The Advisor: John Gulley

This article appears in the September issue of Oilsands Review

By Peter McKenzie-Brown

John Gulley speaks with the voice of authority developed over 35 years; few people can match his longevity of oilsands experience. He is a senior oilsands advisor with Golder Associates, an engineering and environmental company operating under the banner “Engineering Earth’s development, preserving Earth’s integrity.” Now a global company, Golder has more than 7,300 employees – 3,000 in Canada, where the company began.

“I started working with what was then Great Canadian Oil Sands (now Suncor) in 1976 on a project that was about deterring birds from landing on tailings ponds,” Gulley says. “I’ve seen significant changes in the way companies produce oilsands, the way regulators work, and of course major changes in the way oil companies deal with the environment.”

Today, his specialty is to work with companies as they prepare their environmental impact statements. Given that background, he has a clear view of the way oilsands regulation functions. Top of his list is the idea that regulation doesn’t improve industry performance. As an example, he cites ERCB Directive 074, which was issued in 2009.

“Many people believe it will actually change the way companies operate,” he says. “In fact, it reflects work the industry has been doing for many, many years. The companies have been searching and researching ways to deal with (environmental) problems for many years. The directive put in words the industry’s achievements. I’m not convinced that regulators and stakeholders play a large role in identifying problems.”

Science and technology

In Gulley’s view, advances in scientific technology have led to the biggest changes in environmental protection. Monitoring systems began tracking oilsands data about 1970, and “their existence and the way we use them hasn’t really changed in recent years. What has changed in the last 35 years is the volume of data we can record and the level of accuracy that’s now possible. The information we use to prepare an Environmental Impact Assessment, for example, is staggering. (Data on wildlife and habitat) has lagged, but we’re developing that now.”

According to Gulley, the increasing analytical capability of the lab has created a whole new world of environmental science. One result is that data from the industry’s early years has become irrelevant. “The detection limit of a chemical or an element – mercury, say – may have been 1.0 in those days. (Today we measure the same element at 1/1000th of a unit, instead of one.) You may have hundreds of data points from (the early) years, but you don’t really have any data. Thirty-five years ago when you talked about polycyclic aromatic hydrocarbon compounds you didn’t have a list of 150 compounds (as you do today). You had a single PAH number (for all of them).”

Better labs, better techniques and more data have helped create better environmental management. “The amount of data that we have and our knowledge of the environment enable us to predict the potential effects of (oilsands) projects as we move forward. When we look at cumulative effects we have a lot more certainty now. We now have a great deal more confidence.”

Progress in the oilsands industry has created an increasingly complex sector. Today there are three distinct groups of producers. The pioneers – Suncor, Syncrude and Cold Lake – are the first group. Producing facilities that have been constructed in the last decade or so, many of which use in-situ production, are the second. Then there are those in the planning stage. “There’s a difference in each of their operational requirements,” says Gulley, “and we have people dealing with all of them.”

The regulatory system

The rapid advance of technology has made the environmental regulatory system both flexible and robust. “You have to adhere to a guideline number rather than to a technology,” Gulley explains. “This gives operators quite a bit of flexibility. They don’t have any flexibility around the number – for example, they can’t say ‘I’m going to achieve 12 instead of 10.’ How they meet the required number is up to the operator.”

He pauses for effect, then notes a recent announcement by the federal government that they are going to become involved in the choice of technologies to reduce carbon emissions. “This is quite a departure from the way this has traditionally been done. Perhaps the industry should be alarmed.”

Two features of the traditional regulatory system make it so effective. First, if an operator doesn’t meet one of the criteria in its operating permit, by law the company has to report that fact to the authorities. That’s the first level of protection. The second is that the values required in the operating permits are “protective,” in the sense that they are far more restrictive than necessary.

Consider two examples, each based on the same operating permit. The permit specifies that a particular discharge into water can be no more than five even though the best scientific thinking says a discharge volume of 50 would be enough to protect the environment.

On the one hand, imagine that the producer hits a level of seven for one day. The company must immediately report the infraction. The regulator may do nothing because the science has shown that higher values are safe, but the producer will still need to take swift action to reduce the discharge to the permitted rate.

