National Post (National Edition)
Energy leans on tech to stay in the game
Recovery today is about low-cost production
CALGARY • Proceed with caution. That’s how Canada’s oil and gas sector is looking at 2018. After three years of depressed conditions, the new year is expected to bring improved, but still challenging energy prices, particularly in Western Canada.
Much of the unease is about the lack of export pipelines and shipping options for both oil and gas out of the basin, which means increasing supplies remain heavily discounted. Two key prices reflect the infrastructure problem: Western Canadian oil is selling for about half the price of U.S. oil, while Western Canadian gas is selling for roughly 40 per cent of U.S. gas.
The lack of export capacity is also holding back producer spending (particularly in the oilsands), hiring (oilpatch layoffs continue) and share prices, pushing companies to do what they can to succeed, such as accelerating innovation in both the field and at head office to lower costs and get more out of existing resource plays.
Bigger picture, innovation is needed because businesses recognize that they are on the cusp of seeing a new set of industry rules since cheap energy is abundant and competition from new sources is increasing, said Peter Tertzakian, executive director at the ARC Research Institute.
He said past recoveries were about higher oil and gas prices, but today it is about low-cost production and/or offering a better product — for example, with less carbon.
One innovative player is Seven Generations
Energy Ltd. Since its IPO three years ago, the company has grown production sevenfold from the massive Montney play to nearly 200,000 barrels of oil equivalent daily in the fourth quarter, and is on a trajectory to produce 300,000 boe/d by 2022.
How? By pushing the limits of drilling, completion and production techniques.
Chief executive Marty Proctor said the next step is to use data science, now in its early days, to create even cheaper wells that produce more, thereby further reducing costs.
“We want to be as competitive as possible,” he said. “Will you find oil from information only? No. You need good rock as well. But it will certainly enhance how much we can recover.”
Seven Generations’ explosive growth has enabled it to hire while others are shrinking their headcounts. It now employs 170 full-time employees and more than 1,000 contract workers. More staff will be added in 2018.
The company also moved into a new office it subleased at a bargain price from another company that was sold. That’s the upside of a 30-percent office vacancy rate in downtown Calgary due to the departure and downsizing of scores of oilpatch companies.
Seven Generations is planning to spend about $1.7 billion in 2018, slightly up from $1.65 billion in 2017. It also plans to contain spending to no more than its cash flow by 2019.
In the meantime, production growth will be moderated to improve execution and margins, said Proctor, a 56-year-old petroleum engineer who took the helm in July.
With one of the strongest positions in the Montney, a top North American resource play, Seven Generations is beating price discounts by selling 80 per cent of its liquids-rich gas in the Chicago area. Some of that goes to the U.S. Gulf and is available for LNG export.
However, “we still see too much supply (in Western Canada) and we are looking for ways to diversify that reliance on gas markets,” said Proctor, who views LNG exports from Western Canada as essential.
Longer term, Proctor believes global demand for LNG will outstrip supplies, which bodes well for Canadian gas if LNG exports from the West Coast ever move forward.
“I am optimistic for the future of our business and I feel good about the way we develop resources in Canada and in Alberta particularly,” he said.
New technologies have also helped Crescent Point Energy Corp. ride the oil downturn. With 1,084 employees, Crescent Point did not lay off staff when oil prices collapsed, but it isn’t planning to boost hiring this year, other than some small additions in Denver, even though production continues to grow.
The same number of staff can handle more work in the field and at its offices due to increased technology use, said chief executive Scott Saxberg. “We used to drill a well in Saskatchewan in 10 days, now we drill it in five,” he said. “We have 20 or 30 new technologies that we test constantly to improve those efficiencies. We look at the oil industry as a tech industry. There is a lot of room in the future in AI and data analysis. That is another leg of coming efficiency.”
Though Crescent Point will firm up its capital spending plans in January, Saxberg said the budget will be slightly higher in 2018 than this year, or around $1.8 billion compared to about $1.6 billion in 2017.
Most of the money will be spent in Canada, particularly Saskatchewan, but spending will also increase in the promising Uinta and Williston basins in the U.S.
Crescent Point, which produces about 180,000 barrels a day of predominantly light oil in Canada and the U.S., is encouraged by the upward direction of oil prices.
The upward trend is supported by production cuts by the Organization of the Petroleum Exporting Countries cartel. Longer term, moderating production growth in the U.S. Permian basin due to cost pressures and lack of manpower could also support oil prices, Saxberg said.
The flood of capital into U.S. tight oil has raised costs to the point it could re-ignite investor interest in Canada, where costs are relatively low and could decline further, he added.
“We are going to see uniqueness around our cost base … and that is going to create a unique opportunity that hopefully will attract U.S. capital into Canada, and specifically into companies like ourselves that are oil-weighted,” the 49-year-old engineer said.
Saxberg is also hopeful that oil pipeline uncertainties will be resolved in 2018 and that should reduce price volatility.
TransCanada Corp. will soon decide whether to move forward with construction of the Keystone XL pipeline to the U.S. Gulf. Meanwhile, Kinder Morgan Canada Inc. will start construction of the Trans Mountain expansion if it overcomes final regulatory and legal hurdles.
Pipeline bottlenecks as well as provincial and federal policy changes to boost environmental performance have pushed more industry capital outside Canada.
Oil’s price crash hasn’t helped either. One of the effects of such a prolonged and severe downturn is that oil and gas price predictions are all over the map.
Tim Pickering of Auspice Capital Advisors, a commodities trading firm in Calgary, is optimistic about commodities in general, which he said have been forgotten relative to equities in the past decade. He believes a spike in oil prices is possible based on strong global oil demand and the lack of investment in new oil supplies during the past three years.
“We are not far from US$60 WTI, we can definitely see US$75-plus oil in 2018,” he said. “The market wants it, the demand is there.”
But full pipelines mean the discount on Canadian prices will stay wide.
“Some people say, ‘You guys produce heavy sour, that is the reason for the discount,’” Pickering said. “That is completely false. We see heavy sour barrels from South America, Mexico, trading at only a $2 discount to WTI on a consistent basis. It’s all about getting to the global market.”
But even if the Keystone XL pipeline goes ahead, there would only be a muted positive effect on Canadian oil prices because more oil is going to the same buyer, the U.S. The big boost would come when Canadian oil gets to tidewater through Trans Mountain, he said.
Pickering is also optimistic on gas prices, particularly if a cold winter boosts heating demand.
Canadian gas prices, however, will remain depressed until more export capacity is built, whether pipelines to the U.S. Gulf or LNG shipping from the West Coast, he said.
Gil Dawson and Duncan Robertson of Turnstone Strategy Inc., an oil and gas price-forecasting firm in Calgary, are bearish on oil prices.
They worry there is a serious risk of another price crash because the world continues to swim in oil. They note U.S. production is soaring and it’s now exporting an unprecedented 2.5 million barrels a day, stockpiling by China could come to an end because storage is running out, and demand in the developed world is flat.
However, the forecasters believe this is a light oil problem, while the future of heavy oil, such as that produced in Canada, is bright because of plummeting production in places such as Mexico and Venezuela.
Western Canadian producers would be impacted by another price pullback, but longer term, “Western Canada could be the only major stable source of heavy oil in the world,” Dawson said.
The pair is bullish on gas and sees prices spiking to $6 to $10 if there is a cold winter, because the system is under-supplied. But the lack of transportation capacity out of Western Canada means producers won’t be able to fully participate.
“We are in a trapped system,” Dawson said.
ONLY MAJOR STABLE SOURCE OF HEAVY OIL IN THE WORLD.