The Changing Face of the Oil and Gas Industry in Canada

Relevant • Independent • Objective www.ceri.ca 1

The Changing Face of the Oil and Gas Industry in Canada

Canadian Energy Research Institute

Peter Howard, P.Eng President and CEO


August 2012 Washington DC


Agenda

Who We Are and What We Do

Let’s Talk About Canadian Oil and Oil Sands

Let’s Talk About Pipelines

But…

Let’s Talk About Western Canadian Natural Gas

Be Careful What You Wish For!


Canadian Energy Research Institute Overview

Founded in 1975, the Canadian Energy Research Institute (CERI) is an independent, non-profit research institute specializing in the analysis of energy economics and related environmental policy issues in the energy production, transportation, and consumption sectors. Our mission is to provide relevant, independent, and objective economic research in energy and related environmental issues. A central goal of CERI is to bring the insights of scientific research, economic analysis, and practical experience to the attention of government policy-makers, business sector decision-makers, the media, and citizens in Canada and abroad. Core members of the Institute include the Canadian Government, the Government of the Province of Alberta, the University of Calgary, the Canadian Association of Petroleum Producers (CAPP) and the Small Explorers and Producers Association (SEPAC). In-kind support is also provided by the Energy Resources Conservation Board (ERCB).

All of CERI’s research is publically available on our website at www.ceri.ca


2011-2012 Reports Released

Canadian Oil Sands Supply Costs and Development Projects (2011-2045) (March 2012) Canadian Energy: Pacific Access – Foreign Investment in the Oil Sands and British Columbia Shale Gas (March 2012) Canadian Energy: Pacific Access – Oil Spills and First Nations: Exploring Environmental Land Issues Surrounding the Northern Gateway Pipeline (February 2012) Canadian Energy: Pacific Access – Overview of Transportation Options (January 2012) Overview of Eastern and Atlantic Canada’s Petroleum Industry and Economic Impacts of Offshore Atlantic Projects (November 2011) Applicability Abatement Potential for the Alberta Oil Sands Industry and Carbon Capture and Storage (CCS) Applicability to Coal-fired Electricity Generation and Oil Sands (October 2011) North American Natural Gas Market Dynamics: Global LNG – A Review (June 2011) Economic Impacts of Drilling, Completing and Operation of Gas Wells in Western Canada (June 2011) Economic Impacts of Drilling, Completing and Operating Conventional Oil Wells in Western Canada (June 2011)


2012 Reports Released (July/August 2012)

Pacific Access Part I – Linking Oil Sands Supply to New and Existing Markets Pacific Access Part II – Asia-Directed Oil Pathways and Their Economic Impacts Pacific Access Part III – Economic Impacts of Exporting Horn River Natural Gas to Asia as LNG Natural Gas Liquids in North America: Overview and Outlook to 2035


2012-2013 Current Work

Potential Impact of Shale Gas Development in Quebec North American Natural Gas Demand Pathways (ICF/MARBEK, whatIf? Technologies) Energy Metrics Handbook Potential Transportation Options for Alberta Land-Locked Oil

For a list of all CERI publications, please visit our website at www.ceri.ca


CERI Conferences

CERI hosts three major conferences each year (Oil, Natural Gas and Petrochemicals) attended by over 100 delegates from across North America.

Dates and venues for our 2013 conferences can be found on our website. For further information, contact our Conference Manager, Deanne Landry, at 403-220-2395 or [email protected].

CERI 2012 Oil Conference “Achieving Super Power Status” April 23-24, 2012

CERI 2012 Petrochemical Conference “Pathways to the Future” June 3-5, 2012

CERI 2012 Natural Gas Conference “Going Global – Shifting the Focus of the Natural Gas Industry” February 27-28, 2012

mailto:[email protected]


“Western Canada’s Upstream Oil and Gas Industry”

Land Acquisition Crown Land Sales

Evaluation

Construction

Operation and Maintenance

Production

Wages

Royalties

Western Canada’s Oil and Gas Industry

Land Acquisition Crown Land Sales

Conventional Drilling

Completion and Tie in

Operation and Maintenance

Production

Wages

Royalties

2009 Expenditures: $41.4 billion 2009 Expenditures: $25.1 billion

Oil and Gas Drilling Oil Sands Developments 9


“Let’s Talk About Canadian Oil and Oil Sands”