On the other hand, imagine that the operator reports discharges of 500 for five days in a row. The regulator would act quickly. Penalties could include fines or a halt to operations.

If regulators and stakeholders play a large role in identifying problems, what role do environmental NGOs play? “The Pembina Institute and other environmental NGOs provide perspective. Their goal is to control, minimize and in their words ‘protect the environment’. I review every one of their documents. I look at their information, and I compare it to ours, and it’s as though we live in two different worlds. I would consider our data to be more scientifically based,” he modestly reflects.

However, he says, “They provide a voice for many people who otherwise wouldn’t say anything. Have they driven improvements? Yes, in my view they have. They push companies to be better, they push regulators to be better, and they increase everybody’s awareness of the oilsands. Do I agree with everything they say? No, I don’t.”

Piero Cicalese: The Builder

This article appears in the September issue of Oilsands Review

By Peter McKenzie-Brown

The name Snamprogetti Canada doesn’t come easy for most of us, but it’s nonetheless worth remembering. Snamprogetti is one of Alberta’s hottest success stories in recent years.

According to President and CEO Piero Cicalese, “it’s been a very successful adventure, from 2007 (when he took his present job) to today. While other companies were laying people off during the financial crisis, we were hiring them. We are growing week by week.” An accountant by background, 46-year-old Cicalese conveys a great deal of personal charm. A 16-year veteran of Snamprogetti’s parent organization, he has spent four years in Canada heading its Canadian and Mexican operations.

The roots of the parent organization go back to the 1950s, when Italian oil major ENI set up Saipem SpA to look after its engineering, procurement and construction needs for new developments around the world. Based in Milan, Saipem is now a publicly traded engineering giant, with market capitalization of more than $20 billion. ENI now owns 41% of the company – Europe’s largest oilfield service provider.

As an international organization, Saipem specializes in remote and difficult locations. “For example, we built a very long pipeline in Sakhalin Island (in Russia’s Far East). There is nothing there. We’ve also worked in Iran and Central Asia, East Africa and West Africa. We have a lot of experience developing oil and gas projects in very remote areas.” He stresses that for 40 years the company has been involved in projects involving heavy oil. Because of the remoteness of its activities the company does a great deal of modularization – pre-fabricating projects as modules, then assembling them Meccano-style on location. “We are one of the largest companies around for this kind of work, at least in the petroleum sector.”

Snamprogetti is a wholly-owned Saipem subsidiary, active in North and Central America, and the newest large EPC player in Canada’s oilsands space. The company got its first Canadian contract in 2005, on a joint venture with SNC Lavalin on CNRL’s Horizon project. “For the Horizon project we built the hydrocracker,” according to Cicalese. “We were involved in all aspects of the (roughly $100 million) project. The leadership was ours, and the project went quite well.”

Since his team completed that project, there has been no looking back. There were two people in the company’s Canadian offices when Cicalese arrived in Calgary, he says. Today, “we have more than 350 employees. Most of them are engineers. We are growing, and most of our growth has taken place since the financial crisis.” Calgary is now the main office for the company’s North American and Central American operations. “While all of our offices report back to Milan (including the U.S. office in Houston), I look after Canada and our Mexican division.”

A different mentality

Saipem acquired Snamprogetti in 2006, and retained that name primarily because the company had a foothold in North America already, and therefore some brand recognition. According to Cicalese, “in Canada we are the only true EPC contractor. Most of our competitors are EPMC companies” – companies which add project management to their engineering, procurement and construction services. “We come from quite a different mentality (than EPMC firms). We come from a lump-sum background. If there are cost overruns, our competitors pass them on to the oil company. We absorb them. That’s part of the contract. So, there is much less risk to the client. We are one of the largest lump-sum contractors in the world.”

This approach is unusual in Canada, he says, “but it is quite usual in the rest of the world. We can do this because we have the largest capability of managing risk. There is risk on the table that has to be managed, and we are very good at that.”

This comment triggers the obvious question: if there is so much risk on the table, isn’t quality at risk? Cicalese is adamant. “Quality doesn’t suffer. We have been 60 years in the business, and our record speaks for itself.” He adds, “About 60 of our employees are ex-pats. For the most part they came here from the company’s international operations because of the particular skills they can bring to the table. We have to work to our (international) standards, so we brought them in to help train our Canadian recruits.”

