Derrick Digest for Aug. 4, 2017: OPEC, Latin America's pain is Canadian oil sands' gain

Refiners look to Canada to plug gap left by OPEC, Latin America

The Derrick Digest is a weekly collection of curated content, based on events from across the oil and gas industry, that caught our eye at Pennine Petroleum Corporation.

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AUGUST 4, 2017


As OPEC cuts sour crude, refiners are turning to Canada’s oil sands for the heavy crude they need. And the increased interest has boosted the price that Gulf Coast refiners are paying for Western Canada Select.

The discount for WCS in Cushing, Okla. is about $5 a barrel below U.S. crude. That is approaching the narrowest differential, which was $4.10 per barrel in mid-2015 at Cushing.

Canadian heavy oil is the go-to choice, as it is a natural substitute for Middle Eastern and Latin American grades. Compounding OPEC’s cutbacks of sour crude is the fact that non-OPEC Latin American countries such as Mexico and Venezuela have seen drops in production due to everything from natural production declines to infrastructure issues.

Venezuela, for example, has seen its output fall 11 per cent in the first five months of 2017, hitting a 27-year low. That country is the majority importer to refineries in Sweeney, Tex., and St. Charles, La.

Canada exports more than three million barrels of oil a day to the United States. Producers with committed capacity on Enbridge pipelines that carry crude to the Gulf could make hay of the situation, with their lower tariffs. Pipeline capacity issues could mean an increase in shipments by rail, although transportation method comes with added costs.

But the market is expanding west, as well. The demand for sour barrels is increasing in Asia, traditionally a region that looked to Russia and the Middle East for its supply. In July, Indian Oil Corp. bought its first cargo of U.S. and Canadian heavy crude.


Billions of barrels of oil resource potential added to Duvernay

The in-place quantities of natural gas, natural gas liquids and oil in the Duvernay Formation are significantly higher than estimated five years ago.

In a report released by the Alberta Geological Survey (AGS), the best estimate of hydrocarbon resource potential in the Alberta play are as follows:

  • total in-place resources of raw gas is now 820 tcf (up from 444 tcf in 2012)
  • 95.9 billion barrels of natural gas liquids (up from 11.8 billion in 2012)
  • and 208 billion barrels of oil (up from 62.8 billion barrels in 2012)

The 2012 report was based on the earliest test wells in the play in west-central Alberta and assumptions were made about factors such as rock properties, water saturation and fluid distributions. Information was also lacking in the areas of porosity, total organic carbon and net thickness.

Data from increased activity in the area has led to the new figures and more precise hydrocarbon resources model, according to the AGS.

 “These are the total in-place resource estimates and do not take into consideration accessibility, recoverability, or economics,” the AGS stated in the report. “The in-place resources are very different than reserves, which are based on estimated recovery from projects currently in development or expected to be within a short time frame.”


Supreme Court’s message: Be very careful tampering with the NEB

Two separate but related decisions by the Supreme Court of Canada recently served to reinforce the value of good consultation on the part of oil and gas companies in their dealings with Indigenous communities and the special role the National Energy Board (NEB) has to play in that process.

“The decisions emphasize the importance of the role of the NEB as a highly experienced and highly qualified tribunal, with a very complex role that should not be tampered with lightly for the sake of political fashions,” professor of law Dwight Newman wrote in the Financial Post following the decisions.

While the court ruled in favour of the Inuit community of Clyde River in Nunavut that opposed a Norwegian consortium conducting seismic testing in Baffin Bay, it also upheld the NEB’s approval of Enbridge’s expansion and reversal of its Line 9 pipeline, which was appealed by the Chippewas of the Thames First Nation in Ontario.

In the latter case, the court found that Enbridge’s communication and consultation was “far more robust” than the former’s efforts with the residents of Baffin Island. Enbridge hosted several oral hearings before work began on the pipeline and allowed adequate time for locals to submit their concerns to the NEB.

In Clyde River, key documents from the consortium weren’t available in the local language, or were only accessible in large computer files that were inaccessible due to the slow Internet speeds in Canada’s north. The community had asked for video monitoring of how the proposed airgun blasts could affect maritime life — specifically narwhal, beluga, bowhead whales and walrus. The consortium (made up of TGS-NOPEC Geophysical Company, Petroleum Geo-Services and Multiklient Invest AS) failed to provide it.

According to an article in the National Post, “Supreme Court Justices Andromache Karakatsanis and Russell Brown wrote that the NEB is compelled to have clear and reciprocal discussions with local communities, and give locals the opportunities to ask questions and respond to proposals. The justices ruled the NEB failed to meet that standard in Clyde River, but successfully met that expectation during consultations over the Line 9 project. “

The decisions come as the federal government is holding consultations on restructuring the NEB, broadening its mandate to considering upstream emissions in its approval process.


Opinion: Opportunity knocks in natural gas sector

The Gas 2017 report by the  International Energy Agency (IEA) contains some golden opportunities for the Canadian natural gas industry, according to an opinion piece in the Vancouver Sun by Mark Milke.

As demand for liquefied natural gas grows south of the border and in Asia, Canada should position itself as an exporter of this natural resource.

“The IEA believes industrial sector growth will drive up demand over the next five years. Worldwide, natural gas consumption is forecast at 4,000 billion cubic meters (bcm) in 2022, up from 3,630 bcm last year. That’s a not-insignificant, 10-per-cent jump,” Milke writes. “China is a key driver of increased demand. The IEA predicts that natural gas consumption in China will, by 2022, be five times current usage. The rest of developing Asia, the Middle East and the U.S. will also see significant increases in consumption.”

If gas supplies tighten, that might be the impetus for Canada to get going on LNG export capabilities, he adds. Canadians should be sold on the development of this abundant natural resource, as it will bring thousands of well-paying jobs, drive up government revenues and billions in infrastructure. And don’t forget the green side of LNG.

“The environmental advantages of natural gas, particularly when replacing coal,” asserts the IEA, “deserve more attention from policy-makers.”