Today marks the end of what has been one of the best weeks in two years for positive news for Canada’s battered upstream oil and gas industry.
Obviously, the OPEC meeting November 30, which concluded with the commitment to meaningful production restraint resulting in an immediate jump in crude prices, has every oil producer, investor and employee (E&P and oilfield service) in the world starting to believe the light at the end of the tunnel may not be a train. Canada is no exception.
WTI at US$51 a barrel is US$24.81 higher than the recent multiyear low of US$26.19 on February 11, 2016. Canada produces about 4 million barrels per day of light oil, synthetic crude, bitumen and natural gas liquids. Using the current Canadian dollar exchange rate of US$0.75, Canadian petroleum liquids are fetching over C$30 a barrel more than nine months ago. This equates to C$120 million a day in additional revenue or nearly a C$44 billion annualized improvement from the low water mark.
Of course the math isn’t that simple. The February 11 number was the low and today’s price could be the high. Regardless, C$30 a barrel is a huge amount of money when it comes to spending in the field. Earlier this year when a well or facility went down with mechanical problems the operator was hard pressed to justify the investment to fix it. But starting last summer after WTI returned to the right side of US$40, the increase in operating expenditures (OPEX) was measurable. Service rigs and field crews went back to work putting dormant production back on stream. Production repair spending typically pays out in 90 days or less so even producers with the most stressed balance sheets can talk to their bankers and justify OPEX to put proven production back on stream because of the low risk and short payout.
In late September when OPEC met in Algiers and agreed to the concept of the November 30 production cuts, WTI busted through US$50 and looked like it might stay there. It gave producers the opportunity to hedge a year out at what could be $C65 a barrel (depending upon exchange rates), a number at which pretty well everything in Canada works with the exception of a new multi-billion-dollar greenfield oil sands mine.
That’s when the phone started ringing for drilling contractors. E&P companies must drill eventually to replace reserves or they go out of business. Higher oil prices combined with lower drilling and service prices started to make the math work for an increasing number of prospects. On December 2, it was reported by JuneWarren Nickles there were 234 rigs drilling in Canada, the highest figure since the normally active winter drilling season when it reached 241 on January 19, 2016. Before that the last time there were this many rigs active in the field was March of 2015.
On November 22, the Canadian Association of Oilwell Drilling Contractors released its 2017 drilling forecast which predicted a 31 percent increase next year at 4,665 wells. This looks like a nice bump until you note the figure was over 10,000 in 2014 and every prior year in recent memory. However, this projection was done before the OPEC meeting. There is no doubt if current oil prices hold or rise this number will increase.
The trickle-down effect on employment has been measurable. Service companies are scrambling to find staff again. They phone their former employees who have found work doing something else and discover they don’t necessarily want to go back to the ‘patch unless there is evidence the recovery is long term. This is something their prospective employers cannot yet provide. Oil companies are again waiting for frac crews. If you’re on the service side of the customer/vendor relationship, this is a fantastic development compared to what has transpired in the past two years. The outlook for the winter drilling season is materially improved and this week’s OPEC meeting was the icing on the cake. Related: Why The Oil Industry Shouldn’t Fear Peak Demand
The other piece of really good news this week was the federal government announcing the approved of Kinder Morgan’s Trans Mountain pipeline expansion which runs for 715 miles from the refining hub on the east side of Edmonton, Alberta to Pacific tidewater in Vancouver. Originally built in 1953 and in safe and reliable service for 53 years carrying about 300,000 b/d, Kinder Morgan formally applied in 2013 to expand the line to 890,000 b/d at an estimated cost of C$6.8 billion. An additional 580,000 b/d of pipeline export capacity is a huge boost to the industry particularly when it is to tidewater, not Canada’s historic major crude buyer the United States. Kinder Morgan hopes to start construction next year.
Alberta’s oil producers have endured crude prices below world levels because of restricted access to tankers which could move oil to markets paying the highest price. While nobody will admit it publicly, the significant investment reduction in greenfield oil sands projects is due in part to the lack of low cost access to market via pipeline. No major oil producer is going to commit to investing billions in a new bitumen mine or thermal recovery project with a 30 to 40-year life if rail is the only means by which to export the product.
At the same time the federal government approved the replacement of the Canadian segment of Enbridge Line 3 which runs from Hardisty, Alberta (the closest thing Canada has to Cushing, Oklahoma) to Superior, Wisconsin. The U.S. section is still waiting approval but because it is an existing line crossing the Canada/U.S. border this project doesn’t not require White House approval, the withheld permission that killed TransCanada’s Keystone XL project.
This 1,031-mile line dates back to the 1950s and when the work is completed in 2019 it will transport 760,000 b/d with future capacity of 915,000 b/d. Because of its age and Enbridge’s concern for safety and integrity Line 3 is currently carrying under 400,000 b/d. At C$7.5 billion this project will be the most expensive in Enbridge’s history.
The same day Ottawa officially put the nail in the coffin of Enbridge Northern Gateway which was intended to run from Edmonton to the Pacific Ocean seaport of Kitimat, B.C. This was approved by the National Energy Board in 2012 and the federal government shortly thereafter but was challenged in the Supreme Court of Canada. Based on a failure to adequately consult aboriginals, earlier this year the court overturned government approval. Related: Winners And Losers Of The OPEC Deal
While the possible addition of over 1 million b/d of pipeline takeaway capacity from Alberta is great news, the reality is these are only government approvals, not buried pipe. Northern Gateway was approved twice before it was cancelled. Opponents to Kinder Morgan have promised fierce opposition through the courts and civil disobedience. Energy Minister James Carr this week hinted opponents involved in anything but peaceful and legal protests will be dealt with appropriately. “We can’t let the pipeline get held up by people that will never agree to any standard. The law of the jungle cannot prevail.” The suggestion was they could be arrested but in Canada senior politicians like Carr invariably choose their words very carefully.
Of interest is the major battleground for oil pipelines in North America today is in North Dakota, not Canada. News reports indicate some 2,000 more people are going to appear at the site prior to the promised December 5 date to shut down the protester’s base camp. How this unfolds will either embolden Canadian protestors if the North Dakota Access pipeline is allowed to continue, or send the message that governments will stand behind legally sanctioned energy infrastructure projects if the demonstrators are physically forced out.
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It might be a bit easier for Canada because the two lines approved are expansions of legacy infrastructure using existing right-of-ways. But the increase in tanker traffic in the Port of Vancouver because of Kinder Morgan is flash point on Canada’s west coast that a great number of people who live in this region will never accept even if the project is economically advantageous to the country. They simply don’t care what the unemployment rate is in the oilfields of Alberta.
Regardless, the price of oil went up this week and the plumbing to develop and sell more took a material step forward. After two years of nothing but bad news it’s about time.
By David Yager for Oilprice.com
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