Future strategy to survive discovering 1 out of every 20 bbls of oil we now use.

[tombgrt]

... and weird days!

 

 

Bought some more ATU and GXE with CRC option profits. Apparently the deserve a down day because WCS issues are insurmountable. Taking a little break from watching the tickers as I have no shorter term options left (all at least 1 year out). Time for a break.

[Cardboard]

IMO, Saudi Arabia has no real spare capacity or quickly available. Certainly not the 2 million bls/d originally claimed and recently they mentioned something along the lines of 1.2 million bls/d. Why the sudden difference? There has been some production increase since June and a lot came from their inventories which are now very low.

 

Their claim would be synonymous with Iraq or Iran saying that it has 1 million barrels/day of spare capacity: once developed. None of these countries has invested into oil development since the crash as budgetary constraints did not allow.

 

Latest events now give them the opportunity to walk back on their commitment to offset any miss by Iran:

 

https://www.cnbc.com/2018/10/14/saudi-stocks-plunge-on-khashoggi-fallout-biggest-drop--since-2014.html

 

Now, if you have invested like me into Canadian energy producers, we know that Brent is of little use. Canadian discount on all grades of oil has now gone through the roof with well known shipment issues and crucial refineries being on major maintenance. Only Cromer oil has shown some resilience which helps Saskatchewan producers and condensates which are used to dilute bitumen for shipment into pipelines. Thursday was really grim with just over $40 CAD/barrel discount on Edmonton light oil:

 

https://www.psac.ca/business/gmpfirstenergy/

 

At these discounts, it would make sense to truck oil down South or West. Clearly not sustainable. It is also a shame for Canada to be subsidizing the U.S. the way it is or at the tune of $40 to $50 billion/year. How much is lost in royalties/tax revenues? How long can Alberta keep sending billions of dollar/year at these prices to provide $7/day daycare to Quebecers?

 

Maybe that Canada will go back to horses and donkeys since Son of Castro seems too imbecile to push through more modern techniques such as a pipeline  ::)

 

Cardboard

[SafetyinNumbers]

I know everyone hates Trudeau but wasn’t his big mistake thinking that BC wouldn’t elect the NDP again.

 

But also, TMX wouldn’t be in operation by now anyway so wouldn’t the discounts still exist?

 

This year’s refinery maintenance schedule seems particularly to blame. There is ~300k bbl/d more offline now then 2017 and 500k bbl/d more offline than 2016. But the good news is that refinery capacity starts to come online in the next few weeks, Redwater starts taking 80k bbl/d and crude by rail continues to ramp. I think it works out to 1.1m bbl/d of capacity in total which should go a long way to close differentials a decent amount.

[Cigarbutt]

^Humble contribution.

 

The transmission problem has been known for a long time and opposing forces have been shaping up for even longer.

https://calgaryherald.com/business/energy/canadian-oil-production-growth-to-slow-by-2030-says-new-capp-report

https://thenarwhal.ca/what-s-fair-price-canada-s-oil-and-what-happens-if-we-get-it-0/

 

The procrastination has many causes and some are very obvious but IMO the CDN oil industry participants need to share some blame and have done a very poor job because the issue is multi-faceted. The economic argument is contentious but amenable to a fair solution. However, the main issues that the oil market participants failed to appreciate (if one wants to operate in Canada) are the growing importance of security and social acceptance. Whether one agrees or not with opposing views, environmental concerns are likely to grow. It just is what it is.

 

The transmission problem seems like it has reached a dead end but there may be hope. In the 90's, Canada's fiscal situation looked dire but, mostly because of the Finance Minister, Mr. Paul Martin (good plan, good tactics and good message), things turned around. And the recently elected Prime Minister in Québec has often said openly that he was ashamed about receiving equalization payments and one of his top priority is to close the gap. In early 2016, he didn't seem to stand a chance. Things change. It just may take longer than anticipated.

https://ipolitics.ca/2016/02/01/why-cant-francois-legault-get-any-respect/

 

 

[SharperDingaan]

Agreed Alberta has real problems.