Last December the company was awarded a $1 billion contract to construct the central processing facilities for Husky’s $2 billion Sunrise SAGD project, which will produce 60,000 barrels per day of bitumen after start-up in 2014. Cicalese calls it “one of the very few lump-sum EPC contracts awarded in Canada.” While Horizon dwarfs the combined value of Snamprogetti’s other recent North and Central American deals, he nonetheless boasts that in the last 18 months his firm has signed lump-sum contracts worth more than $1.5 billion.

The Innovators

This article appears in the September issue of Oilsands Review

By Peter McKenzie -Brown

After taking a close look at the AJM Deloitte business plan, some of Deloitte Touche’s competitors may give themselves a Homer Simpson-style whack on the forehead and grunt “Doh!” The business case for the global accounting giant’s new business unit is so compelling that it’s only a matter of time before the copycats arrive.

To start at the beginning, chairman and CEO Robin Mann is one of the founders of AJM Petroleum Consultants – a 12-year-old company that provides geoscience services to the petroleum industry. With staff of only 50, as a stand-alone entity AJM is one of the world’s seven largest firms providing resource estimates and calculations of petroleum reserves to the industry. The company operates in 10 countries, but has only one office – in Calgary. “We have worked with companies wanting to come into Canada, like the Chinese,” according to Mann. “We did our first bitumen and heavy oil studies nearly 10 years ago.”

It was overseas that Mann and his colleagues first sensed that integrating financial services into its technical offerings could be a winning combination. “We were working for offshore clients and they were asking whether we had financial expertise, and we didn’t. They wanted advisory functions that we didn’t have.” At a conference in Singapore last fall, several of the firm’s executives began to discuss the possibility of combining with an organization that also provided financial services. When they returned home, they asked Deloitte Touche to broker the idea to the business community. The idea didn’t make it out of the firm’s offices.

Global Organization

According to Deloitte’s Chris Lee, a CA whose unit provided financial and other business services to energy, mining and power and utilities companies. “We quickly saw AJM as a great complement to our existing skill set. We have a financial advisory practice across Canada, with 60 people in Calgary alone. We do business evaluations and corporate finance and provide financial due diligence.” In addition, Deloitte Touche is a global organization, with offices in 140 countries.

“Overseas we worked with state-owned enterprises and national oil companies that wanted technical expertise that we did not have,” Lee continues. His enthusiasm is palpable. “They were looking for one source where they could get all of these services in one place. About half of the deals they wanted us to look at were asset deals, and they wanted a service that could offer due diligence plus a technical analysis of quality of the reserves. We couldn’t do that before. Now we can.” With somewhat uncharacteristic restraint he adds: “Our challenge is going to be where to focus globally. We (have been able to) see in our work all the time that not having geological expertise has held us back. Now we don’t have that (restriction).”

Robin Mann continues, passionately: “What we have created is a one-stop shop. It was a good meeting of minds when we started talking about this. We are building a service that is available nowhere else on this planet, using Canadian technologies, exporting the way we do things around the world. No one else has the breadth of services we can offer.” Because of the Deloitte connection, the business unit can now present its services to the business world in virtually every oil-producing region.

Both sides of the business unit are beneficiaries. According to Lee, “Almost from day one we have been seeing combinations of service that would build both businesses.” According to Mann, “a (Deloitte) partner in Toronto told me early on that ‘You guys are going to be sorely understaffed from the get-go.’ And he was exactly right.”

For the present, Lee’s and Mann’s units will remain in separate office buildings because neither side has spare space. They will share an acronym, however, as Lee is quick to point out. “ERAS stands for Energy Resource and Advisory Service,” and that is the in-house description of the unit, which itself is part of the Financial Advisory group. “Deloitte just loves acronyms,” Mann says with a chuckle. “Longer-term, we would like to get all the staff together (under one roof) so we can interact. That will happen, but we don’t know when.”

