Winners, Losers and Unlikely Survivors in the New Energy Order | Alberta Oil and Gas Industry |
The past two years have witnessed a sea change in the oil and gas business. Many players that rode the boom are now hurting badly while others continue to thrive. Here we take a 360-degree snapshot of who’s up, who’s down and who’s reinventing themselves as a result
by Michael McCullough, Scott Messenger and Stephanie Sparks
Shale Gas Producers
The investment wave over shale gas has not meant economic gain in Alberta
The stock prices of virtually every player in the shale gas business took a jump when Exxon Mobil Corp. agreed to pay US$41 billion to buy Texas-based shale player XTO Energy Inc. in December. The scene was repeated a few weeks later when Total SA bought Chesapeake Energy Corp. of Oklahoma City. The beneficiaries included Alberta-based companies active in the United States and British Columbia including EnCana Corp., Talisman Energy Inc., Canadian Natural Resources Ltd., Progress Energy Resources Corp. and Arc Energy Trust. Even juniors like Questerre Energy Corp., which is pioneering the nascent Utica shale play in Quebec, are attracting money they wouldn’t have a few years ago. Alberta’s new royalty regime for conventional oil and gas announced last month lacks any specific policy for shale gas, but that may come later in a report on regulatory change for unconventional gas.
Old Plays
Last fall Calgary’s towers were abuzz over a new oil play. Well, not really new. The flurry of land purchases and new drilling took place in a familiar area. The Pembina oilfield, covering a 2,300-square-kilometre area west and southwest of Edmonton and incorporating the towns of Edson and Drayton Valley, is the largest and most prolific in Canadian history. Imperial Oil Ltd. first discovered oil here in 1953 and the formation has been producing conventionally all this time, though less than 20% of its bounty has been recovered. The Pembina still contains an estimated 7.8 billion barrels of oil in place.
By 2009 the secret was out about the success juniors such as Berens Energy Ltd., Nexstar Energy Ltd. and TriAxon Resources Ltd. were having drilling horizontal wells into the formation (mostly around its edges, previously not considered economic) and fracturing the rock with high-pressure injections of sand or water in localized “stages.”
The story mirrors that of Saskatchewan’s Bakken play about two years earlier. The Bakken had been known to exist for a long time – it was first exploited in 1957 in North Dakota – but it simply didn’t make sense to drill conventionally through its seemingly impenetrable caprock. That is, until horizontal drilling came along, making it possible to do with one hole what used to be possible only with 10. The light oil of the Bakken has made the area’s dominant players, Crescent Point Energy Corp. and PetroBakken Energy Ltd., the darlings of the TSX energy sector the past two years. As if to underline the analogy between the Bakken and the Pembina, last winter Crescent Point bought TriAxon, followed by PetroBakken’s purchases of Berens and Result Energy Inc., which had snapped up Nexstar just weeks before.
Another old play that’s been revived lately is in the area of the gas fields near the east-central Alberta town of Viking, cementing the notion that, even in a supposedly declining basin like Western Canada’s, what’s old can be new again, thanks to technology and new understanding of how to extract previously intractable hydrocarbons from the rocks. Wildstream Exploration Inc., Penn West Energy Trust, Baytex Energy Trust and Crescent Point Energy Corp. are among players in the area. Geologists first described the Viking formation way back in 1919.
Machine Shops
It’s been a bad 12 months in manufacturing enclaves such as Nisku. Companies that make drilling and other equipment have found themselves at the end of their rope. Garneau Inc. wound up operations; National Oilwell Varco closed its Edmonton shop; Precismeca Ltd. will move its conveyor factory to Ontario this summer. When times were good, everyone was busy. But now, with demand from producers spotty, the work is going only to the most cost-effective companies and locations.
The picture isn’t so grim, though, for other value-added suppliers, especially to the oilsands, whose services are not so easily outsourced out of province. In December, Edmonton-based PTI Group won a $460-million contract to provide accommodations for workers on Imperial Oil’s Kearl project. Then in January Air North landed the project’s lucrative air transportation deal. The restart of Suncor’s Firebag 3 in situ project resulted in the largest contract ever for construction company Aecon Group as well as new jobs for up to 385 workers at Flint Energy Services’ modular fabrication plant in Sherwood Park.
High-Cost Gas Production
In retrospect, the high natural gas prices that enabled Alberta to gain a one-sixth share of the American market last decade (and in large part fuelled the province’s boom) were an aberration. The commercialization of techniques to extract gas from shale, much of it right next door to major U.S. markets and able to increase volumes on short notice, has put a ceiling on gas prices around the $7 to $8 per million British thermal units threshold at which much conventional production in this province breaks even. The same arithmetic has struck unconventional sources such as coalbed methane in the Horseshoe Canyon belt of central Alberta and shallow gas activity in the foothills.
“Five hundred to 2,500-metre-deep conventional gas is tough to play at $5 a million cubic feet,” says Hugh Mosher of AJM Petroleum Consultants. “If you’re a conventional gas player that can’t attract capital, you’re hooped.” Such companies typically have two options: acquisition by a deeper-pocketed rival or recapitalization, which lowers the cost of capital, usually accompanied by a new management team and a new strategic focus.
Such a transformation recently took place at Calgary-based junior Triton Energy Corp. Triton gutted the team headed by former CEO Michael Zuber and replaced it with a group of veterans led by Ernie Sapieha that had itself been shown the door at ailing mid-tier gas producer Compton Petroleum Corp. in January of 2009. It also acquired Sapieha’s privately held Waldron Energy with a plan to refocus on tight gas in central Alberta.
Ultimately, such firms and their suppliers will also have to trim down operational spending. A helping hand may also come with the province’s new royalty regime, announced last month. The Alberta government is banking that its strategy of permanent drilling incentives and lower royalties for conventional oil and gas will spur a resumption of gas activity as well as new job creation.