 

But however unpalatable it is, the only real solution is a temporary shut-in (or extended severe curtailment) of tar-sand production. Because the differentials are screaming that supply so exceeds export capacity, that the oil (and gas) has essentially become worthless. Ongoing continuous tar-sand expansion to lower the cost per unit has destroyed the market.

 

We don’t want to hear it, because politicians are trying to get re-elected, and nobody wants to hear about pending extended unemployment. The obvious solutions are massive increases in trans-national infrastructure, refining at home, and a very different overall approach. But even if construction started tomorrow, it would be YEARS before that new capacity became available.

 

Until the industry shuts-in, and uses the unemployment to feed construction demand as new infrastructure gets built; Alberta’s long-term prospects don’t look great. Get it done and it’s a great future, but a lot of the current attitudes have to go.

 

SD

 

[SharperDingaan]

‘Carbon tax’ is a dirty word too many, but we would suggest that it’s actually an industry saviour. Simply because putting a price on carbon can now be used to justify capital spending on pollution saving equipment and projects - as the NPV is now positive. Versus the current process of having to force investment in a negative NPV project through legislation.

 

Yes you’ll have to pay more for your gasoline and heating.

Your solutions are either change your lifestyle, use a vehicle with better mileage (gas/hybrid/electric), or put better insulation in your house. The rewards are the smiles in your kids eyes, and leaving them with a better future than you inherited. 

 

The vast bulk of Alberta’s tar-sand reserves are too deep to mine commercially with existing technology, but easily accessible via the drill bit. Simply pump Co2 INTO that unusable reserve, and get paid for it, as an entirely NEW and GREEN industry. A process that is already occurring at the re-purposed North Sea Goldeneye gas field. http://abarrelfull.wikidot.com/goldeneye-gas-field

 

And if you also happen to be shut-in while ‘carbon tax’ legislation is in effect …

You’re not paying as much as you might, because you aren’t producing as much AND

Canada is a lot closer to its environmental targets REMOVING much of the ongoing environmental criticism.

 

And if that domestic Co2 sequester is in place at the same time Alberta ramps up (post infrastructure build), the net Co2 increase is close to zero – permanently silencing the environmentalists.

 

SD

 

[bizaro86]

Putting CO2 into oilsands reservoirs is ridiculously untenable.

 

CO2 is not miscible with heavy oil, which is why CO2 tertiary recovery schemes are always light oil. If you put CO2 into your reservoir, you'll still need to steam the oil to get it out. But now you have acid gas in there, which makes every thing more dangerous and corrosive. Stainless steel costs way more than regular steel. Oops.

 

And of course, there's the issue that while the oilsands are mostly too deep to mine, they're not deep enough for permanent sequestration of Co2.  The rock on top of the reservoirs isn't thick enough to keep Co2 in permanently, it will migrate out to surface eventually, or if you're unlucky it will do it quickly and kill a bunch of people (Co2 is heavier than air. If it escapes it travels along the ground suffocating people...) If you try that, you won't get permission from the AER for cap rock reasons, it's really just simple geomechanics.

 

 

[SharperDingaan]

Agreed you wouldn't do this for every application, but you also don't need to. All you really need is net injection and some absorbtion of the Co2, you are not trying to permanently lock it in place. It doesn't have to be perfectly miscible.

https://petrowiki.org/CO2_miscible_flooding_case_studies

 

SD

 

 

 

 

[bizaro86]

Agreed you wouldn't do this for every application, but you also don't need to. All you really need is net injection and some absorbtion of the Co2, you are not trying to permanently lock it in place. It doesn't have to be perfectly miscible.

https://petrowiki.org/CO2_miscible_flooding_case_studies

 

SD

 

Your link is about miscible flooding. The oil in the oilsands isn't miscible with CO2.