Big Dreams

I ask whether the merger was an exit strategy for senior partners at AJM. “Not for me,” says Mann. “I’m now a partner in Deloitte, and I intend to help turn this into a world-class business. We can do that because we have people like Dave Russum in our technical group. (Dave) is a sought-after speaker, and he has been very innovative in the gas business. We have people who are similarly innovative on the oil side, and who look at how we do things in Canada and how we should do them around the world. We can marry our innovations with the innovation created by Deloitte in tax and so on. Right now we are a marketplace of one. We have no competitors.”

Of course, among the Big Four accounting firms – Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers – there is debate about the merit of building too big a consulting business. The critics argue that accounting firms with huge consultancies could find themselves with conflicts of interest that will run afoul of global regulators. According to one highly reliable source, in Europe a Green Paper on the subject is already “causing many people in accounting to lose sleep.”

Mann and Lee are far from these worries, however. Both men believe their big dreams are possible because Calgary is destined to become the world’s dominant petroleum centre. According to Lee, “Calgary is one of the fastest growing Deloitte offices in the world,” and he expects growth to continue. “Canada has the opportunity to be an energy superpower. To do that we have to unsure that issues around transportation infrastructure are resolved. We need a national energy strategy. We have to deal with potential labour shortages and cost overruns, and we need a more positive public image for the oilsands. The future of the oilsands is incredible. Just imagine what would happen if (bitumen) carbonates became economic! What would this city be like?!”

Mann adds another perspective to the conversation. “Within the next five years Calgary will be known around the globe as the most knowledgeable place (in the petroleum industry) with the best technology. A big reason is our regulatory system, which makes (so much) information public. That freedom of information speeds up the leapfrogging of technological advance.”

And the discussions continue. Calgary may not yet be the world’s dominant energy centre, but it does seem to have spawned yet another great energy idea.

Don Thompson

This article appears in the September issue of Oilsands Review

By Peter McKenzie-Brown

The more things change, the more they stay the same. Don Thompson finished his term as president of the Oil Sands Developers Group in July, but he has no plans to quit what he started doing when he took the organization’s presidency four years ago.

He’s going to talk.

After taking the helm of an organization that was born as a regional issues management house, Thompson became an important industry spokesman, carrying the oilsands torch. He became president in 2008 – taking on a role which effectively represented his retirement from Syncrude. He had previously worked for Syncrude for 32 years, with environmental regulatory responsibility there. Because he is articulate and committed, the company continued to support him his efforts with OSDG. Week after week ever since, he has trudged across the continent giving presentations in communities large and small.

What drives him to do this? “Historically, the purpose of the developers group was to deal with regional issues which slowed down the development of our industry,” he says. “However, what I call the ‘reputational’ issue has become as much a problem for our industry as, for example, lack of transportation and other infrastructure concerns. And you have to remember that many other stakeholders (especially NGOs) are quite willing to give their views. So we started to go out and talk to people ourselves” to bring balance into the conversation.

“The messages I am effective have to do with ensuring a balanced discussion about the 3E’s – our industry’s economic contributions, environmental footprint and contribution to energy security,” he says.

“On the economic contribution side, I talk about the huge value this industry creates in terms of royalties, taxes and basic economic demand, and how it contributes enormously to our lifestyle and our economic well-being in a time of very rough economic seas. Wherever I go in Canada, I meet people who tell me someone in their family has benefited in an employment sense from the oilsands.”

He adds, “I talk about energy security. People are very focused on what’s happening in North Africa and other oil-producing countries around the world, and the prospect of becoming dependent on those countries for our energy is not a very comforting one. It is clear that if Canada did not have the oilsands, we would be dependent on those producing regions of the world.” And then he moves on to the big kahuna: “I talk about our environmental footprint, which is really being overblown by our critics. I talk about our impact on air, water and the land, and about our efforts to mitigate those impacts.”

In the last year alone, he has given 80 to 100 presentations (including tour groups) – roughly one third of them in the United States. If his main responsibility is to talk, he chooses his soapboxes carefully. His efforts are strategic. For example, he doesn’t often set up talks to audiences who strongly support the industry, “but neither do I focus on people who are adamantly opposed. I prefer to talk to people who are neutral or soft-positive, and make them more positive about my industry, so they will go out and talk it up. I talk to a lot of Rotary clubs and Chambers of Commerce and those sorts of organizations. I also talk to a lot of conferences where there is not a strong focus on the oilsands. And I talk a lot (using the same strategy) in the United States, where the knowledge of our industry is limited at best.”

