Tuesday, December 20, 2011

12 trends for 2012

Oilsands developers gather momentum and mature in an increasingly complex business environment; this article appears in the January issue of Oilsands Review
It takes more than a global cardiac arrest to slow oilsands activity down for long. The sector has now entered what some are calling its “second boom.” The industry is feeling good as economics, supply and demand push bitumen expansion. Characteristically oilsands, the coming year promises to be laced with tests, trials, achievements, and advancement.
By Peter McKenzie-Brown and Deborah Jaremko
      With files from the Daily Oil Bulletin

Human resources: the cost of a labour shortage grows higher
The oilsands sector is moving into a full-blown labour shortage, and the associated cost implications for new projects will be on the rise in 2012.

“A number of indicators demonstrate that the labour market in Alberta is already tight,” says Chris Lee, a partner with Deloitte whose group recently prepared the report Gaining ground in the sands 2012: A deeper look at major trends and opportunities in the oil sands sector. “Last time around [in 2007-2008], this resulted in a labour shortage, with certain trades hit especially hard, and there was a significant switch of the risk to getting labour from engineering, procurement and construction to the owners. Oilsands projects will continue to be a talent drain.”

Lee says that particularly going into winter, when conventional oil and gas drilling heats up, those projects compete with the oilsands sector. And the challenge is not just in staffing for mining and upgrading “megaprojects.” The relatively smaller-scale steam assisted gravity drainage (SAGD) projects that are multiplying offer new complexities. Construction of these projects generally takes place in “bite-sized” increments replicated in stages.

“SAGD plants, steam generation, and so on require process-oriented skills more akin to refining, pulp and paper, and water handling,” says Lee. Not prevalent in the conventional oil and gas industry, “these skill sets may be harder to attract to places like Fort McMurray. This all adds up to increased labour costs in the next few years – especially when you get into periods of high investment there is a lot of competition for talent.”

The Petroleum Human Resources Council of Canada arrives at a similar conclusion although it begins at another place. According to that not-for-profit organization, the oilsands sector—which it estimates will have to hire up to 15,000 new workers between now and 2020--has challenges attracting qualified people because of its remote location, the competition for skilled labour when several large projects start at the same time, and the industry’s negative public image.

Non-labour cost inflation will stay relatively low
Labour may be the highest piece of oilsands project costs, but there are other inputs that can significantly alter the bottom line. Greg Stringham, vice-president of oilsands and markets with the Canadian Association of Petroleum Producers (CAPP), notes three of the major the indicators that forecast non-labour inflation in the oilsands: the price of steel, the price of natural gas, and the cost and availability of capital. Each of those three now reads better than it did before the global crash.

Steel is a globally priced commodity, and prices could spike rapidly (as they did in 2008) if there were sudden growth in some of the larger developing countries. At the moment, however, its price is roughly the same (US$600 per tonne) as it was in 2007. Natural gas, of course, is important as a fuel source. In 2007 natural gas was averaging between $5-$7 per gigajoule, but according to the Natural Gas Exchange, has averaged approximately $3 per gigajoule since January 2010. The price has dropped and it’s stable.

Stringham adds that, “In 2007 we had a problem with the availability of capital. That isn’t a problem anymore. There is much more East Asian interest in the oilsands, and even some coming from India.” For companies that are capital constrained, he says that, “We’ve seen many cases where the industry finds capital through another company or even overseas.” Also, of course, interest rates are near the bottom of the chart.

New business combinations and sales will help with expansions
Although it is difficult to predict merger and acquisition (M&A) activity, it is clear that in 2012 the oilsands sector will see at least a few important new transactions. Alan Tambosso, president of M&A leader Sayer Energy Advisors, for example, confirms that his company is brokering some raw oilsands properties but can’t comment until after the deals are done.

