Derrick Digest for Sept. 1, 2017: Hurricane Harvey, aftermath hammer Texas energy industry


Effects, which may be long lasting, being felt north of the border

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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SEPT. 1, 2017


More than a dozen refining facilities along the Gulf Coast have shut down in the wake of the historic flooding blanketing the region. The Houston-Galveston area alone could lose more than a million barrels of refining capacity a day.

Oil production capacity is down by a fifth in the U.S. due to Hurricane Harvey in all its forms, and could drop even further, depending on how badly facilities — and area infrastructure — is damaged.

The loss in refining capacity has the potential to spark a fuel shortage, so the Environmental Protection Agency issued waivers on Wednesday allowing for the sale of “winter fuel.” The fuel is easier and cheaper to produce, but doesn’t comply with clean air laws.

Expect fuel prices to spike and stay that way through the fall, said Jackie Forrest, research director at ARC Financial. The effects of Harvey could equal that of Hurricane Katrina.

"Katrina did cause prices across the continent to increase, not just in the Gulf Coast," Forrest said. "Those elevated gasoline prices did stick around for almost three months until those refineries were back on line."

S&P Global Platts estimates that around 2.33 million barrels a day of Texas refining capacity is offline. Having interests in U.S. refineries well out of Harvey’s reach is paying dividends to Calgary-based Husky Energy and Cenovus Energy. AltaCorp Capital’s report states that refining profit margins have shot up by 20% this week.

AltaCorp's Nick Lupick told the Canadian Press that while Canadian refinery product pricing is up, it's "nothing compared to what we have seen in the U.S."

Canadian companies with interests in the affected areas are waiting it out. Earlier this week, Calgary-based Baytex Energy said it was closing its Houston office. In addition, it shut down production on its Texas Eagle Ford site, which was outputting about 37,000 barrels of oil equivalent a day.

Enbridge also closed its Houston offices and removed most staff from its processing facilities in the Gulf of Mexico. Precision Drilling CEO Kevin Neveu splits his time between Houston and Calgary. Earlier this week, he said his house was dry, but some of his employees weren’t as fortunate.

"Our number one priority right now is make sure our employees are safe and sound and their houses aren't damaged," he said. "Number two priority is to watch the civil infrastructure and see how that responds. When the streets are safe and the power is up and running and gasoline is available, that's when we'll expect people to start coming back to work."

Encana reported it has restarted its operation at Eagle Ford, which didn't incur any damage during the storm or the flooding that followed it.

Cheniere Energy, meanwhile, is reporting that its under-construction $13-billion light natural gas facility received only minor damage from the storm, despite being located in Corpus Christi, which is near where Harvey made landfall. Production at its Sabine Pass export site by the Texas-Louisiana border was not significantly impacted, according to Cheniere, the largest exporter of LNG in the U.S.

The markets are reacting to the impact of Harvey much differently than they did to Katrina or Rita. In a piece for Bloomberg, Liam Denning chalks that up to the impact of the U.S. shale boom. He posits that the effects of Harvey will be “bearish for natural gas,” but indifferent on oil pricing because of the shift away from offshore production in the Gulf.


Newfoundland to Ottawa: don’t mess with our oil

The Newfoundland and Labrador Oil & Gas Industries Association (NOIA) is going on the offence against the federal government, warning that it — and the province and industry it represents — won’t roll over when it comes to Ottawa’s move to centralize and expand regulatory reviews of major energy projects.

In a letter to Jim Carr, the federal natural resources minister, NOIA warned that the feds shouldn’t mess with a good thing, pointing out that oil and gas royalties will contribute more to the province this year than federal transfer payments ($902 million vs. $745 million).

“Our members – and Newfoundlanders and Labradorians – will not accept the loss or delay of the benefits of these valuable resources while we struggle to pay for the demands of an aging population,” NOIA said in the letter.

“In a time where global exploration spending has been reduced by 75 per cent, we are competing for the remaining 25 per cent – competing against jurisdictions that can offer the certainly required for investment decisions of this magnitude.”

This comes after last week’s announcement that the National Energy Board would broaden the scope of its study of the Energy East pipeline to include potential climate change impacts.