Thompson’s typical audience is fairly small – 50-100 people. However, he believes those audiences are very influential in their communities. “They are opinion leaders. They tend to be appreciative that a business leader took the time to visit them. Their meetings are often larger than usual – I suppose that means I’m a bit of the draw. And they often tell me that they are happy they were able to hear my industry’s point of view because the only other opinions they hear are fairly negative. They tend to be business-friendly people, but all they’ve ever heard were the negatives.”

Thompson cites the example of recent presentation to a Rotary Club in Bellingham, Washington – a small city whose council voted last year to make the city an oilsands-free zone. “There was quite a large group of people at that meeting – many people brought guests.” Will council rescind its directive as a result? Probably not, but over the long term Thompson’s strategy should take effect.

“When you put yourself out as a speaker the way I have done, you quickly find that the world is very, very large. It's hard to change much at once, so at the end of every speech I tell people to get out and get active. That’s the best way I have to leverage myself. It’s the old domino effect.”

“I’ll continue crusading as past president,” he adds. “I don’t have to worry about staff and other issues now, but I still have bitumen in my veins. How could I not continue to carry the torch?”

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.

Mary Clark Sheppard on her Father, Karl Clark

Mary Clark Sheppard on her father - Karl Clark - and the quintessential oilsands research breakthrough.

This article appears in the September issue of Oilsands Review. 

By Adriana A. Davies

The renowned "father of the oilsands," Karl Clark spent his entire working career technically outside of his discipline. An inorganic chemist by training, Clark's life work was in organic chemistry. His daughter and biographer, Mary Clark Sheppard, recently described his path.

After being awarded a Ph.D. in Chemistry by the University of Illinois in Urbana in 1915, Clark went to work for the Geological Survey of Canada. Because he had previously done soil surveying in Ontario, he was assigned to road materials research.

In July 1917, Eugene Haanel, Director of the Mines Branch, asked Clark to read a collection of working papers written by Sidney C. Ells, titled “Notes on Certain Aspects of the Proposed Commercial Development of the Deposits of Bituminous Sands in the Province of Alberta.” Mary notes that Clark was uncomfortable reading a senior colleagues’ work and critiquing and making sense of it but, together with geologist/topographer J. Keele, he wrote a 5,000 word review.

In summer 1918, Clark went to Manitoba as part of his field work and was able to see first-hand the difficulty of road maintenance. He worked around Brandon and, in Mary’s words, “noted that the soil made wonderful roads in the summertime when it was hot and dry, but the clay – everything slipped apart when it got wet, and he thought if you could only – it sounds pretty simplistic now – if you could only waterproof the clay then that might be a way of preserving roads. Of course, after the war and certainly by the early 1920s, roads were big. I mean everybody had a car then, and farmers had to get things to the railway and all the rest of it.”

Clark began to ponder a solution involving the water repellant properties of oil. This theory, in brief was that, if he could obtain oil from tar sands and mix it with the clay surfaces, he could waterproof them. Mary continues, “So back in his lab, in Ottawa in the winter, he got some tar sands and he thought if he could emulsify them ...you could put this emulsification on the road. Well, instead of getting an emulsion he got a separation. That was the big ‘ah ha’ moment. He got this separation. He’d got... sand in the bottom, oil in the middle, and water on the top. So he’d got these three things, but he had to get the oil out without the sand and the water; particularly, the sand. He tried everything possible but the oil and water got mixed up again.”

In chemical terms, what Clark had succeeded in doing was a “colloidal suspension” (the suspension of a solid in a liquid, in this case two “solids’ since bitumen is thicker than water). This discovery has spurred oil sands research until today. Mary noted that this happened in 1919 but he was told to stop the research and that the orders “came down from on high.” She believes that it was because Ells had returned from the war and that Ottawa and Alberta were fighting about the bituminous oilsand resources.