But there are at least a couple of transactions already in the works and out in the public domain, such as Connacher Oil and Gas Limited’s initiative to find a joint venture partner to enable its planned 24,000 barrel per day expansion of the Great Divide SAGD project, as well as Cenovus Energy Inc.’s efforts to execute a execute a transaction involving the proposed 90,000 barrel per day Telephone Lake SAGD project and some surrounding leases. At the end of the third quarter Connacher said it expected to receive bids by the end of 2011, while at the same time Cenovus said that interested parties were viewing transaction information.

There are also cases such as Oilsands Quest Inc. and Andora Energy Corporation. The future of Oilsands Quest, its assets and proposed SAGD project in northwest Saskatchewan, is now up in the air—the company has been under a strategic review for months, and recently entered into creditor protection. Andora Energy, a subsidiary of Pan Orient Energy Corp. holds oilsands leases in the Peace River region at Sawn Lake, and has plans for a SAGD demonstration. Its strategic review process was initiated in February 2011 and closure of this process has not been indicated.

And let’s not also forget the growing interest of international players in the oilsands industry and their penchant for M&A—that is unlikely to quit in 2012.

Deloitte notes that, “National oil companies with an expressed interest or current investment in Canadian oilsands will continue in 2012 to play an evolving, if somewhat unpredictable role in development of the resource.”

That said, as Tambosso points out, one generally doesn’t know what's in the M&A pipeline until the deal is done.

Learnings from other sectors help the oilsands move into the future
According to Deloitte, there are early signs that the oilsands industry is moving away from legacy “staunchly independent or even adversarial” oil and gas attitudes and toward strategies that borrow models from other sectors in order to address complex issues such as new technology development, and environmental and social sustainability.

“Ideas about municipal water treatment jump to my mind,” says CAPP vice-president Stringham, citing a 2010 initiative where CAPP worked with the Ontario and Alberta governments to organize a “clean and green” workshop in which people from many industries and sectors, including academia and researchers, discussed ideas the oilsands sector could use to clean up its act.

“We basically started with the concept, ‘Bring your good ideas for water treatment, for reclamation and for other kinds of environmental processes and let’s see if there’s anything we can apply,” Stringham says. “Some of the ideas were already being developed for the oil industry through existing partnerships but others were brand new.”

Deloitte argues that by using ideas from the automobile, high tech and other sectors, oilsands producers can take advantage of contemporary manufacturing approaches. “These can reduce cycle times, reduce operational costs and eliminate non-productive activity.”

Producers move closer to commercializing in situ frontiers
Two major frontiers for the in situ oilsands industry—bitumen carbonates and SAGD in the Grand Rapids formation—are coming closer to commerciality, and further progress is expected for 2012. This could mean the potential unlocking hundreds of billions of barrels of currently stranded resources.

Laricina Energy Inc. is operating in both of these resource plays, deploying SAGD at Saleski in the Grosmont carbonates, and at Germain in the Grand Rapids. The 1,800 barrel per day Saleski pilot, which produced first oil in March, saw cumulative sales as of Sept. 30 of 26,300 barrels of blended bitumen.

"We are in the very early stages of unlocking this vast reservoir and, given our progress to date, we consider the results positive," the company says. In an investment note, Peters &. Co. described the oil production as a "positive initial achievement" as the Saleski pilot is the first large-scale production test in the Grosmont since Unocal’s operations in the early 1980s, but it added that well rates need to improve to demonstrate commerciality.

Laricina says that, "Based on our work to date, we expect that in the second half of 2012 the SAGD performance curve will be at a stage in maturity allowing us to initiate solvent injection, thereby beginning the [solvent-cyclic] SAGD phase of our pilot plan."

Athabasca Oil Sands Corp. (AOSC) is also advancing piloting in the bitumen carbonates. Earlier this year the company began an electric-heat pilot in the Leduc formation which it said received favourable results including indications of uniform heating of the reservoir and fast ramp-up and wider well spacing. In October AOSC filed its application for a 6,000 barrel per day pilot of the technology, expecting to start construction in 2012 and production in 2014.

