Canadian Oilpatch Guardedly Optimistic Amid Strong Competition From Booming U.S. Energy Sector

By: Maurice Smith
Published: Daily Oil Bulletin

The Permian Basin is delivering transformational growth for Chevron as it applies advanced technologies and builds drilling efficiencies. Image: Chevron

Amid Trump tax cuts and reduced regulations in the U.S., and robust activity in premium basins like the prolific Permian, Canada’s battered energy sector is looking for some relief. As U.S. output soars to all time record levels, driven by technology partly developed north of the border, Canada risks losing its edge, panelists told the Calgary Energy Roundtable.
“No question that Precision [Drilling Corporation] is focusing most of our capital, most of our time, on growth in the U.S. We can pivot quickly, and pivot back here quickly, but for the near future, for 2018 and 2019, maybe even into 2020, until LNG really starts affecting oil and gas services, we expect most of our focus will be on the U.S. and international markets,” said Kevin Neveu, Precision president and CEO.
Ian Dundas, president and CEO, Enerplus Corporation, echoed those comments. “We see opportunities in the U.S., and so next year most of our capital will be spent on our existing assets in the U.S.”
One bright spot is the midstream sector that, despite headlines that may suggest the contrary, continues to build pipelines at a rapid pace. “We have bigger backlogs now than we have ever seen in our business,” enthused Karl Johannson, president, gas pipelines and Energy, TransCanada Corporation.
While hailing approval of TransCanada’s $6.2 billion Coastal GasLink pipeline project earlier this month, which will feed the recently sanctioned LNG Canada natural gas liquefaction facility in Kitimat, B.C., Johannson maintained that is only part of the equation. “Beyond that, beyond the major projects that you see, every day we put in miles of pipeline, in northern Alberta, in the Appalachian and in Mexico, where we are able to procure our permits.”

Competition for capital

Canadian producers and international oil majors continue exploring the Montney and Duvernay formations, which are said to rival the most prolific U.S. tight and shale fields, according to the panel focused on the Canadian and American perspectives. But the competition for capital is intense, even within companies straddling both sides of the border.
“Internal to Chevron [Corporation], we are in a very tight market for capital — competition for capital is very strong,” said Frank Cassulo, president, Chevron Canada. He framed the situation with a comparison between the company’s Permian and Duvernay positions, “because within Chevron that’s our main competitor.”
An early entrant to the Duvernay in 2011, it has since acquired acreage and worked on appraisal programs over the last six years, and is “very excited” about its position in the shale play. While Chevron announced last November it would proceed with development of the east Kaybob field in the Fox Creek area of west-central Alberta, which it sees as “a very attractive liquids-rich play,” its development is measured and paced relative to the U.S., Cassulo said.
“We have to put in place infrastructure agreements for the midstream piece to ensure that we have access to processing, ensure that we have takeaway capacity, and we have a regulatory environment that takes a little bit longer to develop. So it is a tougher playing field to compete with the U.S.
“So the topics we are discussing today around competitiveness, fiscal policy, market access, stability, to build infrastructure, and then driving regulatory certainty, are key. That’s the differentiator, I believe…. We really have to look at the regulatory piece and how we partner with government to provide an environment by which we can invest and compete here in Canada. That’s my job, to drive investment here in Canada.”

Contrasting values

It’s not just market forces and regulatory differences that differentiate the Canadian and U.S. oil and gas sectors, according to Neveu, who has spent about half his career living in the U.S. — Canadians have a different mindset, he said.
“[In the U.S.], competition starts in kindergarten and runs through university, and everything competes — every public policy, every state regulation, every county regulation, every town, thinks about competing for investment, all the time. It underpins the U.S. mentality. So when you are talking about a county or a town or even a state, competition underpins everything they do.
“Whereas in Canada, social sentiment underpins everything we do. So we are competing with a social sentiment against a competitive environment, and we have to keep that in mind as we set regulation in Canada, as we set investment criteria in Canada. We have to realize that our large neighbour, our large customer for a lot of our products, is focused on competition as a primary driver.”

Legislative change

The competitive landscape won’t be helped by new legislation that threatens to move the country in the wrong direction, Dundas said. “As Canadians, we have a choice right now. We have allowed the Americans to out compete us and out regulate us, and we find ourselves in this position. So let’s stop making it worse,” he said. “In our opinion Bill-69 [the new Impact Assessment Act] is going to be a problem. The other thing coming down the pipe is clean fuel standards — they are going to be a problem that makes it worse.
“We have got to look at what’s going on and look for tangible policy changes that help us get back on a competitive playing field. There is a whole bunch to choose from. We have got a smorgasbord of stuff we can fix, and choosing some of that will help.”
Some legislation, like the new Impact Assessment Act, seeks to put more emphasis on reducing greenhouse gas emissions. Panelists did not address the challenge of Canada meeting its greenhouse gas reductions targets in relation to the oil and gas sector.
Asked about how optimistic he is about the future, Dundas said: “I have a lot of confidence in Canadians and in ingenuity and in common sense to prevail…. So sure, I am optimistic, but there is some heavy lifting and we have to make some choices.”