The feds had tried sinking a well at Athabasca Landing as early as 1894 but that and several other efforts had failed. Federal bituminous sands research was under the control of the Honorary Advisory Council for Scientific and Technical Research. The proprietary attitude of Ottawa with respect to resource development did not sit well with the government of Alberta or University of Alberta President Henry Marshall Tory. Mary notes: “Tory, I think quite rightly said, ‘If this is going to go on in my university, it’s going to be under my control’.”

In 1919, Tory visited Ottawa looking for someone who could take on research on oil and coal in Alberta. His vision was that the University that he helped to found would support province-building through research leading to economic development. In the Mines Branch, he heard of the great excitement about Clark’s discovery and, according to Mary, “he went straight to my Dad and persuaded him to come out to Alberta. Correspondence between the two continued on Tory’s return to Alberta and, by September [1920], my Mom and dad were in Alberta.” Tory wanted Edgar Stansfield of the Mines Branch to come out first to head up coal research but Stansfield had work to tie up that would take him a year. Thus, Clark became the first full-time member of the Research Department with a focus on tar sands research. On January 6^th, 1921, by an Order-in-Council, the Industrial Research Council of Alberta was established (becoming in 1930, the Research Council of Alberta; in 1981, the Alberta Research Council; and, most recently, Alberta Innovates Technology Futures).

Tory was a staunch supporter of Clark’s efforts and a railway line to Fort McMurray made it easy to get supplies of bituminous sands for research. To facilitate Clark’s research, in the winter of 1919, Tory had secured about six tons of the bituminous sand and stockpiled it on campus. He instructed Clark to begin his research from scratch without reference to the previous work of Ells (Ells was interested in the use of super-heated steam for separation). Clark would focus his research on separation based on the use of a chemical reagent.

In 1922, Sidney Blair came to the University of Alberta and was hired by Clark as his assistant. He began surveying up north as a part of his Master’s degree program. Mary has described her father as “a quiet self-effacing intellectual” while Blair was “worldly, self-confident and aggressive.” Together they forged a solid team working together for three-and-a-half years.

Clark’s oil sands research continued throughout the Great Depression of the 1930s when most of the research staff at the Council were let go. Clark and Stansfield became part of the Faculty of Applied Science. When they had moved to the employ of the Research Council, in a far-sighted move, Tory had insisted that they be given Faculty status. The Research Council was revived in December, 1942, nearly 10 years after it effectively ceased operations. The new chairman was N.E. Tanner, minister of Lands and Mines.

While initially, Clark continued his research in relation to finding a waterproof coating material for roads, eventually, he realized the importance of the tar sands as a source of refined oil products. He had his separation facilities in the University power plant, Everything was carefully tested from the amount of sodium silicate used as a surface-active agent or soap, to the temperature of the water, amount of power consumed and duration of heating period. His process and technology was eventually piloted at Bitumount and Abasands.

In December, 1949 just after the Abasands plant closed for the winter, Blair was commissioned by the government of Alberta to make a comprehensive study of both the technical and economic viability of actual mining, separation, delivery and sale of oil derived from tar sands to southern Ontario refineries. The Blair Report, officially, The Development of the Alberta Bituminous Sands was published a year later. Mary notes: “Blair concluded, even though the price of oil was only $3 a barrel – it seems hard to believe – his reckoning was that you could produce it for $2.50. That was challenged later as they said he didn’t take into account all the capital investment for background things like roads and whatnot. That was assuming everything was in, which of course it wasn’t.” The next step was the convening of an international symposium in September 1951 on all aspects of the oil sands, which was attended by one hundred and twenty delegates.

Clark, Blair and Tanner would usher in the next era of development. The prototype science and technology were in place to be shared with industry; the Government of Alberta wanted to see the oil sands developed; and, finally, the destabilization of the Middle East (the Suez Crisis in 1956) made the oil companies look more seriously at tar sands development.