2011 Facts about Canadian Crude

Production: • Western Canada (AB,BC,SK,NWT) Conventional LIGHT Crude 561,929 bbls/day • Western Canada (AB,BC,SK,NWT) Upgraded Bitumen 846,112 bbls/day • Western Canada (AB,BC,SK,NWT) Condensate (C5+) 128,498 bbls/day • Western Canada (AB,BC,SK,NWT) Conventional HEAVY Crude 421,618 bbls/day • Western Canada (AB,BC,SK,NWT) Non Upgraded Bitumen 758,919 bbls/day • Eastern Canada (NF/LAB,ON) Conventional LIGHT Crude 271,778 bbls/day • Total 2011 Production of Crude Oil and Equivalent 2,988,854 bbls/day

Exports: • PADD I (74% Light, 26% Heavy) 171,182 bbls/day • PADD II (21% Light, 79% Heavy) 1,439,447 bbls/day • PADD III (12% Light, 78% Heavy) 111,358 bbls/day • PADD IV (17% Light, 83% Heavy) 213,709 bbls/day • PADD V (61% Light, 39% Heavy) 167,295 bbls/day • Non-US (67% Light, 33% Heavy) 35,261 bbls/day • Total US (28% Light, 82% Heavy) 2,138,260 bbls/day

Imports: % of Capacity

• Atlantic Canada Conventional Crude 333,990 bbls/day (80%) • Quebec Conventional Crude 298,775 bbls/day (84%) • Ontario Conventional Crude 52,836 bbls/day (15%) • Total Canadian Imports 685,560 bbls/day


$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

$1.20

$1.40

$1.60

$1.80

$2.00

$2.20

$2.40

$2.60

$2.80

$3.00

$3.20

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Cdn/US Multiplier

Normalized

WCSB Conventional Oil Production Forecast Realistic Scenario (2010-2035)

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

Pro

du

ctio

n (

bb

ls/d

ay)

British Columbia Existing Wells British Columbia New Wells Alberta Existing Wells

Alberta New Wells Saskatchewan Existing Wells Saskatchewan New Wells

Manitoba Production NWT Production

+ 150,000 bbls/day


Western Canadian Oil Sands Potential

0

500

1,000

1,500

2,000

2,500

3,000

3,500

2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043 2045

('000 bpd)

Total In Situ Bitumen Volumes Total Mined Bitumen Volumes

SAGD and CSS Projects Potential 3.3 mbpd

Mining Projects Potential 2.1 mbpd


Western Canadian Oil Sands Potential

2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029 2031 2033 2035 2037 2039 2041 2043 2045

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

5,500

6,000

('000 b/d)

Announced Awaiting Approval

Approved Suspended

Under Construction Onstream


Options for Canadian Crude By Pipeline

Source: Canadian Association of Petroleum Producers, Crude Oil Forecast, Markets & Pipelines, June 2011

Churchill


Economic Impacts of Alberta’s Oil Sands “No Expansion” Scenario

0

1,000

2,000

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35

'000 bbl/d

AB Conventional Prodn SK Conventional BC Conventional

MB Conventional NWT Conventional Diluent for Primary/Eor

Existing&Under Construction US Bakken prodn Existing Export Operational Capacity

Note(s): 1) Operational Capacity is 95% of total design capacity. 2) Conventional crude volumes are net production volumes available for export (i.e., net of domestic demand). 3) Oil Sands volumes comprise of net bitumen SCO available for export and diluent volumes required to move bitumen as per pipeline specifications. February 2, 2012

Mainline Expansion (2014) Enbridge Line 61 +160,000 bpd Enbridge Line 5 +50,000 bpd Rail volumes (+50,000 to +200,000 bpd)



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50

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35

Induced

Indirect

Direct

0

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50

60

70

80

Canada Direct employment 90,000 (2011)

growing to 125,000 jobs (2022)

Total Direct, Indirect, Induced employment 270,000 (2011) to 370,000 (2022)

United States Total Indirect and Induced

employment 54,000 (2011) growing to 71,000 jobs (2022)

Source: CERI, Pacific Access: Part I Linking Oil Sands Supply to New and Existing Markets


Thousand

Person Years

GDP Compensation of

Employees

Employment

PADD I 38,742 19,604 447

PADD II 50,550 24,983 580

PADD III 19,844 7,814 195

PADD IV 8,028 3,740 88

PADD V 24,474 11,412 258

Total US 141,638 67,554 1,568

2011-2035$CAD Million

Alberta $1,440 Billion

0

200

400

600

800

1000

1200

1400

1600

GDP

$C

DN

Bill

ion

s

Rest of Canada $80.9 Billion

Ontario 55% British

Columbia 24%

Quebec 12%

Saskatchewan

4%

Manitoba 3%

Rest of Canada

2%

Total GDP Increase as a result of Oil Sands Investment & Operations 2011-2035 1. Ontario $44.30 billion 4. Saskatchewan $3.05 billion 2. BC $19.45 billion 5. Manitoba $2.93 billion 3. Quebec $9.59 billion 6. ROC $1.56 billion


