JUNIORS REPORT

The Business of Energy

CARTEL
A handful of homegrown juniors and mid-caps unearth black gold in

Canadian
Colombia
PAGE 28

WINNERS & LOSERS

How to pick a junior stock

An old investment vehicle returns

TRUST US

PETROMINERALES PRESIDENT AND CEO COREY RUTTAN >

FRENCH CONNECTION
National roots laid bare in Quebecs shale gas storm
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november 2011

volume 7 issue 5

contents

36

28
28

Fortune Hunters
Nimble. Innovative. Aggressive. These are all apt descriptions of the companies that populate Canadas vibrant junior universe. In this special report, Alberta Oil takes stock of a sector where the players have big dreams and take big risks

Promised Land
A Canadian cartel makes its mark in Colombia
by DArreN CAmpbeLL

27
Cover Package 42
Due Diligence
How to pick winners instead of losers in a crowded juniors sector
by JAsmINe buDAk

66
36

Master of His House

Meet Andre Caill, the man at the center of Quebecs shale gas controversy
by Jeff Lew Is

48

Against the Grain

Low cost producers prove chasing natural gas plays isnt a death sentence
by C AILy NN kLINgbeIL

53

The Rebound
Energy trusts make a comeback in the oil patch
by sTeve m ACLeOD

53

november 2011

coNteNts

volume 7 issue 5

NoveMber 2011

dEpartmEnts
6 Editors Log 19 transactions

Canadas juniors continue to punch above their weight

9 obsErvEr

Enbridge Inc. makes a power play

21 aLtErnativEs

News and views from the national and international scenes

13 sErvicEs

The renewable energy industry faces uncertainty post-election in Ontario

23 champions

Rig matting firms keep the industry on a solid footing

15 advancEs

Unconventional thinker Dan Allan stands up for a scorned sector

66 FinaL words

A suite of West Coast expansion plans slowly gains traction

17 poLicy

Brian McLachlan talks about his Duvernay gamble

23
hot topics
58 insights

Can behavioral science stop the next offshore disaster?

Why an outright ban on the oil sands is no low-carbon panacea

by An dr ew Le Ach

61 EntrEprEnEurs

Video surveillance spawns a business idea for Osprey Informatics

by Jesse sn y der

64 dispatchEs

Economic worries put a premium on petroleum at the expense of species protection

by doug M At thews

Hydro-Quebec doesnt like shale gas. Find out why at www.albertaoilmagazine.com/hydroquebec

19

coNteNts iMaGes John Gaucher, Luc MeLanson, bryce Meyer, Dushan MiLic, Marc riMMer anD coLin way

www.albertaoilMaGaZiNe.coM

They can copy us. They just cant be us.

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editors log

A scrappy and nimble junior sector faces strong headwinds

iN the caNadiaN oil aNd gas

Do or Die

industry, its the big players, the Imperial Oils and the Suncors, that make the big deals, spend the big money and create the big headlines on the energy scene. Yet the vast majority of the companies that make up this busy sector dont deal in production thats hundreds of thousands of barrels per day or profits that total hundreds of millions or even billions of dollars a year. Of course, Im talking about Canadas juniors, who happen to be the focus of this issue of Alberta Oil. The juniors bear names like Gran Tierra Energy Inc. and Angle Energy Inc. These are small operations that casual investors likely have never heard of. But these firms make an outsized contribution to the oil patch. Its not something you can measure in the size of their profits or production. Its the risks, new plays and technologies they are willing to gamble on while the big guys wait to see how the gambles turn out that mark their impact.

Whether its entering risky jurisdictions like Colombia or Kurdistan in search of big petroleum prizes, exploring emerging plays like the Duvernay or the Horn River basin or utilizing novel extraction technologies such as enhanced oil recovery, the juniors are often at the vanguard of what is happening in this industry. The sector also serves as a good barometer for how healthy the industry is in Canada. Lots of juniors pitching their stories to the investment community, buying up land and searching out new frontiers whether they be geological or technical usually means the industry is doing well. And the industry has been doing well as the economy recovered throughout 2010 and much of 2011 a recovery that is now being threatened as the financial woes of Greece and the United States send markets into a tizzy. Still, spending and drilling activity have been up in Western Canada as explorers look to free up liquids-rich natural gas and take advantage of high oil

prices. The dark clouds that are gathering around the global economy could scupper the industrys growth plans just as it did during the recession of 2008-2009 as investors grow more cautious and capital becomes harder to raise. But the Canadian junior sector seems to weather the cyclical nature of the business. Its a scrappy and nimble bunch. And it has to be, because these companies have to seize new opportunities quickly before bigger players move in. They must also adjust business strategies when market conditions change. Its not an easy way to make a living, but this dynamic group of companies mostly manage to make it happen and keep the industry moving forward in the process.