Mary had a final observation on the name oil sands: “You see, they were always known as bituminous sands officially. They were known as tar sands colloquially. It was like a nickname – a loving nickname. But that’s all it was, but after the Blair Report came out, and they knew that they could produce a crude oil because refining techniques had so improved. Then, Dad and Blair said they should no longer be called bituminous sands, or tar, because we now know they are a source of crude oil. They were now oil sands, and so officially by the Research Council, by order of something or other. I’ve got it written down in one of my books. That’s when they were officially reclassified as oil sands.” This was confirmed when the Alberta Oil Sands Authority was set up in 1973 by Premier Lougheed.

This article is the second in a series that reflects information from the Petroleum History Society’s current Oil Sands Oral History Project, which is recording the stories of oilsands pioneers in their own words. As with its previous oral history projects, transcripts and recordings will reside in Calgary’s Glenbow Archives. Adriana Davies is part of the team of researchers/writers behind the project.

Caught in the Net

With the growth of social networks and electronic trading systems, it's easier now than ever before to trip over insider trading prohibitions

This article appears in the August issue of Oilweek

By Peter McKenzie-Brown
If you don’t get caught, breaking the law can pay quite nicely – especially the offense of insider trading. Consider the case of William Bint. As the indexes of publicly traded oil companies were stretching toward their May 2008 peaks, he bought 38,000 shares of Canadian Quantum Energy Corporation at just under $.30 per share. At the close of trading that Friday afternoon – just after he’d bought his shares – Quantum issued a press release disclosing the acquisition of a prospective natural gas property in Québec.

When the markets opened the following Monday, Bint was richly rewarded. He liquidated his $11,110 investment from the previous Friday, netting $156,443 through a few simple trades. From beginning to end, less than a week had elapsed.

Unfortunately for his reputation and his net worth, the Alberta Securities Commission (ASC) investigated and suggested that Bint had benefitted from illegal insider trading. He had, after all, helped negotiate the deal that drove Quantum’s stock price into the stratosphere. After a hearing by an ASC tribunal, Bint agreed to pay an administrative penalty of $234,000 and $5,000 to cover investigation costs. In addition, the commission restricted his trading privileges for two years.

Now retired, Bint is one of eight Albertans listed in the Canadian Securities Administrators’ list of found to have participated in illegal insider trading last year. Six of those prosecuted traded in energy shares. Looking outside the province, last year three Quebeckers were found to have committed insider trading, and so were two Ontarians. No one else in Canada was found to be at fault. Put another way, a province with 10% of Canada’s population was responsible for 60% of the country’s infractions.

Really?
Is this tabulation credible? For example, did absolutely no one in British Columbia trade a mining stock without inside information? That seems unlikely, and it lends support to the idea that the ASC is a very effective commission.

But now consider the case from the other point of view: Forty per cent of the world’s 995 energy companies are headquartered in Calgary, and those companies represent about 30% of Canadian stocks by market value. In all of Canada, are there only six people per year, say, who use illegal insider trading to profit from this dynamic sector? Really?

To find out, I talked to Marc Arseneault – the ASC’s enforcer. As the manager for assessment, market surveillance and investigation, he is responsible for enforcing the rules that apply to this form of white-collar crime. “This is a very difficult problem to investigate” he says. The commission has an insider trading team of five, plus access to legal staff when litigation is required.

"Under our act we can prosecute these cases in provincial court or we can go before an administrative tribunal. Those are the two avenues available to us. We don’t take the case to court unless our evidence is beyond all reasonable doubt. When our evidence is simply a matter of balance of probabilities, we use an administrative tribunal. Those are important distinctions." In either case, the matter is likely to become a matter of public record. For example, tribunal decisions, which summarize evidence and agreed sanctions, are posted on the organization’s website.

Avoiding that kind of public humiliation is a big motivator for those who are caught, and the commission does offer an informal third alternative. According to Arseneault, “Sometimes we have settlement discussions that make the need for an administrative tribunal unnecessary. If we can get someone to give us an admission and agree to sanctions that would be within the proper realm, that frees up resources for us and it works for everyone. If someone says ‘Yeah, I did it’ and is willing to make amends, then we are willing to have that conversation” outside the tribunal process.

“We aren’t here to penalize people,” he says. “Criminal law penalizes. Our goal is to deter people from illegal trading. We aren’t here to punish them, but to discourage them.”