Canadian GDP Impacts

United States Impacts by PADD

Source: CERI, Pacific Access: Part I Linking Oil Sands Supply to New and Existing Markets


Thousand

Person Years

GDP Compensation of

Employees

Employment

Alabama 1,291 647 19

Alaska 521 113 3

Arizona 1,729 849 22

Arkansas 754 355 11

California 15,091 7,012 151

Colorado 3,305 1,563 35

Connecticut 1,703 839 15

Delaware 474 176 4

District of Columbia 475 292 4

Florida 5,139 2,498 69

Georgia 2,827 1,471 38

Hawaii 395 181 5

Idaho 378 193 6

Illinois 17,303 8,442 173

Indiana 2,446 1,216 30

Iowa 1,072 471 14

Kansas 2,008 977 24

Kentucky 1,216 599 18

Louisiana 3,493 1,115 27

Maine 340 178 6

Maryland 1,740 895 21

Massachusetts 2,567 1,463 28

Michigan 4,468 2,371 54

Minnesota 2,046 1,063 26

Mississippi 761 367 12

Missouri 1,728 918 25

Montana 3,176 1,504 32

Nebraska 593 280 9

Nevada 903 433 12

New Hampshire 430 238 6

New Jersey 3,545 1,801 35

New Mexico 610 214 7

New York 7,713 3,902 71

North Carolina 3,121 1,389 37

North Dakota 209 89 3

Ohio 6,662 3,358 77

Oklahoma 1,368 556 16

Oregon 1,382 650 18

Pennsylvania 4,058 2,097 50

Rhode Island 337 165 4

South Carolina 1,120 602 18

South Dakota 252 98 4

Tennessee 1,870 957 27

Texas 12,935 5,116 119

Utah 787 382 11

Vermont 173 90 3

Virginia 2,577 1,313 31

Washington 4,451 2,174 48

West Virginia 401 195 6

Wisconsin 7,308 3,590 79

Wyoming 382 98 3

Total US 141,638 67,554 1,568

$CAD Million


United States Impacts by State

Source: CERI, Pacific Access: Part I Linking Oil Sands Supply to New and Existing Markets (Appendix A)


“Let’s Talk About Pipelines”


0

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'000 bbl/d

AB Conventional Prodn SK Conventional BC Conventional

MB Conventional NWT Conventional Diluent for Primary/Eor

Existing&Under Construction US Bakken prodn Approved

Approved-on Hold Awaiting Approval Announced

KXL Addition Expansion of Enbridge mainline Existing Export Operational Capacity

Note(s): 1)Operational Capacity is 95% of total design capacity. 2) Conventional crude volumes are net production volumes available for export (i.e., net of domestic demand). 3) Oil Sands volumes comprise of net bitumen and SCO available for export and diluent volumes req'ed to move bitumen as per pipeline specifications. August 23, 2012

Keystone XL (2015)

Mainline Expansion (2014)

Alberta Oil Sands Projects Coupled with WCSB Conventional Oil Inclusion of the Keystone XL Pipeline


0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

20

07

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08

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09

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'000 bbl/d

AB Conventional Prodn SK Conventional BC ConventionalMB Conventional NWT Conventional Diluent for Primary/EorExisting&Under Construction US Bakken prodn ApprovedApproved-on Hold Awaiting Approval AnnouncedTMX Expansion KXL Addition Expansion of Enbridge mainlineExisting Export Operational Capacity


TMX (2017)

Keystone XL (2015)


Alberta Oil Sands Projects Coupled with WCSB Conventional Oil Inclusion of TMX Expansion


0

1,000

2,000

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8,000

20

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'000 bbl/d

AB Conventional Prodn SK Conventional BC ConventionalMB Conventional NWT Conventional Diluent for Primary/EorExisting&Under Construction US Bakken prodn ApprovedApproved-on Hold Awaiting Approval AnnouncedNorthern Gateway Addition TMX Expansion KXL AdditionExpansion of Enbridge mainline Existing Export Operational Capacity


TMX (2017)

Keystone XL (2015)

Northern Gateway (2018)


Alberta Oil Sands Projects Coupled with WCSB Conventional Oil Inclusion of Northern Gateway


0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

20

07

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08

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35

'000 bbl/d

AB Conventional Prodn SK Conventional BC ConventionalMB Conventional NWT Conventional Diluent for Primary/EorExisting&Under Construction US Bakken prodn ApprovedApproved-on Hold Awaiting Approval AnnouncedNorthern Gateway Addition TMX Expansion KXL AdditionExpansion of Enbridge mainline Existing Export Operational Capacity


TMX (2017)

Keystone XL (2015)

Northern Gateway (2018) Looping/Expanding Existing Pipelines


Alberta Oil Sands Projects Coupled with WCSB Conventional Oil Full Potential


“BUT”


1. Canadian exports currently feed one market (flat demand and increasing domestic supply).

2. Western Canadian oil/oil sands are land-locked and need transportation options in order to grow either new barrels to the US or Asia.