 

Maybe you'd get a bit of absorption (I've only run simulation studies for CO2 floods on miscible reservoirs) but mostly you would create an artificial gas cap. I don't think it would have any positive impact on recovery, and it would have a huge negative impact on the cost of the project. It would almost certainly be cheaper to sequester an equivalent amount of CO2 in some other deep reservoir.

 

Have you ever done geomechanics in the oilsands area? I have, and it's complicated. CO2 is tough to sequester, and the oilsands reservoirs are very shallow.

[Cardboard]

Thanks Bizaro86 for straightening up another crazy dream.

 

This is no different than calling for carbon plans and Alberta to do this and that. Didn't Notley do that already? And what happened? She got betrayed.

 

The time to negotiate with greenies and abusing fat socialists from out East with their belief of moral superiority is over. Folks in Alberta and Saskatchewan need to say screw you and then stop all transfer payments immediately! This is the only thing they will understand or when they lose their freebies.

 

Cardboard

[SharperDingaan]

Years ago I had some peripheal involvement with trying to extract in-situ oil from tarsand via underground heating. Basically start a fire underground, pipe in air, pipe out CO2, and use the heat to improve viscocity. Pump the oil out via conventional extraction versus mining it instead. A lot less CO2 came out than was expected, indicating either absorbtion or leakage (which was unlikely). My own thoughts were that the heat was either causing the formation to partially absorb the CO2, or we were carbonating ground water.

 

Cardboard, I simply recognize that there is a pressing need to do something different.

Agreed we need new pipe and rail, and in large quantities, but we also need new attitude, and new approaches.

It's everyobody else's fault doesn't get us anywhere.

 

SD

 

 

[Cardboard]

Nope!

 

What we have learned here after the complete refusal of cooperation by Quebec/Montreal for Energy East, Trudeau cancelling Northern Gateway and now the same Federal government not using all its tools at its disposal to push through the project it has selected (TransMountain) is that they don't give a damn about Alberta/Saskatchewan and their citizens.

 

It is time for these people to keep their money home. Why would you give money to people who undermine you at every turn? This is way too many examples to be ignored.

 

Furthermore, if there is no future for oil and gas, they should retain every dollar a la Norway to ensure a future for next generations. Equalization will never flow the other way around.

 

And no, keeping Quebec happy to stay in the Confederation is not a good reason. They can threaten all they want. And if they were to decide to separate, very unlikely with PQ having been destroyed in the latest election (and also in the one before when Liberals took power), you would see the province split apart with those wanting to stick with Canada.

 

Take away their $7 day daycare and all their socialist benefits that they cannot afford.

 

Cardboard

[bizaro86]

With the limited information you've presented, I agree with you, at least partially. I would say CO2 entering ground water is vastly more likely than absorption. You can do lab tests to determine CO2 absorption, and bitumen does poorly.

 

The problem with that on any significant scale is that CO2 + H2O equals carbonic acid. On an industrial scale you aren't operating a sodastream, more like an acid plant. I predict acidifying the groundwater won't be regarded as an environmental coup, especially if it is classified as fresh water, which most of the water in contact with the oilsands is due to its shallow depth and changes to the classification system used in Alberta.

 

If politicians decide that sequester in CO2 is important, the engineers and geos that run the industry can do it. It just won't be in shallow oilsands reservoirs.

[SharperDingaan]

In practice in-situ CO2 sequesture really means chemical fixation in carbonates. Ideally by injecting CO2 into a porous formation, and letting the gas migrate through it. O/G involvement is because dolomite is both a petroleum reservoir rock, and an anhydrous carbonate.

https://www.sciencedirect.com/science/article/pii/S0920586106000800

 

Granted this isn't the typical tarsands reservoir, but there's still quite a bit of this in the rest of the WCSB.

Show that those reservoirs can also absorb carbon, and you've just extended their lives.

But it means thinking outside the box.