Pace of Change
Insider trading in general is not illegal. If you are a designated insider – a director or executive of a company, for example – you can trade in company shares. You just can’t do it on the basis of privileged information, and you have to report your trades to the ASC within ten days.

Illegal insider trading is different, and it’s is a surprisingly complex problem. It has two elements: first, you have access to undisclosed material information; second, you trade on that information before it is publically released. And critically, you don’t have to be an insider to be guilty of insider trading. You don’t have to be a director or officer of the company to be at fault. In fact, the people caught are rarely corporate executives or directors. They are actually more likely to be outsiders than insiders – for example, employees familiar with a deal or a new development at law firms, investment banks, geological consulting firms, drilling service companies and even printers.

Illegal insider trading and the related infraction of “tipping” are increasingly difficult to control – and part of the problem is partly that they are poorly understood. The key is that if you have access to undisclosed material information you automatically become an insider by virtue of having a “special relationship” with the company.

According to Arseneault “I can’t tip someone if I have insider information. If I (break the rules and) provide someone with that information, I put them in the category of having a special relationship with the company, and their trading would be considered illegal insider trading.” Thus, even if the information you have is fifth-hand and you’ve never even heard of the company in question before, trading on the basis of undisclosed material information makes you guilty of illegal insider trading. If you pass this information on to another person, you’ve committed the offence of “tipping,” which is also subject to fines, sanctions and, in extreme cases, jail time.

The rules are strict. However “because of the nature of the oil and gas industry in Calgary there is a lot of opportunity to trade on insider information,” acknowledges Arseneault. “That information should be contained. Once it gets out of the container, troubles begin” – and that trouble is increasingly difficult to reign in. There are many new platforms on which people can trade, and even micro-cap companies can be listed on a number of exchanges. There is computer trading, there are social networks and there are online sites that promote stocks. Also it’s increasingly easy to put smaller trades into different accounts – your own, but perhaps also those of a spouse or a trusted accomplice – to ward off suspicion.

“The system is evolving very quickly,” Arseneault concedes. “We have to respond to that, so we’re pushing harder.” As evidence of the pace of change, the legislation governing securities regulation has changed several times since receiving royal assent a decade ago. Changes through order-in-council have been even more frequent.

Penalties
Is enforcement more stringent in Alberta or are acts of commission more common? It’s possible that the ASC had more successful prosecutions than Canada’s other securities commissions in recent years because the commission is more vigilant and aggressive in combatting insider trading. It’s also possible that there are more prosecutions in the province because there is a bigger pool of offences. The answer to this conundrum is unknowable, although Gary Leach – the executive director of SEPAC – thinks senior people in the patch have powerful financial reasons not to transgress. “The oil industry is a close-knit community, and you have to have a sterling reputation to succeed. You want to go back to capital markets year after year. One offense will make it a lot harder to do that.” If caught, an offense could also get you fired or expelled from the board.

The ASC’s investigation and enforcement tools seem relatively limited, making the challenge a big one. “We work with other agencies and we have a network of contacts that help us stay informed,” Arseneault explains. “We have to stay on top of the news and the markets. We carry out market surveillance, including real-time computer surveys. We analyse trading in individual stocks, we analyse trading by individuals, we talk to people and we summon documents. This enables us to develop a case.”

Most of the ASC’s cases are generated through market surveillance conducted by the Investment Industry Regulatory Organization of Canada (IIROC) and through post-trade investigations conducted by commission staff. Arseneault is reluctant to provide details about his investigations, but a couple of red flags are obvious. If people have traded in large numbers just before a deal is announced market, share volume spikes. This sends up a flag that IIROC can easily detect. The discovery that an individual under investigation recently opened new accounts for trading is a different kind of flag – one that would greatly interest commission investigators.

Most illegal insider trading is treated under administrative law, and therefore isn’t criminal – but don’t let that lull you into complacency. In 2004 Canada created the first specific Criminal Code offences of improper insider trading and tipping. The legislation also made it a crime to threaten or retaliate against employees who blow the whistle. The legislation applies to the “most egregious cases” of illegal insider trading.

The penalties? Conviction carries up to ten years in the slammer for each offence. Tipping carries a maximum five-year term. They aren’t worth the risk.