Big problem, small-scale solutions
Saskatchewan deals with pipeline constraints
Stunned by Enbridge Inc.’s Kalamazoo River oil spill in 2010 that disrupted its sole market access in Saskatchewan, Crescent Point Energy Corp. found an unlikely ally: an agriculture company.
Toronto - based Ceres Global Ag Corp. owns a stake in Southern Stewart Railway, set up to transport grain from Stoughton, Sask., to Regina, from where it connects to other lines. But floods over the past two years had wrecked its agriculture business, and the province’s burgeoning oil production seemed like a good way to bring its trains back into active duty.
The arrangement took off. Within the space of a year, SSR was shipping nearly 30,000 barrels per day (bpd) of oil out of Saskatchewan, helping Crescent Point and others escape the heavy oil discounts plaguing Canadian producers.
“The Kalamazoo River leak was a bit of an eye-opener as a lot of our production is in Saskatchewan and we are not blessed with the number of pipeline alternatives they have in Alberta, so we really had one way of getting our crude to the market, and that’s the Enbridge mainline system,” said Trent Stangl, vice-president at Crescent. “The SSR has been a key part of our rail plan for southeast Saskatchewan.”
Saskatchewan producers desperately need these smallscale solutions for the big problem of pipeline capacity constraints.
Encouraged by its first foray into oil shipment, Ceres is now roping in bigger players such as Warren Buffett’s Burlington Northern Santa Fe Corp. railway company for its second ag-and-oil venture.
“We think we know logis- tics and transportation pretty well. And there are synergies between ag and oil,” said Michael Detlefsen, president of Ceres.
The company starts building a logistics hub in Northgate, Sask., next month, featuring two high-efficiency rail loops, each capable of handling unit trains of up to 120 rail cars, to be served by BNSF Railway’s network. The facility will be shipping 15,000 to 20,000 bpd of Saskatchewan oil in the first phase, ramping up eventually to 70,000 bpd.
“We settled on Northgate as it was one of the few places where the Burlington Northern railway came into Canada and because of our oil experience on the SSR, we said, ‘OK, we are not just going to do grain, and we will add oil supply to the mix,’ ” Mr. Detlefsen said.
The company is in talks with six groups with oil operations in Saskatchewan interested in transporting oil to U.S. refineries and tidewater.
Meanwhile, Twin Butte Energy Ltd., an intermediate producer, which ships 15% of its oil via rail, will complete construction of a facility at Lashburn, Sask., by the second quarter, which potentially doubles its rail car shipments.
Unlike its neighbours, Alberta and the Northwest Territories, Saskatchewan is not exploring expensive northern pipeline proposals and is instead sticking with a series of low-key but effective rail-based solutions.
“The reality is that options have to make economic sense,” Tim McMillan, Saskatchewan’s minister responsible for energy and resources, said in a telephone inter- view. “But we discount nothing. There are solutions that are happening that weren’t thought possible a short time ago. The conversion of a natural gas pipeline from Western Canada to Eastern Canada when gas was $12 per gigajoule was not an option. Today it looks a possible and effective option for all parties.”
In the interim, rail remains the most viable option for many Saskatchewan producers, as a number of small loading facilities spring up across the province.
Home to the mighty Bakken — which it shares with North Dakota — as well as the Shaunovan, Viking and Birdbear plays, Saskatchewan has emerged as a hunting ground for producers able to squeeze oil from mature wells and explore sizeable conventional pockets largely left alone by major producers.
“We felt there was lot of growth in Saskatchewan at the time of our inception in 2001,” Mr. Stangl said. “A lot of our peers were really focused on Alberta and natural gas opportunities. We were more oil focused and Saskatchewan has a tremendous amount of upside for us.”
While Alberta gets all the attention, Saskatchewan ramped up oil production to a record 470,000 bpd last year. But the industry has been unable to realize the full fruits of its labours, Mr. McMillan said.
“[The discounts] are very serious for our economy,” Mr. McMillan said. “To the government we estimate a loss of up to $300-million on an annual basis in differentials last year. We estimate opportunity loss to the industry in Saskatchewan alone of US$2.5billion.”
Access to market is especially important for the province, which competes with other oil and gas regions that are closer to tidewater or refineries.
“Saskatchewan is facing the same challenges Alberta has as a major energy producer,” said Michael Holden, senior economist at the CanadaWest Foundation.
“Its access to the U.S. market isn’t as certain as it was in the past because of the oil plays that are being developed right across the border — that’s where Saskatchewan’s oil has traditionally passed through.”
The province’s economy is in the midst of a robust growth cycle, creating 25,000 new jobs over the past 12 months and driving the unemployment rate down to 3.9% in March, one of the lowest in the country. But discounts are taking the shine off, with new exploration and development activity slowing.
“Oil and gas land sales through April have yielded a disappointing $19.6-million in revenues for the provincial government in 2013, less than half the amount raised over the same period last year,” the CanadaWest Foundation said in a note. “Land sales in April were the lowest in over a decade.”
To keep producers engaged, Saskatche wan is hoping its portion of the oil sands also gets a look-in from producers, but the deposits remain a backwater.
Late last year, Cenovus bought a 34,000-hectare lease in east-central Saskatchewan, as part of a $10-million acquisition from Oilsands Quest, an early-stage oil sands exploration company.
“It was a bolt-on acquisition and contiguous with our Telephone Lake [assets in Alberta],” said Cenovus spokesman Brett Harris, although there are no immediate plans to develop the Saskatchewan oil sands.
Two other companies bought land parcels in the oil sands last December for $ 1- million, Mr. McMillan noted.
Pushing Saskatchewan oil sands is part of the ministry’s plan to attract $50-billion over the next 20 years. The government hopes the province’s royalty regime and embedded incentives on horizontal drilling will entice companies to keep Saskatchewan on their radar screens at a time when cheaper oil and gas deposits beckon elsewhere.
Indeed, lack of market access and prolonged discounts could make the province less attractive than other plays dotted across the continent.
“It is not something that you will see overnight, but down the road it could potentially halt growth in oil development in Saskatchewan,” Mr. Holden said.