it has important assets in the heavy oil belt along the Alberta/Saskatchewan border – Ardmore/Cold Lake and Lindbergh on the Alberta side; Carruthers, Tangleflags, and Celtic in Saskatchewan. According to company spokesman Brian Ector, “Development in these areas consists of mainly vertical and horizontal cold drilling, as well as waterflooding at Carruthers.”

However, Baytex also produces conventional heavy from a property in the Peace River Oil Sands. This is unusual. According to Ector, “we developed Seal (the Peace River property) through the use of multi-lateral horizontal wells, and production in the third quarter of last year averaged 10,100 barrels per day. In addition to cold primary development, this year we are embarking on our first commercial cyclic steam stimulation (CSS) project at Seal – a 10-well module scheduled for start-up late in the year.”

Production is approximately 11° API, and the oil flows through “mile-long multi-lateral horizontal wells” from the Bluesky formation at depths of 600-700 metres. Given where it’s located in Alberta, “technically, this is an oilsands lease,” he observes; “it therefore qualifies for the oilsands royalty regime,” which much more attractive to the producer, since it equalizes royalties across all wells.

Northern Blizzard (15,000 barrels per day): A private company, Northern Blizzard pierced the top ranks of heavy oil producers by acquiring assets belonging to Nexen Energy last summer. The price was $975 million; the properties have proved reserves of 39 million barrels of oil equivalent.

The company doesn’t use waterflood or other specialized techniques to produce. According to the company’s chairman, John Rooney, production consists entirely of “cold flow production” – mostly in the Lloydminster area, and mostly from Saskatchewan.

The Outlook
For much of last year, the differential between the prices of Canadian heavy oil and Edmonton par, Canada’s standard for light oil, was very narrow. Indeed, for a brief period last May heavy oil producers were actually able to sell their heavy oil for almost the same price as light oil. This was an extraordinary event – very profitable for producers –and it wasn’t likely to last. It didn’t. At the beginning of 2011, the average difference between light and heavy oil prices had expanded greatly, to about $23. This significantly changed the economic outlook for the sector.

A number of factors have contributed to the widening of the differential. Most importantly, Canadian heavy oil differentials respond to competition at a small number of specialized US refineries. Other heavy oil producers – think Venezuela – also compete in those markets, and competition has picked up in recent months.

Canadian competition has been hamstrung by transportation problems: expanding pipelines to American markets has been slow, and Enbridge’s problems in Michigan have resulted in pipeline shutdowns for maintenance. This is curtailing existing capacity. The rise of the Canadian dollar to parity with that of the US has also contributed to a change in outlook for the Canadian heavy oil producer. The bottom line is that these producers are unlikely to find their conventional heavy oil operations as rewarding in the first half as they were a year ago.


Jed said...

Thank you for writing this article. I was looking for some clarification to a news story about the loss of production due to flooding in Saskatchewan. They only mention Cenovus and I thought there was more than one company here. Thanks, I like to do the math myself. I've always wondered how much money we are making here as a province. Obviously they are going to hide most of it but its fun to try and find the money and make them nervous.

Jed said...

Having said that, I read on further to see Husky is claiming to have a "land position of 8000 square kilometres?" show me a map of this territory. Is this on Jupiter? Its only 2000 some km from Ontario to BC. Surely you must mean metres unless they actually do have rigs on other planets which is entirely possible.. tweet me your reply unless I never come back to this quadrant of cyber space again @jaredmysko

Peter McKenzie-Brown said...

Subsurface mineral rights typically consist of smaller plots -- for example, 2k x 6k (=12 square kilometres); when a company like Husky refers to 8000 sq km, they are aggregating these properties.

In Alberta, mineral rights to a single piece of land can be sold simultaneously -- for example, company A gets the rights to one geological formation, while company B get rights to a deeper or more shallow formation under the same surface property.

Unknown said...

Peter are you able to direct me to any written material on the different types of extraction methods these companies use in production and why they have chosen such methods (cost etc) As well as a place to find the cost differential between the heavy and sweet oil. Finally I have been told that in these areas you talked about that there are different types of heavy oil itself, some that are simialr in characterisitics to the tar sands and some not as heavy in nature. Are you able to direct me to any information on this topic. Thank you for you article as a teacher I enjoyed reading and want to know more.