Energy Ink

The black swan in shale gas, cold water for upgrading

Expect the unexpected in North America's oil and gas renaissance

Guest Post

November 25, 2011

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Trucks offloading ore at Suncor’s oil sands mine (Photo: Suncor Energy Inc.)

Processing posturing: Is bitumen upgrading in Alberta really back on the table? Stephen Ewart at the Calgary Herald pours cold water on the notion that Alberta policy-makers are engaged in “heated” discussions about one of the oldest questions in Canadian economic policy. Do we export too much of our raw materials? Many would say that we do. But it’s doubtful that companies are seriously weighing the merits of building additional upgrading capacity in the province. The proof, Ewart writes, lies in an announcement made this week by Syncrude Canada to put off building a 200,000-barrel-per-day expansion at its Aurora property until after 2020. It’s worth keeping in mind, too, that neither Suncor Energy Inc. nor its partner, Total E&P Canada Ltd., have sanctioned their Voyageur project. And no less an agency than the National Energy Board (NEB) expects the share of total bitumen production upgraded in Canada to decline from 49 per cent in 2010 to 37 per cent in 2035. (Alberta’s Energy Resources Conservation Board puts the percentage at 47 per cent by 2020).

It’s not clear, either, that upgrading is the next-best available option following suspension of TransCanada Corp.’s Keystone XL pipe to the Texas Gulf Coast. “I think the two decisions are independent,” says IHS CERA consultant Jackie Forrest. “You put a pipeline in because you’re growing your production. Whether it’s [synthetic crude oil] or Dilbit, you need to get it to market. That’s one decision. The second decision is do you want to upgrade it at market or here in Alberta, and that’s really driven by economics.”

Short-circuits and black swans:renaissance in North American onshore oil production is said to be afoot. Ground zero for the revival is North Dakota, where drillers are busy blasting water-, sand- and chemical-laced cocktails into the prolific Williston basin at the heart of the sprawling Bakken formation. The surge in production – currently averaging around 400,000 barrels per day – underpins a belief that America, with help from Brazil and Canada, is on its way to becoming energy self-sufficient. Shale gas also supports this view.

Yet executives must invariably ask themselves: Is it all too good to be true? The answer is maybe. Not because shale gas or its oil equivalent haven’t had real impacts on global energy outlooks, but simply for the reason that North Americans are highly sensitive to industrial development, especially the kind that requires, as the International Energy Agency has put it, “constant drilling activity” to maintain production. Shale gas in particular has been a divisive force in communities like Amwell Township in southwestern Pennsylvania, Eliza Griswold writes at the New York Times magazine. An undercurrent of doubt was likewise present at a conference hosted by the Canadian Association of Petroleum Producers in Calgary Nov. 15. In new markets unaccustomed to fossil fuel development especially, “The notion that you need shale because you need the economic upside is a little more vague and uncertain for people,” Bruce Anderson, senior vice-president with NATIONAL Public Relations Inc., told a room full of shale gas advocates. “The notion that it’s needed as an energy source isn’t as firmly rooted in those markets.”

Could the skittishness short-circuit growth projections? The NEB piled on the doubt this week, noting in its latest market assessment that concern – legitimate or perceived – about the environmental impact of large-scale hydraulic fracturing operations could “affect the pace and level of production” of shale gas (one assumes the same applies to shale oil). The potential fallout underscores an NEB prediction that Arctic gas will flow by 2020; and that gradually rising prices aren’t the only factor that could revive interest in building the long-delayed Mackenzie Valley Pipeline. Nor should the role OPEC countries play in meeting American oil demand be discounted, notwithstanding the recent assertion by Saudi Aramco’s Khalid A. Al-Falih that shale oil has helped turn the “terms of the global energy dialogue upside down.”

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