3. Alberta needs oil hydrocarbon growth in the face of a tanking gas market (Growth = GDP, Employment, Taxes, Royalties).

4. The Cushing Oklahoma bottleneck is affecting PADD II and Canadian market prices “negatively”.

5. Tightening Canadian pipeline capacity will Affect Edmonton/Hardisty basis differential ($$$ left on the table) Potentially slow development of the Oil Sands Potentially slow development of Conventional Oil

6. Oil on Oil Competition for pipeline space and access to refineries Competition with Alberta/Saskatchewan conventional oil developments Competition with North Dakota Bakken oil developments Competition with US Shales (Niobrara, Eagle Ford, etc.)

What are the Problems for WCSB OIL?


Competition from the US Bakken Oil Production Forecast and Transportation


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WTI - Brent Differential ($/b)

Europe Brent Spot Price FOB ($/b)

West Texas Intermediate (WTI) @ Cushing ($/b)

Differential Problem WTI-Brent


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$2.80

$3.00

$3.20

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Cdn/US Multiplier

Normalized

Problem WTI-Brent Differential

Q3 2011

• WTI discount averaged $23 to Brent • Canadian Crude (Conventional, SCO, Bitumen) Exports

• 1,477,000 bbls/day to PADD II • 105,000 bbls/day to PADD III • 216,000 bbls/day to PADD IV • 157,000 bbls/day to PADD V

Simple Math: 2,152,000 bbls/day times $15/bbl = $32 million per day (discounted Value)

2012-2013 “The Pipeline Solution” • Enterprise/ETP (Cushing to Houston) 400,000 b/d Q4 2012 • Enbridge/Wrangler (Cushing to Houston) (light crude) 2013 • Enbridge Monarch (Cushing to Houston) 350,000 b/d Q4 2013 • Houston to El Paso reversal (bypass Cushing) 200,000 b/d Q2 2013 • TCPL Keystone Market Link (Cushing to Houston) 150,000 b/d Q2 2013


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$2.40

$2.60

$2.80

$3.00

$3.20

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Cdn/US Multiplier

Normalized

Future Problem WTI-Brent Differential

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

2011 2012 2013 2014 2015 2016

Cap

acit

y B

PD

Year

Pipeline Capacity Into and Out of Cushing

Total Flow Into Cushing

Total Flow Out of Cushing

RISK


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$3.20

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Cdn/US Multiplier

Normalized

Western Canada WTI-WCS Differential

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WTI - WCS Differential ($/b)

West Texas Intermediate (WTI) @ Cushing ($/b)

Western Canadian Select (WCS) @ Hardisty ($/b)

Average Light - Heavy Differential ($/b)

2005 - 2006 Median Differential ($/b)



2011 Median Differential ($/b)

Linear (Average Light - Heavy Differential ($/b))

Risk of widening differential if new pipelines are delayed

Keystone Base and Alberta Clipper new capacity

Production ramps up


“Canada has Energy”

“North South East or West”

“If the Market Wants the Energy, Canada Needs the Pipes”


“Let’s Talk About Western Canadian Natural Gas”


United States Gas Pipeline Import/Export Forecast CERI “Realistic” Case (Feb. 2012)

-12,000

-10,000

-8,000

-6,000

-4,000

-2,000

0

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4,000

6,000

8,000

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-10,000

-8,000

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-2,000

0

2,000

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6,000

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10,000

12,000

2001

2002

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2007

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2011

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Ne

t Im

po

rt V

olu

me

s (M

Mcf

/day

)

Exp

ort

s

(

MM

cf/d

ay)

Im

po

rts

Canadian Exports to US Canadian Imports From US Net Exports

Too much GAS not enough DEMAND

“Where is the Problem?”

