General Electric Co. enters the oil sands
Industrial and infrastructure giant opens Calgary innovation shop, eyes in situ extraction
On June 4, analysts at CIBC World Markets Inc. published a research note titled “Welcome to the House of Pain: Benchmark Prices Collapse … & CDN Discounts Widen.”
In it, they highlighted the “relentless pressure” oil prices were under. At the time, Western Canada Select, the heavy oil marker in Alberta, fetched just US$64, a 23 per cent discount to benchmark West Texas intermediate, which had slid 10 per cent in the course of a month.
Two days later, General Electric Co., the maker of jet engines and power turbines, strode through the door, vowing to help the oil sands run “better”, “faster” and “cheaper”, as company vice-chairman John Rice put it in prepared remarks.
He was defining innovation at a press conference held in conjunction with the opening of GE’s $7 million innovation center 34 floors above downtown Calgary in a new high-rise tower.
The center is part of a $70 million investment the Fairfield, Connecticut-based company is pouring into Alberta just as the province’s oil sands enter a period of constrained commodity prices. GE is counting on new business in the province to buoy revenues as Canada embarks on an industrial expansion estimated to be worth $500 billion.
“The things that this province is working on matter to us,” Rice said at the Calgary opening, addressing a group that included Alberta energy minister Ken Hughes and Stephen Kahn, minister of enterprise and advanced education.
GE does not break out country-specific earnings, but revenue from its industrial business grew 14 per cent through the first quarter of 2012. Infrastructure orders jumped 20 per cent from the year-prior period, to $23.1 billion, according to a statement.
The total includes a $1-billion order for equipment and services from Total SA for its Ichthys liquefied natural gas (LNG) project in northwest Australia. In an interview, Rice says GE will position itself similarly in Canada, “right in the middle” of the budding LNG industry taking shape on the country’s West Coast.
Mining is another focus. “Eighteen per cent of the world’s mining capex is going to be spent in this country,” he says. Many projects are located far from grid tie-ins, providing a potentially lucrative market for sales of gas turbines and electrical distribution equipment.
The oil sands provided a “big” incentive to open the Calgary innovation shop, the first of its kind outside China, Rice says. GE pledged to build the center as part of an agreement signed with the Alberta government in 2010. The three-floor facility is designed as a sort of diagnostic lab (minus the white coats) where old problems – think corrosion, water use and energy efficiency – can be matched with new solutions.
The grand opening comes as production from in situ, underground extraction schemes is forecast to eclipse strip mining as the No. 1 method for coaxing thick bitumen out of the ground. GE is positioning itself to take advantage of that trend.
Last year, for instance, the company bought the well support division from the Wood Group for $2.8 billion. The acquisition marked GE’s first foray into the business of artificial lift. It now markets electric submersible pumps – needed to make thinned bitumen flow to the surface – to operators of steam-assisted, gravity drainage (SAGD) projects.
GE also owns 100 per cent of the market for thermal evaporators, with 15 or 16 units installed and another seven or eight orders on the books, says James Cleland, general manager of the company’s heavy oil solutions team. The units, which retail for between $10 million and $50 million each depending on specifications, can increase recycle rates of so-called produced water at SAGD projects to 97 per cent, he says.
GE’s focus on the oil sands comes as the sector grapples with a number of challenges, from the rise of tight oil in the United States, to pipeline constraints and increased scrutiny over the environmental toll of extracting the sticky goo from Alberta’s hinterland.
Some producers have also been hit with execution issues. In May, a fire knocked out a 100,000-barrel-per-day coking unit at Syncrude Canada Ltd.’s upgrader 40 kilometers north of Fort McMurray. Canadian Natural Resources Ltd. has also struggled with operational hiccups.
Elyse Allan, president and chief executive officer of GE Canada, acknowledges the oil sands are a tough place to do business. “We forget how new of an industry it still is, and how new a technology, for example, SAGD is,” she says in an interview. “We expect that there will be challenges on execution there, because they’re still figuring a lot of stuff out.”
That’s where the Calgary innovation center can play a role, Allan suggests, by diagnosing minor glitches on paper before they become major problems in the field. “Is it outages, or is it optimization of a particular area of the process?” she asked.
The answer might depend on perspective. Slightly more than one-half of all oil sands production still comes from open-pit mines modeled on the original Great Canadian Oil Sands venture built in 1967 by industrialist J. Howard Pew.
It remains to be seen whether a company founded by Thomas Edison can help move the needle on that record. “Not everything he did worked,” Rice says of the inventor. “He threw away a lot of light bulbs before he got one that worked.”