Controlling costs energy’s new mantra.
As energy prices continue to trend lower, Canadian companies are looking at ways to drive down costs, with technology and innovation as the most effective weapon in their arsenal.
While oil and gas companies are rationalizing their projects worldwide, the oil sands are particularly vulnerable given the climate, the geology and distance to market. The discounted Western Canada Select also makes the oil sands among the cheapest oil in the world.
“We are getting the lowest prices for our products, we should be driving relentlessly to achieve the lowest-possible cost,” said Gary Leach, president of the Canadian Explorers and Producers Association.
While some Canadian producers say a falling loonie and tightening of discounts should help them in the short term, others believe now is not the time to tie up large sums of capital in the oil patch.
Statoil ASA and Total SA’s decisions to shelve their respective oil sands projects highlight the constant struggle to make projects feasible in Western Canada.
“Many companies are taking a pause from long-cycle investments to focus on more capital efficiency and shareholder rewards. This could slow down sector growth even if investor returns ultimately improve,” said Moody’s Ratings Service in a report published Thursday. The agency cut its West Texas intermediate crude price forecast to US$85 per barrel for 2015 and 2016. Western Canada Select, the heavy oil benchmark, stood at $76.80 per barrel on Friday, compared to its yearto-date high of $87.33.
The cost-cutting trend is playing out across the world, as companies grapple with rising costs and diminishing returns. Between the years 2000 and 2013, capital expenditure of global oil and gas firms shot up 374%, while oil prices rose just 24%, and gas prices 43% on average, according to John Westwood, group chairman of consultants Douglas-Westwood.
Similarly, an IHS report estimates drilling and production costs had more than quadrupled since 2000 to more than US$21 per barrel by 2013, while finding and developing costs also have soared to nearly US$22 per barrel of oil equivalent during the period.
And as supply gluts slash commodity prices, North American oil companies find that as many as 58% of their proposed megaprojects proposed are facing cost overruns, according to Ernst & Young estimates.
“In situ projects are supposed to be more profitable,” said Amin Asodallahi, program director at Pembina Institute, referring to Statoil’s shelved Corner project.
“If companies’ ... margins are really tight, the question is: Why are we in this business?”
The spectre of higher carbon pricing on emissions also has gripped the industry, although Mr. Asodallahi believes companies have suggested they can live with higher rates.
“A predictable, meaningful carbon-pricing regime will improve regulatory certainty and investment decisions.”
Despite the slew of bad news, some analysts are confident Canadian innovation will keep the industry competitive. Peter Tertzakian, chief energy economist at ARC Financial Corp., believes Canada can turn the price discount to its advantage, especially as information technology, logistics and streamlined midstream processes “are taking the cost fat out of supply lines.”
“Canadian oil and gas producers are undercutting the market and taking share with the cheapest oil and gas in the world,” Mr. Tertzakian wrote in a note to clients on Sept. 25.
Developments such as Canada’s Oil Sands Innovation Alliance (COSIA) also are contributing in bringing down costs directly and indirectly. The 13-company alliance shares innovations and technologies in a bid to reduce Canada’s heavy footprint on the environment, but some projects also have an eye on cost-control.
Innovations in steam generation in the oil sands, such as at Devon Energy Corp.’s Jackfish project, and watertreatment and recycling technologies, are accomplishing the “win-win” task of curbing carbon emissions and costcutting, says Dan Wicklum, chief executive of COSIA.
“Ninety-per-cent steam quality using rifled tube or boilers-in-series technologies compared to a typical in situ facility could reduce water use by up to 15%, waste water generation by close to 50%, and GHG’s between 1% and 6% with a reduction in both capital and operating costs for greenfield development,” Mr. Wicklum said.
Another COSIA innovation helps reclaim land at a faster pace and replant trees even in winter, saving companies such as Suncor Energy Inc. about $5-million per year, said Mr. Wicklum, noting that incremental and breakthrough technologies will help the industry gain efficiencies.
“There is a horizon of possibilities when you have 13 companies working together. Overlap that with 40 associate members from General Electric to Alberta University and we have literally hundreds … of people thinking about the innovation needed in this sector. When you harness all those people in a structured way, good things will happen.”
Outside of Calgary, few understand that the oil and gas patch is really a large scientific experiment, says Greg Turnball, lawyer at McCarthy Tétrault LLP.
“This is a technology-driven play. If that technology works, a number of entrepreneurs will go back and look at Western Canada’s older and mature gas fields, which perhaps were drilled vertically, and now are going to be drilled horizontally with a different completion technique.”
Away from the oil sands, the venerable Viking and Cardium plays, apart from Montney, have been rejuvenated and reimagined thanks primarily to technological advances in horizontal drilling and multistage fracking.
But technological innovation is not unique to Canadian oil and gas companies.
A survey of 250 global executives published this week noted that 59% of respondents had increased their research and development spending in the past two years, with 68% looking to raise their R & D budgets in the next two years.
“Nobody is safe from the resultant competitive forces: Over three-quarters of respondents say that the pressure to innovate has risen over the last two years,” according to London-based Lloyd’s Register Energy, which conducted the study in collaboration with Longitude Research. Technological innovation is definitely a higher priority for the Canadian oil sands companies, said Matti Teittinen, senior policy analyst at IHS. “But I don’t think they are alone in that. Many other companies have a heavy focus on technologies and supermajors have large budgets devoted to this.”
The challenge for Canadian producers remains immense compared to other jurisdictions. Shorter drilling times due to the weather, higher labour costs and uncertain regulatory timelines for projects means companies are often unclear of the final outlays of projects.
“Royalty stability is key and investors need to see signals that Western Canada welcomes investment,” Mr. Leach said. “Those are areas we push governments because they have a big part to play in keeping our costs down. Especially, as costs continue to go up, we have to stay ahead of that curve.”