Both Cenovus Energy and BlackPearl Resources Inc. recently fired up SAGD pilots in the Grand Rapids formation. As of the end of the third quarter, BlackPearl said its single well pair BlackRod project was ramping up production, currently at about 200 barrels per day. During the first quarter of 2012 the company plans to file an application for a 40,000 barrel per day SAGD project on those leases.

The Cenovus Grand Rapids pilot is located on the company’s Pelican leases; it began producing in the third quarter of 2011. The company has filed for regulatory approval to expand the project up to 180,000 barrels per day. According to executive vice-president Harbir Chhina, the company’s original target at the pilot was to get “about 600 barrels per day at a steam to oil ratio of three on a cumulative basis, and so if we’re seeing that ratio on an instantaneous basis we’re feeling pretty good.” He adds, “We want to try other unique things that we’ve learned from the last nine months or so in that pilot.”

Laricina is currently building a 5,000 barrel per day demonstration project at Germain, and recently filed its application to increase capacity to 155,000 barrels per day.

Solvents continue to be all the rage for in situ producers
More and more in situ producers are piloting solvent-assisted SAGD projects. “Solvents are the next big thing in situ development,” says CAPP’s Stringham. “Almost every company is experimenting with it now.” Companies using solvents include Connacher Oil & Gas, Cenovus Energy, Japan Canada Oil Sands, Imperial Oil Ltd. and Suncor Energy Inc. “Not only is it an effective tool for production. It’s also more environmentally responsible” since it reduces the amount of heat needed to mobilize the bitumen.

Fortunately for the companies wanting to use solvents, a lot of natural gas exploration is being directed toward liquids-rich gas--especially in shale gas development--because those liquids are much more valuable than dry natural gas. And, the design for in situ oilsands projects adding solvents is to recover as much as possible for re-use. “For the most part once a company has its solvents,” says Stringham, “there isn’t much need for more of the stuff. There is an initial demand upfront and a certain need for makeup demand.”

Collaboration grows as key to managing environmental issues
In a recent interview, Suncor president and chief executive officer Rick George said the oilsands industry should “share anything to do with safety, the environment, environmental improvement, anything on reducing our air, land and water footprint.” Given that perspective, it isn’t surprising that Suncor is one of the founding members of the Oil Sands Leadership Initiative (OSLI)—a group of major producers that has agreed to share technologies and best practices in these important areas.

According to CAPP’s Stringham, “Collaboration is the big topic for improving environmental issues. It is a growing initiative. Environmental issues are not a competitive issue, but something that needs to be worked on collaboratively. The leading edge is the Oil Sands Tailings Consortium.”

Deloitte’s report notes that, “The associations being forged now will set in motion the expectations and rules of engagement that will carry forward when addressing even bigger picture issues requiring even greater universality and solidarity.” For this to happen, says the firm, the industry will need “a wider representation of both large and small operators…to truly push ahead.”

Legislation for a single regulator planned to be tabled
The administration of Alberta Premier Alison Redford plans to establish a one-stop regulator for oil and natural gas projects in 2012, Energy Minister Ted Morton said in early November.

Alberta's previous Progressive Conservative administration under Premier Ed Stelmach and Energy Minister Ron Liepert promised to establish a "one window" regulator for the upstream sector. For example, operators would presumably be able to file a single application instead separate applications with the province's environment and energy departments.

"That's something that we're going to continue to pursue. [Environment Minister Diana] McQueen and I will work on that together," Morton said. "And we have some draft regulation now that we hope to use as a discussion matter with industry over the next several months, and would hope to move to legislation sometime next year.”

Threats build close to home
University of Alberta economist Andrew Leach says the biggest threats to the oilsands sector right now are not in its carbon footprint. Rather, he zeroes in on two problems closer to home: issues from First Nations communities, and Canada’s endangered species legislation.

