Monday, 22 June 2015

An uncertain future for fracking...

Fracking seems to have held considerable promise:

The fracking revolution in the United States means its natural gas prices have fallen to less then the average in Europe. As a result, heavy industry (and jobs) are flooding back to former rustbelt states.
The Tories must seize the chance to rethink climate change policy - Telegraph

Things have been really looking up in Alberta:
Alberta Oil Sands Jobs
The U.K. is trying to build its own shale industry – and it wants your help - Alberta Oil Magazine | Canada's leading source for oil and gas news

This blog has considered the promise of the tar sands:
Futures Forum: Fracking in Fort McMoney: a web documentary and strategy video game about Fort McMurray, the oil sands capital of Alberta, Canada

However, as this recent piece from the Financial Time shows, things are now looking rather bad:

June 16, 2015 7:03 pm

New oil order: Leaner times for Canada’s ‘Fort McMoney’

Gregory Meyer

A forest clearing in northeast Alberta contains a monument to oil wealth. The Anzac Recreation Centre, opened last year, serves a hamlet of 800 people with 112,000 square feet of gym space, grandstands and an ice rink built to National Hockey League standards. An aboriginal dream catcher hanging in a window — the gift of the centre’s sponsor and chief local employer, the Chinese oil group Cnooc — encourages those who enter to “Dream Big”.

FT Series

The New Oil Order

Energy groups wield the knife
Industry takes drastic action in cutting costs

Saudis spend despite low oil price
Kingdom insists it can weather crude fall despite fears of slowdown

How the shale revolution changed the world
. . . and why nothing will ever be the same again

But dreams are now more unsettling than grandiose in Alberta, the western Canadian province with the world’s third largest proven oil reserves. With the collapse in crude prices, energy companies have suspended or cancelled billions of dollars in new projects, thousands of workers have lost their jobs and voters ousted the party that ran the provincial government for 44 years.

New projects in Canada’s oil sands need an average Brent crude price of more than $100 per barrel to break even, according to Rystad Energy, a consultancy — well above levels eyed by forecasters and futures markets.

The investment environment could be further complicated if Alberta’s new premier follows through on a pledge to review royalties paid by energy producers, suggesting added expense for the high-cost oil region. A clampdown on greenhouse gas emissions would also threaten the carbon-intensive extraction methods of Canada’s oil sands, already a target of green campaigners over pollution and deforestation.

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In the Alberta oil sands region that encompasses Anzac, unemployment has doubled to 8.6 per cent from a year ago, when prices started to fall. Feeling the strain, the municipal council has cut its capital budget.

“We need to re-examine how big we’re going to grow and at what pace and be realistic with our budgeting,” says Tyran Ault, a council member.

The shock has been sudden for Albertans. For the oil market, however, supply from Canada is still flowing as normal. The recoil from its great retrenchment is instead likely to hit in the next decade. Less oil will arrive just when forecasters say world oil demand — running at 93m barrels per day at the moment — will surpass 100m b/d, risking a tighter market. “You could see several years of higher oil prices [in the future],” says Ryan Kubik, chief executive of Canadian Oil Sandsin Calgary.

Canada was a crucial contributor to the glut that halved oil prices. Its fields and sands added about a fifth of North America’s net oil supply growth over the past five years, or 1.1m b/d. Much of the rest came from US shale formations.

Alberta’s oil sands — the engine of the country’s supply growth — are distinct from most other oilfields. They have high initial costs and take years to construct before a single barrel is produced. They “are on the opposite end of the price-sensitivity spectrum” from shale, the International Energy Agency says.

Delayed impact

Shale producers reacted to oil’s price plunge by idling hundreds of drilling rigs, leading to expectations of a US supply dip starting in late 2015. In contrast, oil sands companies that have already sunk money into mines and steam injection wells in Alberta have no incentive to stop operating or building projects meant to deliver a return over several decades. Instead they attempt to run their plants, truck fleets and pipelines at full capacity, much like a factory.

