As the Canadian oil industry fights against rising costs and blocked pipelines, it finds itself facing new threats from an old competitor.
The Alberta oil sands were once seen as the last big oil reserve available to be exploited in a stable, democratic country. But that is no longer the case as companies bore in on new pools of oil in the United States. The latest is the Permian Basin, an oil-rich region in Texas that has produced crude since the 1920s.
Using new technology, the industry has now begun to to unlock parts of that reservoir they say are amongst the largest ever tapped.
“This is the second-largest discovery in the history of the world,” said Scott Sheffield, the chief executive officer of Pioneer Natural Resources Co., which is based in Irving, Tex.
The Permian has attracted rising interest in recent years, and Pioneer is the largest landholder in an area of the basin known as the Spraberry/Wolfcamp. In a presentation earlier this month at the DUG Permian Basin conference, Mr. Sheffield startled some participants by suggesting that the basin could hold 50 billion barrels of economically recoverable oil.
In another area of the Permian, a subbasin known as the Delaware, “you could easily put [estimates at] somewhere around 20, 25 billion,” Mr. Sheffield said.
The broad array of Canadian oil sands fields, by comparison, hold some 169 billion barrels of recoverable oil. But that crude faces a number of issues, including its environmental footprint, the cost to extract it and industry’s ability to get it to market – all of which give it some vulnerability to competition from elsewhere.
Part of the reason the world’s biggest oil companies flocked to the Fort McMurray, Alta., area is the belief it was “the only game in the world where you’re going to get incremental supply,” said Peter Tertzakian, chief energy economist for ARC Financial. But with major new U.S. finds, “the oil sands all of a sudden becomes somewhat marginalized,” he said.
The Permian offers wells jammed with light oil – profitable at oil prices down to roughly $70 (U.S.) a barrel – close enough to Texas refineries that it can be profitably trucked if pipeline access isn’t available. The “big risk” to Canada is that those factors attract corporate dollars to Texas that might otherwise have been spent north of the border, says Kevin Neveu, CEO of Precision Drilling Corp.
Still, he said, the U.S. is expected to need Canadian oil for years to come, suggesting the larger question for Alberta is whether it can get its oil to that market.
“I don’t think success in the Permian Basin is going to particularly hurt Canada. I do think continued delays in getting pipelines to move oil out of Canada are going to be a problem,” he said.
There is also the question of how large the Permian will actually become. Industry players have a tendency toward optimism in the early days of a play, meaning Pioneer’s figures should be treated with some caution. Even other oil drillers say initial estimates can fail to account for the magnitude of difficulty, or cost, of extracting new supplies.
“Many of the newer plays haven’t lived up to the initial expectations, because the rock is more complicated – it’s very technically challenging to get the oil out of the ground,” said Trent Yanko, CEO of Legacy Oil + Gas Inc., a mid-sized Calgary oil producer.
Major U.S. companies have had to retreat from large forecasts for the Utica play in Ohio, after that rock yielded less oil than expected. Some land acquired during a buying binge just a few years ago is now for sale.
Other areas, however, have exceeded expectations. North Dakota, home of the fast-growing Bakken play, produced 779,000 barrels a day of oil in February, up nearly 40,000 from January. Although fierce winter weather briefly halted growth this winter, the state is now on track to reach its 2015 goal of 850,000 barrels a day later this year, Lynn Helms, director of the North Dakota Industrial Commission Oil and Gas Division, said on Tuesday.
Companies have now applied to drill some 6,000 North Dakota wells in the next three years. That’s more than the 5,156 drilled in the last seven, at a time when “what we’re seeing is an industry with the brakes on,” Mr. Helms said. Companies expect to employ some 198 rigs in North Dakota this year, down from the 214 reached last year, as they seek to keep costs down.
International energy analysts Wood Mackenzie estimated that the Bakken contains some 10 billion barrels of commercially recoverable oil, and could reach nearly 1.5 million b/d by 2025. Another major new U.S. play, the Eagle Ford, could pump 1.35 million b/d of oil and condensate, a form of very light oil, by 2025, Wood Mackenzie has estimated.
The Permian, by comparison, could reach as high as 3.5 million b/d, Mr. Sheffield said – nearly a fifth of current U.S. crude consumption. Canada exports slightly more than two million b/d to the United States.
It’s enough to be a source of worry, given the impact such a deluge of energy could have on the value of oil.
“If our government does not let us export crude, and y’all have a hard time getting your crude out through British Columbia, then it’s going to put significant pressure on oil prices,” Mr. Sheffield said. “Which will then slow down the whole economic boom.”