Net Canadian Exports - 5 BCF/d


0 2,000 4,000 6,000 8,000

10,000 12,000 14,000 16,000 18,000 20,000

2005 2010 2015 2020 2025

WCSB Marketable Gas Supply -1,000

0

1,000

2,000

3,000

4,000

5,000

6,000

2005 2010 2015 2020 2025

TCPL Northern Pipeline

0

1,000

2,000

3,000

4,000

2005 2010 2015 2020 2025

TCPL Sarnia Import Volumes

-2,000

-1,000

0

1,000

2,000

2005 2010 2015 2020 2025

TCPL Niagara Net Flows

-14,000 -12,000 -10,000

-8,000 -6,000 -4,000 -2,000

0

2005 2010 2015 2020 2025

WCSB Export Flows Ontario / Quebec

Ontario/Quebec Import/Export Forecast CERI “Realistic” Case

Mid Continent Gas Rockies Gas Connect to Sarnia

Marcellus Gas into Niagara Marcellus Gas connect to Iroquois to New York

OIL Potential for Stranded Gas Pipeline Assets Conversion to Oil Service


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$2.80

$3.00

$3.20

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Cdn/US Multiplier

Normalized

AECO C Gas Price Forecast

Average WCSB Well Supply Cost Range ($3-$5.75/mcf)

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$/MMBtu AECO C Natural Gas Forecasts

AECO C(real2010$/MMbtu) EIA AEO 2012

CERI Speculative

External Consultant

2008 Gas Wells Completed

2010 Gas Directed Licences

2011 Gas Directed Licences

Montney (34) Falher (17) Duvernay (11)

Cardium (24) Bluesky (17) Notikewin (10)

Glaucontic (49) Viking (16) Lower Mannville (10)

2012 Gas Directed Licences (Jan.-June)


$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

$1.20

$1.40

$1.60

$1.80

$2.00

$2.20

$2.40

$2.60

$2.80

$3.00

$3.20

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Cdn/US Multiplier

Normalized

Western Canada What Makes the Gas World Work BC Montney Supply Cost example

$3.8 $3.8 $3.9 $3.4

$3.0 $2.5

$2.1 $1.7

$1.3 $1.0

$0.7 $0.4 $0.2

$0.8 $-

$0.7 $1.3 $2.0 $2.6 $3.2 $3.8 $4.3 $4.9 $5.4 $5.8 $6.2 $6.5

$4.5

$3.8

$4.5 $4.7

$4.9 $5.1

$5.3 $5.5

$5.7 $5.8

$6.0 $6.2 $6.4 $6.5

$-

$0.5

$1.0

$1.5

$2.0

$2.5

$3.0

$3.5

$4.0

$4.5

$5.0

$5.5

$6.0

$6.5

$7.0

$/

mcf

Liquids Portion Gas Portion Revenue March 2012 Intra AB NIT Price ($/mcf)

With a Gas Price of $1.87/mcf a well needs a minimum of 60 bbls/mmcf (Liquids) to be economic


$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

$1.20

$1.40

$1.60

$1.80

$2.00

$2.20

$2.40

$2.60

$2.80

$3.00

$3.20

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Cdn/US Multiplier

Normalized

Western Canada Gas Well Development Forecast Realistic Scenario: Future Forecast

Summer 2012: Gas Prices are forecasted to drop below $2.00/mcf (Henry Hub)

0

2000

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26000

20

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Wel

l Co

un

t

AB Conventional Vertical Wells BC Conventional Vertical WellsSK Conventional Vertical Wells AB Conventional Horizontal WellsBC Conventional Horizontal Wells SK Conventional Horizontal WellsAB D&A Wells BC D&A WellsSK D&A Wells BC Horn RiverBC Montney AB CBM

Forecast Price Recovery ($2 to $6/mcf) Gas Directed Activity Focused on Liquids Rich Plays

Price Destruction ($14 to $3/mcf)

$1.87/mcf (March 2012)

XXXX


Horn River to Kitimat LNG Potential (2013-2035)

103

59

50

175

107

94

86 82

78 76 73 71 70 68 67 66 65 64 63 62 61

0 0 0

20

40

0.0

100.0

200.0

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Pro

du

ctio

n V

oilu

me

(MM

cf/d

ay)

Wel

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un

t

New Wells Pre Build Production Volume

Over the next 25 years: • $27 billion on upstream Investment • $15 billion in upstream operating cost • $ 5 billion in terminal investment • $ 3 billion in terminal operations • $ 2 billion in Pacific Trail pipeline • $ ? Billion in Spectra pipeline expansions


“The Shale Gas Revolution!”

“The Conventional Oil Rebirth!”

“The Shale Oil Tsunami!”

“The Great NGL Surge”*

*Bentek Energy LLC

Be Careful What You Wish For!



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The Changing Face of the Oil and Gas Industry in Canada

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