“It is very much of a manufacturing mindset,” says Mr Kubik, whose company is the largest shareholder in the Syncrude oil sands venture, opened in 1978. The Canadian Association of Petroleum Producers last week forecast that western Canada’s output will keep increasing by about 156,000 b/d each year until 2020. Then growth slows to 85,000 b/d a year until 2030.

At the same time oil sands companies are applying a ruthless triage to uncommitted projects. Capital spending by Canada’s oil and natural gas industry will total C$45bn (US$37bn) in 2015, 40 per cent lower than 2014.

“This is something that will have an impact in three to five years in terms of production, as opposed to production over the next three years,” says Brian Ferguson, chief executive of Cenovus Energy, a Calgary-based producer.

Alberta’s oil sands, a patchwork of sand, water and bitumen the size of Bangladesh, hold about 167bn barrels of proven reserves. Difficult to convert into a refinable hydrocarbon, they became more economically viable as oil prices crept towards $100 a barrel a decade ago. Turmoil in other oil producing states, from Venezuela to Libya, reinforced the appeal of Canada as a stable country where the government did not expropriate oilfields.

As the oil sands flourished, the Fort McMurray region lured workers from across Canada earning the nickname “Fort McMoney”.

By 2012, average household income in the broader Wood Buffalo municipality was nearly C$190,000 — more than twice the Canadian average. House prices trebled as the population doubled.

Often depicted as a tawdry boomtown, Fort McMurray adopted a more cosmopolitan air. At the Suncor Community Leisure Centre, residents could swim laps in the 54m pool, then listen to author Malcolm Gladwell as he dropped in for a speaker series. A downtown brewpub serves customers seared beetroot and quinoa burgers with cashew spread alongside meatier fare.

Outside town, oil mines have stripped sections of forest into lifeless grey flats. Other producers pump steam deep underground to loosen bitumen so it can be brought to the surface in a process called “in situ.” Both methods require lots of energy to separate viscous oil from sand.

Industry costs escalated amid shortages of labour and parts. Oil companies flew thousands of workers to the frigid north for marathon shifts. At prefabricated “camps” in the forest or next to mining moonscapes, companies pursued an arms race to retain personnel, adding hunting-lodge style faux woodwork, squash courts and WiFi.

“A lot of these guys make 100, 150, 200 grand a year,” says an executive at a camp housing company. “They work 12 hours, then they get really good food, they play their Xbox, FaceTime their girlfriend, watch some porn and go to bed. And repeat the next day. That’s their life. You do that 10 days and you come home and live like a rock star for four days.”

Biting cuts

Then came the collapse. “In a very short time our world has changed, and changed dramatically,” Rich Kruger, chief executive of Imperial Oil , told investors recently.

Western Canada Select, a heavy oil marker, was $86 a barrel a year ago. By March it was trading below $30. Oil companies quickly reassessed the risks of investments that pay back over more than 30 or 40 years. Royal Dutch Shell, for example, withdrew its application to build a 200,000 b/d oil sands mine at Pierre river, north of Fort McMurray. It has delayed by years a new 80,000 b/d in situ project at Carmon Creek, near Peace river, Alberta.

“The way I look at our oil sands business right now is we’re basically running and perfecting what we have,” says Marvin Odum, head of exploration and production in the Americas for Shell, which produces 255,000 b/d from oil sands. “We’re not in any hurry to expand beyond that.”

Companies have paired investment cuts with aggressive moves to hammer down costs. Service companies, for both oil sands and conventional producers, have been forced to renegotiate rates. The Canadian Association of Oilwell Drilling Contractors estimates 25,000 jobs will be lost this year.

In Nisku, an industrial park that manufactures equipment for both oil sands and conventional fields, on-street job boards show no one is hiring and rig manufacturers are finishing work on equipment companies do not want.

The push for lower costs may persist, restoring profit margins and prolonging a period of lower oil prices. Suncor Energy plans to replace 800 dump truck drivers with automated trucks at its oil sands mines, saving about C$200,000 per employee.