Midstream thriving

Despite the media focus on major pipeline delays and obstacles to construction, a high level of activity continues under the radar in the midstream, particularly on the gas side, according to Johannson. “We hear a lot about those key projects that are difficult, but I just want everybody to know that, underlying that, we are getting lots of steel in the ground, [and] we are getting lots of facilities going.”
In fact, TransCanada has never been busier, with some $10 billion worth of projects in each of the last two years, he said. “We are in a period of our company’s life right now where quite frankly we have more business than we can imagine at this time. Right now for the infrastructure player the times are good, regardless of the difficulty of getting permitting and getting the directors’ approvals to go ahead.”
Natural gas transmission is particularly strong as construction continues across the continent. In the not too distant future, producers will be able to move a unit of gas from northern Alberta all the way through to Mexico City, Johannson noted.
“There are permits to be had, especially on the natural gas side. I’m not saying they are easy, I’m not saying they are quick,” but they are proceeding, he said. “But 85 per cent are gas, so what I am finding is that gas seems to be able to make it to the finish line.”
Johannson added that gaining project approval was not much different in Canada, the U.S. or Mexico. “We have unique circumstances regardless of what jurisdiction we are in. Land issues tend to be, and Indigenous issues tend to be, front and centre in Canada and Mexico for example. [In] the U.S., maybe the land issue is a little bit less so, but there is also far greater NGO [non-governmental organization] activism down there, and we have had some regulatory delays in the U.S. over the last few years.”

Innovation moving south

As the booming U.S. shale and tight oil and gas sector diverts activity from Canada, so too moving is the innovation edge Canada once enjoyed, said panelists. Many of the techniques that set off the shale revolution feeding the record U.S. production numbers were in fact developed in Canada, they said.
Historically, new technology would be tested in Canada in the winter drilling season, proven quickly, and applied everywhere, Neveu said, but that is changing. “Typically in Canada things like seasonality — that makes it tough to drill during spring breakup, [making it] really important to be efficient during the winter — [and] the volatility of natural gas prices, have driven a real innovative spirit in Canada. A lot of the technologies that were used to de-risk horizontal drilling in the U.S. came out of Canada,” he said.
“Horizontal drilling was really de-risked in Canada, a lot of the directional drilling that was behind that, even highly mobile rigs that can drill quickly and efficiently, were really de-risked in Canada and helped really unleash the drilling costs [improvements] in the U.S.”
But the large scope of activity in the U.S. is bringing about economy of scale that now makes innovation more likely to occur there, he said. With scale comes more capital investment, more innovation and more opportunity to undertake higher risk investment in new technology, he said, adding that probably 75 per cent of Precision’s innovation activity is now focused in the U.S.
“What we are seeing now is that industrial scale is being applied in the U.S. and we are missing out here in Canada. The mass production or mass scale investments that lead to long-term sustainable economies of technology [development] are just not really being developed in Canada. It’s a function of capital markets really focused on the U.S., better cash flow generation in the U.S., better ability to leverage capital in the shale plays in the U.S.
 “We are becoming more risk-averse here, less likely to invest in riskier technologies because the horizon is so uncertain. And even in my company’s case, the younger engineers want to be in the U.S. where they can try things out,” he added.
Indeed, scale is something being widely applied at Chevron, which takes a factory approach to its shale development that allows it to drive efficiencies across its entire value chain, said Cassulo.
“That means building a high quality [well portfolio], building efficiencies across a wide fleet of drilling and completions crews and looking at standardized designs for facilities, for completions, and all with an effort to drive high value returns,” he said. “So why do we like the shale? It’s a short cycle, high return business, and it’s changed the landscape.”
Chevron has a leading position in the Permian with over 2.2 million acres in play. Closing out 2017 it had about 170,000 bbls/d of production, a 35 per cent increase over the prior year, and recently grew to 280,000 bbls, he said. “That gives you an idea of the rate of acceleration. We currently will end this year with about 20 rigs operating across our portfolio, so to say the least that is a business with significant scale.”
To be sure, there is still some technological innovation occurring north of the border. Chevron recently piloted geosteering techniques in Canada that are now being adopted across its portfolio, including areas like the Permian and Marcellus, Cassulo said.
“We work under an umbrella where we are looking at a shale asset class that is linked very closely and to a point that we are communicating across our portfolio [and] we are sharing real-time data. That brings another element into it, that data analytics is becoming very important. We are able to process massive amounts of well data across the entire portfolio. There are no geographic restrictions on where that data goes in terms of how we analyze it.”
The company has centralized control rooms in Houston that oversee real-time monitoring of performance across its operations, he said. “We are more technically connected today than we have ever been, and I think that is an imperative because the technology is moving at a faster pace, and it’s just a given that you have to adopt it.”


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