Leach acknowledges that oilsands development has created a surge of employment in First Nations communities in the oilsands areas. However, there is a great deal of hostility towards the industry in aboriginal communities where there are no obvious economic benefits, for example along the proposed Gateway Pipeline right-of-way. (Another hot button issue, of course, is the tanker traffic shopping “dirty oil” along the B.C. coast.) Those issues could stop the line.

Leach admits that he is no expert on land disruption and its effect on wildlife. But what he does know about are economics and the value people place on environmental damage, "... and if you're going to kill something with your industry what you do not want to kill is something that looks like Bambi, plain and simple…threats to woodland caribou could threaten the industry’s social license to development.”

Alberta’s first BRIK refinery likely to be sanctioned
After being delayed in 2008 due to strained economics, it looks like 2012 be the year that North West Upgrading Inc.’s Redwater bitumen refinery will be sanctioned, processing volumes both from partner Canadian Natural Resources Limited as well as the Alberta government through its bitumen royalty in kind program (BRIK). Detailed engineering for the first 50,000 barrel per day phase of the project began in the first quarter of 2011.

Canadian Natural says that, “project development is dependent upon completion of detailed engineering and final project sanction by the partnership and approval of the final resulting tolls. Board sanction is currently targeted for 2012.”

The $5 billion project would then be up and running by 2014, and although it is a new step for the province in deploying BRIK, it does not necessarily signal more Alberta-fed upgrading in the province.

During her recent leadership campaign, premier Redford said that “There should be more bitumen upgrading in the province, but only if the market can sustain it. The government should not generally play a role in this sector except in special cases such as the Northwest upgrader.”

Oil prices: West Texas Intermediate takes a bow as the main North American benchmark
“Where once we could look to West Texas Intermediate [WTI] for direction in pricing, the global stage has changed,” says Ralph Glass, a vice-president at AJM Deloitte. “Today, the UK’s Brent reference price is the benchmark. Brent prices have an impact on the North American market because internationally priced oil is imported into both the U.S. and Canada.”

Glass says several international factors could affect oil pricing: “These include uncertainty in respect to whether OPEC can increase production significantly if world demand rises. How much success will Libya have increasing its production levels? There are also issues related to political stability in the Middle East and to Europe’s financial crisis.”

The quest to reach the Gulf Coast and tidewater is far from over
If Canadian crude had significantly expanded access to tidewater for export, the prices it receives would compete with Brent rather than WTI.

The November 2011 decision by U.S. authorities to investigate new routes for TransCanada Corporation’s proposed Keystone XL pipeline expansion to the U.S. Gulf Coast, delaying a decision for at least a year, was a blow to the oilsands sector. There remains confidence, however, that more Canadian barrels will eventually reach the markets they need.

According to the University of Alberta’s Leach, “it’s important not to take this decision as an anti-oilsands measure. At least in part, it’s a reaction to high-profile oil spills in the United States by Canadian pipeline companies.” He also suggests that TransCanada may have been “a bit high-handed” when it planned the line.

The transportation sector is scrambling to fix the problem. TransCanada is working on selecting a new route. Enbridge Inc. hopes to increase Gulf Coast access through its Wrangler Pipeline using existing rights-of-way from Cushing, Ok. The plan is to have Wrangler in service in 2013. The company also recently paid $1.5 billion for a half interest in the underused Seaway Pipeline, with the idea of reversing the line so it can take oil south from Cushing. Closing of this transaction and regulatory approvals are anticipated in 2012.

This year will also be significant for Enbridge’s proposed Northern Gateway pipeline to Canada’s west coast, as public hearings begin in January. Approximately 4,000 people have registered to give oral statements.

According to Robin Mann, president of AJM Deloitte, “my sixth sense says Gateway will go ahead. [Prime Minister] Harper has his majority, and he understands the significance of the line. He’ll make it happen.” He adds that both Keystone and Gateway “are important, but I think Gateway is more critical” since it will open up Asian markets to Canadian oil.
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