Costs were “an industry problem”, says Asim Ghosh, chief executive of Calgary-based Husky Energy. “Yes, Alberta has certainly been a part of that problem. And you are seeing a dialling back of the cost structure.”

The effects of cost cuts are starting to bite in Fort McMurray. At the airport, which opened a new C$258m terminal last June, charter flights are discharging 30 per cent fewer passengers. More families are visiting the community food bank. And as a sympathetic gesture the Wood Buffalo Brewing Company reduced its price for pale ale to a tenth of the cost of a barrel of West Texas Intermediate crude. A pint was C$5.99 early this week.

Oil workers accuse company executives of exaggerating the bust to pressure labour. “Even though they say there’s a downturn, it doesn’t exist. They’re still making money. Oh, they’re making lots of money,” says Don Campbell, a welder who works on Cnooc’s Long Lake oil sands project.

Alberta’s oil industry is also facing the prospect of costs it cannot control. In May, the leftist New Democratic Party was elected to govern the province after pledging to raise corporate taxes and review oil royalties.

This year Alberta’s take from royalties and land bonuses will drop by C$5bn to less than C$6bn, according to ARC Financial.

But even if oil springs back above $100, all will not be settled.

As negotiators work towards a climate agreement in Paris later this year, the oil sands industry also faces potential limits on carbon emissions. Because of its energy-hungry extraction process, crude from the oil sands spews more heat-trapping gases into the atmosphere than many other grades. A study by University College London found that 85 per cent of Canada’s bitumen reserves should remain unburnt if the world is to avoid the 2C average temperature rise seen as the tipping point towards dangerous levels of climate change, suggesting oil sands could become stranded assets if global leaders crack down on carbon.

The most visible casualty of concerns about carbon is the proposed Keystone XL pipeline linking Canada to US refiners on the Gulf of Mexico, stalled in Washington amid pressure from environmentalists.

In Fort McMurray the mood is cautious but resolute. Despite the curb on capital spending the new Shell Place stadium complex opened last Friday.

“We’re not anticipating a lot of significant change for the next year or two,” says Jeff Penney, municipal director of economic development. “But what happens beyond that? When will we see the next influx of new capital investment? Right now, nobody’s really got an answer to that question.”

Emissions: Energy efficiency boosted on newer projects
Once used as canoe sealant by aboriginal Canadians, the bitumen caking the oil sands of northern Alberta constitutes the world’s third largest proven oil reserves behind those of Saudi Arabia and Venezuela. Stripping this thick tar from sand, water and clay and diluting it enough to flow through a pipeline requires vast amounts of infrastructure and heat. At 10C, it is “hard as a hockey puck,” says the Canadian Association of Petroleum Producers. Oil companies remove bitumen from sand in two ways. The first, and older, method is by surface mining — digging sand with mechanical shovels and feeding it into vast “upgraders” that process the material into synthetic crude or diluted bitumen for delivery to refineries. Mining scars Alberta’s forests with wastelands and tailings ponds, though the industry is required to eventually return the land to its natural habitat. The second method is called “in situ,” Latin for “in place.” Here oil companies drill into deeper oil sands, burning gas to generate steam injected into the hole to soften the bitumen. It is then lifted to the surface through a parallel well. Both methods require a lot of energy. As a result, greenhouse gas emissions are higher per barrel from oil sands than the average crude grade. The Oil-Climate Index shows that medium, sweet synthetic crude from Canada’s Athabasca oil sands generates 767kg of CO2 per barrel, compared with 559kg for Brent crude from the North Sea. Energy companies say they are working to reduce carbon intensity. The Kearl mine owned by Imperial Oil and ExxonMobil, set to double capacity to 220,000 barrels a day, has reduced its greenhouse gas footprint by using “froth treatment” to avoid the need for an upgrader. However, oil sands projects are built to last 40 to 50 years and emissions improvements are limited for ones already operating. The first mine, opened in 1967, continues to run. “It’s not really retrofittable,” says Greg Stringham, Capp vice-president.