 

SD

[bizaro86]

Store Co2 all over the WCSB in deep carbonates? Absolutely. That deals with 100% of the objections I raised, and is how I would do it if it was my problem. Might as well start with all the light oil reefs (Nisku type stuff) as you'll sweep a bunch of extra oil.

 

Store it in the oilsands formations (which are mostly not deep and not carbonates) that's a whole different story for a variety of reasons.

[SharperDingaan]

Store Co2 all over the WCSB in deep carbonates? Absolutely. That deals with 100% of the objections I raised, and is how I would do it if it was my problem. Might as well start with all the light oil reefs (Nisku type stuff) as you'll sweep a bunch of extra oil.

 

Store it in the oilsands formations (which are mostly not deep and not carbonates) that's a whole different story for a variety of reasons.

 

Economically, the sale of the swept incremental oil from CO2 injection - would both rapidly reduce the payback period of the injection facilty, and materially raise the IRR of the project. Furthermore, getting paid for the CO2 injection (carbon tax recipient) would diversify the facilities revenue stream, add an additional asset to the SCFP (PV of the commercial CO2 sequesture capacity), and the bulk of the money would stay in the WCSB as both polluters and sequesters are in the same place. But apparently carbon tax is a terrible thing, and just a money grab?

 

Out of the box thinking, that unfortunately is having to be imposed.

On an industry that doesn't want to hear it; because it wasn't invented here? or we 'know best' and don't want to change?

 

SD

 

 

 

[bizaro86]

If the carbon tax gets high enough and politically stable enough that will happen. I was in a pitch meeting for a Co2 sequestration project once, and it got declined on the basis that the carbon regime might change, stranding the capital.

 

Co2 flooding has been used in the WCSB for a long time (weyburn) there isn't resistance to the technology. The resistance is to economics that depend on fickle politicians.

[Uccmal]

If the carbon tax gets high enough and politically stable enough that will happen. I was in a pitch meeting for a Co2 sequestration project once, and it got declined on the basis that the carbon regime might change, stranding the capital.

 

Co2 flooding has been used in the WCSB for a long time (weyburn) there isn't resistance to the technology. The resistance is to economics that depend on fickle politicians.

 

Whitecap and their predecessor having been using Co2 flooding since 2000 in Weyburn.  Personally, Aside from specialized uses I dont see Co2 sequestration as a viable means of reducing atmospheric Co2.  Every part of a sequestration would require energy which would come from where? 

[bizaro86]

The hardest part of CO2 sequestration is getting a decent CO2 stream to the wellsite. Injecting it into the ground takes a really nominal amount of energy, but separating it into a pure enough stream can be tricky, and pipelines are on the expensive side.

 

Weyburn started with CO2 from a coal gasification plant in the US, and added a second source from a coal power plant in SK a few years back.

 

If hydrogen fuel ever takes off CO2 sequestration might be viable, because the logical way of producing hydrogen fuel has a Co2 byproduct stream.

[Spekulatius]

Feels like we have a little bit of a problem with the largest oil supplier:

https://www.newyorker.com/news/news-desk/in-the-wake-of-khashoggis-disappearance-saudi-arabias-crown-prince-is-pushed-to-the-brink

[SharperDingaan]

Just to tie off the sequester discussion.

Valid point re feedstock volume and reliability.

 

The alternative to a nearby single C02 source (gasification, coal-powered power plant) is a collector network; a first mile tie-up from source to network, and a last mile tie-up from network to injection facility. Refurbish and reuse the existing collection network in spent fields, and 1) capital costs come down quite a bit, 2) proximity favours CO2 from a local basin returning to the same basin, and 3) CO2 emission has economic incentive to feed into the network versus simply vent. Collector networks become environmental ‘assets’ enabling physical tracking of CO2 processing, digital tracking via blockchain, fully transparent reporting of ‘net’ versus ‘gross’ environmental CO2 emission, and robust carbon-trading. If both source and injection facility are in the same province - it is also a much easier political ‘sell’.