In a story in the Financial Post, Claudia Cattaneo writes that NOIA is questioning the federal government’s ability to oversee regulatory requirements given the Atlantic Accord of 1998. NOIA contends that Newfoundland and Labrador’s natural resources minister is the one who has the final say in terms of regulatory requirements when it comes to Newfoundland and Labrador’s offshore oil and gas resources.

The Canadian Association of Petroleum Producers is also wading in to the issue, said Paul Barnes, manager of Atlantic Canada and the Arctic.

“We want to see a role for the offshore petroleum board because they are the lead regulator here, we wouldn’t want to see a centralized agency assume many of those responsibilities,” he said.

Newfoundland’s Natural Resources Minister, Siobhan Coady, said she recently met with her federal, provincial and territorial colleagues at the Energy and Mines Minsters’ Conference. One of the topics up for discussion was the proposed changes.

“I made it clear that we are very concerned about potential impacts that proposed changes will have on development of natural resource projects within Newfoundland and Labrador,” Coady said.


Albertan makes abandoned wells his business

One man’s challenge is another man’s opportunity: a 31-year-old entrepreneur from Red Deer, Alta. is proving that maxim as he looks to capitalize on the growing list of parentless wells in the province.

Tyler Visscher, an electrician, bought his first well two years ago. It was one of what is now 1,438 orphan wells in Alberta, according to the Orphan Well Association (OWA). The OWA was assigned an additional 1,380 wells by the Alberta Energy Regulator (AER) earlier this year.

Visscher is looking to add to his initial purchase and is in the process of adding a second well to his roster.

"It's very time-consuming because you have to scour these wells and you have to figure out, 'OK, why is this well on the list?' " Visscher told the Canadian Press.

"Was it bad management and the company went bankrupt and now this well is in the orphan well list? Or is the well a poor well? Was it not completed properly? Was it not operated properly? You have to go through, kinda like a detective."

There’s a common misconception that orphan wells are in that state because they don’t produce. That’s often not the case.

"Recently, many wells, pipelines and facilities have been deemed orphans because their owners have gone bankrupt, despite the fact that they are still capable of producing, transporting or processing oil or gas," said AER spokesman Ryan Bartlett.

It took time, effort and money for Visscher to get his first well up and running. He had to acquire the underground mineral rights, negotiate with the landowner and clean up the neglected equipment. He’s spent about $50,000 on the project, in addition to the $100,000 bond he had to post with the AER.

The well now has an output of approximately 90,000 cubic feet of natural gas, plus two barrels of oil. Visscher installed solar-powered pumps and automated controls he made through his company, Blue Star Electrical.


Opinion: B.C. is risking its prosperity

Canada and B.C. must “take a world-leadership role in supplying the cleanest possible product to meet burgeoning Asian demand and, at the same time, create thousands of well-paying energy jobs,” Joseph international vice-president for Canada of the International Brotherhood of Boilermakers, writes in an opinion piece in Postmedia.

Rather than an outright rejection of the oil and gas industry, the province should take a more realistic approach, he maintains.

“To focus totally on ending our fossil-fuel dependency ignores the many ways we can mitigate its ill effects. As the drop in automobile emissions has shown us over the past 50 years, the greatest advances come in incrementally improving present technology rather than abandoning it for a vision that doesn’t yet have its kinks worked out,” Maloney points out.

“If we somehow managed to take every gas-powered vehicle off the road tomorrow, we’d still need as much as 60 per cent of the oil we now produce.”

It’s important to preserve economic opportunities that could fuel opportunities for the up-and-coming generation in B.C., he maintains. Maloney asks where the green energy contingent is going to step up with a project that rivals the impact of a project in Kitimat to mine oilsands. It’s a billion-dollar question, but one that the green energy industry has yet to answer.

In a related column, Greg D’Avignon, president and CEO of the Business Council of B.C., warns that “our current trajectory threatens to make it too costly and risky to invest in B.C., with the result being a hollowing out of rural communities and our urban centres turning into playgrounds for the wealthy but unaffordable for ordinary citizens.

“If B.C. becomes a place where project approvals, which are granted based on existing rules and rigorous review processes, can subsequently be overturned by a change in government, we will send a message to the world that this province is no longer an appealing or predictable place to invest.”

Rather than taking a combative stance, the province should utilize “a collaborative, solutions-oriented approach” to economic development, which includes the energy sector, D’Avignon writes.