REDRAWING THE ENERGY MAP
25 Nov 2014
REDRAWING THE ENERGY MAP
Small producers and towns could feel the pinch as fracking boom puts pressure on oil prices, writes
The boom in fracture stimulation isn’t merely revolutionizing the oil and gas world – from horizontal drilling to declining commodity prices – it’s also transforming small towns like Kindersley, Sask. A growing population, subdivisions under construction and rising new hotels are all signs of the good times in the oilfield.
“The fracking story is really a small town story,” said one senior executive at a leading oil producer in Western Canada. “It’s revitalized legacy oilfields … it’s like a new lease on life.”
Kindersley, for example, has embraced the oil production renaissance and is selling its treated municipal wastewater to oilfield service companies to use in fracking or other industrial uses at well sites.
“There’s a realization there’s certain realities at play here,” said John Enns-Wind, mayor of the century-old town that is now home to more than 5,000 people in west central Saskatchewan’s resource rich farm country.
The oil and gas boom, along with record crops in recent years, means Saskatchewan is experiencing record growth, one of the highest employment rates in Canada and a population that has risen more than 10 per cent in seven years to a record of almost 1.13 million.
They’ve been pumping oil and gas around Kindersley for 50 years and the fracking boom – like all the others – comes with challenges.
The fact a major oil producer fears being singled out by environmental activists as a “fracking” company speaks to how polarized the national discussion about fracking, and oil and gas production overall, has become.
The “dirty oil” campaign against oilsands development has unsettled the industry.
However, a new — much more price-sensitive — concern is emerging as an immediate threat to the fracking boom that’s redrawn the North American energy map
The big concern now is OPEC heavyweight Saudi Arabia pointing to the fracking boom as the reason for the sharp drop in oil prices.
The most-anticipated meeting of the Organization of Petroleum Exporting Countries in years takes place Thursday in Vienna as their ministers attempt to address an almost 30 per cent decline in benchmark crude prices since June.
Saudi Arabia has reportedly — speculation and leaked stories abound before a major OPEC meeting — blamed the slide in West Texas Intermediate crude to below $75 US on North America pumping 1.4 million barrels a day more oil, even as growth in global demand was waning.
Only 170,000 barrels a day of that additional crude was produced from oilsands, the remainder came from fracking.
Fracking has helped the U.S. overtake Saudi Arabia as the world’s largest producer of liquid petroleum — crude and liquids such as propane and enthane — at about 12 million barrels a day.
This week’s OPEC meeting should determine if the Saudis are willing to maintain production and accept lower prices to force highcost producers from the market.
“The Saudis are freaking out because they’ve lost a lot of market share so they’re now discounting to recapture it in the U.S.,” said Glen Hodgson, chief economist at the Conference Board of Canada. “It’s almost a game of chicken now between the Saudis and frackers in North Dakota and Texas.”
The playing surface extends into the tight oil plays across Alberta Saskatchewan and Manitoba.
“It’s been a four- to five-year boom in town based on fracking,” Kindersley’s Enns-Wind said. “We live in a community where everybody’s job, in one way or another, is connected to the oil industry… the phrase (people) are using around here these days is ‘cautious optimism.’”
The oil price slide is more likely to impact towns like Kindersley than mega-project developments in the oilsands, where investments are often judged over decades, not the next quarterly results.
Even with a pressing need for permanent housing in Kindersley, Enns-Wind said the municipal growth plan is focused against overbuilding in a boom.
Dozens of communities in Saskatchewan have placed moratoriums on publicly funded infrastructure to facilitate economic growth as they address strains on the system on a smaller scale than welldocumented challenges in places like Calgary or Fort McMurray.
About 60 per cent of wells drilled this year in Saskatchewan, 70 per cent in Alberta and 90 per cent in B.C., will be fractured, says the Canadian Association of Petroleum Producers.
The earlier shale gas boom from fracking boosted production so much that it drove prices too low for years to justify spending on gas drilling. About 90 per cent of the wells to be drilled in Canada in 2015 will target oil pools.
Lower cash flows will cut into oil drilling activity going forward.
“It’s not just $30 in profit that’s going away, it’s the investment in the next well that is going away,” said Ali Daneshy, principal at Daneshy Consultants International in Houston, which advises on hydraulic fracturing.
The Canadian Association of Oilwell Drillers and the Petroleum Services Association of Canada have forecast the oil price slide means drilling is likely to decline about 10 per cent to close to 10,000 wells in 2015. With longer horizontal legs, PSAC said total metres drilled will actually increase year over year.
Tight oil production in Canada has doubled since 2011, according to the National Energy Board, surpassing 400,000 barrels a day in 2014. Increased production from the Bakken, Cardium, Viking and Montney formations has reversed a decade-long slide in conventional oil production in Western Canada.
The basic elements of hydraulic fracturing date to the 1950s in Western Canada, but the multistage process applied now is more powerful, far reaching and typically uses large amounts of water and sand.
Raging River Exploration produces all of its 10,000-barrelsper-day of oil in the Viking formation and is among the companies that use Kindersley as a regional operating base. CEO Neil Roszell doesn’t make much of the suggestion the Saudis are focused on farflung junior producers like Raging River.
“I think we’re completely irrelevant,” he said “They really look at the big picture.”
Roszell is feeling a definite sense of caution for 2015 in an industry that last dealt with a price shock in 2008, just as fracking was emerging as a game-changer in the oilpatch. He said analysts want producers benchmarking their spending plans at $75, $70 and $65 a barrel.
Even with the fall in oil prices, he expects Canada’s short winter drilling season will ensure activity levels are high through the first quarter.
“Guys are looking at it and saying, ‘We’ll adjust budgets and activity in the back half of 2015’ and that’s when the pain of a lower price tricking through to the economy really would get felt,” he said.
Roszell said companies with strong balance sheets can still grow until oil prices “fix themselves” over 12 to 18 months. He also understands the “cautious optimism” in Kindersley, which have been through the ups and downs of oil prices before.
“They’ve seen booms come and go,” he said.
Enns-Wind embraces the town’s revitalization due to fracking but will admit he’d be content with a pace of growth that would ensure temporary housing wasn’t an issue or Tim Hortons or McDonald’s would have enough staff available that they could go back to being open 24 hours.
“It might be nice to take our foot off the gas a little bit and catch up,” he said.