 

There are really ‘two’ carbon cost recovery prices. A high cost to extract diluted carbon from the atmosphere (energy, diluted concentration, minimum scale, etc.), and a much lower cost to extract carbon from a much more concentrated and reliable source (injector facility cost structure resembling a refinery). Pay more to dispose via venting, or less to dispose via the collector facility (plus a cost of $X per km transported). Then add to it that the injection facility is both a monopoly AND a clean air refinery, and that the existing collection facilities of o/g producing provinces gives them a competitive advantage.

 

Sequestment is ‘social enterprise’ investing; and very strongly resonates with both Gen Z (born >1995) and Millennials (born 1981-1995). Furthermore, recent surveys indicate that on average ‘consumers would spend 17% more for products that came with social or environmental benefits; 58% of responders also wanted to understand the impact they’re having when they buy a product linked to a social cause' (WEconomy; Keilburger, Branson, Keilburger, p129). Us ‘older’ generations, arguing against carbon-tax because it will both disrupt and raise prices, just don’t get it. Yes, we may win battles in the near-term, but we aren’t going to stop the flow of the river.

 

Hence new attitudes, and new approaches.

 

SD

 

[bizaro86]

I think eventually the single source model becomes a multi source network as you add new nodes. The cement plant and old Nisku field build a line between themselves. Then someone builds a Co2 capture gas power plant and connects to the same line. Then a new field can jump on with a small extension and so on.

 

The first few pieces are the most expensive, but it is a natural monopoly, so whoever puts up the first tranche of capital will end up with a great midstream asset.

[Joe689]

Man, all this stuff is right over my head.   

 

This board is "value investor's haven" right?  Can't believe no one is discussing specific names in the upstream Canadian oil.    2019 cashflow vs EV is insane.  That is you believe these differentials are temporary due to refinery turn around. 

 

Finally the egress issues are getting publicity.  Just in time for the FED to pretend to care.  Maybe they do something material and take credit for "saving everything"

[Cardboard]

Hi Joe689,

 

I have brought up multiple names over the last few weeks: WCP, CPG, CQE. Did I forget TOG, CJ, PPR, CVE, ZAR debentures?

 

They are all really cheap and contrarily to in 2016 when oil got down to $26/barrel (although, WCS is doing well on that front  :o) you no longer have to take much balance sheet risk to get good deals. You can pick cheap companies with sustainable dividends and now high yields such as WCP and TOG with best in class netbacks and solid balance sheets.

 

OBE is another cheap one but, like I said, they are all really cheap so you can't own them all.

 

What has killed Canadian energy lately are the differentials which are nuts. It is being said that it is because of around 800,000 bls/d of refining capacity close to Canada being offline for maintenance until November.

 

However, refineries do that twice a year so even if there is a little more capacity than average at this time of year it seems to me that pessimism has caused most of it following the TransMountain debacle. In other words, we had the same kind of panic in 2016 for WTI when people thought we would run out of storage at Cushing. It never happened and based on Genscape saying that Canadian oil storage is at around 59% of capacity and with refineries restarting soon, it seems like a well orchestrated panic by buyers/traders of oil.

 

If you want to hear from a knowledge person on the topic, tune in to BNN tomorrow at noon as Nuttall will be on discussing energy stocks. Replays are available on their website if you can't or don't have it.

 

Cardboard

[Spekulatius]

The only thing I own in the oil patch is CVE, which I bought in the low $7 range. I like the way things are going, their refinery assets balancing out the large spreads and probably add to my position in the low $8 range. I also follow CNQ, which IMO is one of the best managed large caps, but they are not as cheap.

 

The E&P sector in Canada looks like a giant value trap. I like ENB better, because it pays better to wait, but these names above for sure trade below their NAV. I think some trouble with Saudi Arabia could be a catalyst to get this sector rerated.