Darren Campbell

dcampbell@albertaoilmagazine.com
in the next issue of Ao The shadowy game of setting oil prices The tricky business of refining The U.S. and Canada battle to open up the Beaufort Canadian firms look to the Lower 48 for growth Plus, industry players gear up to expand the market for natural gas vehicles

www.albertaoilMagaZiNe.coM

PhotograPhy by ryan girard

volume 7 issue 5
Alberta Oil is published twelve times per year by Venture Publishing Inc. www.albertaoilmagazine.com Publishing Office/ Edmonton Sales 10259 105 Street Edmonton, AB T5J 1E3 Telephone: 780-990-0839 Fax: 780-425-4921 Calgary Sales #4 2526 Battleford Avenue SW Calgary, AB T3E 7J4 Telephone: 403-228-4337 Fax: 403-217-6588 Contents copyright 2011 by Venture Publishing Inc. Content may not be reprinted or reproduced on websites without express permission of the publisher. ISSN:1912-5291 Subscription Prices One year: $59.95 Two years: $109.95 U.S.A. one year: $79.95 International one year: $99.95 Send subscription requests and address changes via email to circulation@albertaoilmagazine.com or call toll-free: 1-866-227-4276 ext. 237 Undeliverable mail should be directed to the publishing office: Venture Publishing Inc. 10259 105 Street, Edmonton, AB T5J 1E3 or via email to circulation @albertaoilmagazine.com Canadian Publications Mail Product Sales Agreement #40020055 Printed in Canada by Transcontinental Graphics
This magazine abides by the editorial standards set by the Canadian Society of Magazine Editors. We do not publish unsolicited articles and material sent will not be returned. Media releases may be directed to mediareleases@albertaoilmagazine.com. Occasionally, Alberta Oil makes its names and addresses available to carefully screened organizations that want to let you know about a product or service that may interest you. If you do not wish to have your name included, please send an email to circulation@albertaoilmagazine.com.

The Business of Energy

Publisher Ruth Kelly rkelly@albertaoilmagazine.com Editor DaRRen Campbell dcampbell@albertaoilmagazine.com Senior Editor jeff lewis jlewis@albertaoilmagazine.com Assistant Editor steVe maCleOD smacleod@venturepublishing.ca Copy Chief Kim tannas Editorial Intern jesse snyDeR Art Director Kim laRsOn Associate Art Director Ryan GiRaRD Assistant Art Director anDRew fORbes Production Manager Vanlee RObblee Production Co-ordinator betty-lOu smith Web and Systems Architect GunnaR blODGett Web Editor DunCan Kinney dkinney@albertaventure.com Circulation Co-ordinators anDRea CRuiCKshanK, jennifeR KinG Assistant Publisher anDRew williams Controller ally speRle Accounting Assistant Glenna GRaVel Vice-President Sales anita mcGillis amcgillis@albertaoilmagazine.com Sales Assistants julia ehli, KassanDRa mitChell, KaRen CRane Advertising Account Executives Dennis mcCORmaCK dmccormack@albertaoilmagazine.com lisa RiChaRDs lrichards@albertaoilmagazine.com Contributing writers Jasmine Budak, Cailynn Klingbeil, Andrew Leach, Doug Matthews Contributing photographers and illustrators John Gaucher, Luc Melanson, Bryce Meyer, Dushan Milic, Marc Rimmer, Colin Way and Wilkosz & Way

The oil and gas industry is invested in Alberta communities. New technology towns, providing better infrastructure and a more sustainable way of living.

developed and funded by the industry is transferred to our municipalities and Through continuedG: 57 M: 70 collaboration and partnership with industry, Alberta leads M: 0 G: 201 the way in responsible economic, environmental and social development. Y: 100 B:19 Y: 100 B: 43

C: 40

R: 96

C: 29 K: 7

R: 180

K: 50 Together, we make Alberta work.

Visit our new website and join the conversation on our blog at albertaisenergy.ca
Alberta is Energy is supported by several Alberta business associations, many of which are focused on the oil and gas sector.

Profiled Albertans (left to right): Dr. Greg Powell, President & CEO - STARS; Vince Corkery, Director, Wastewater Treatment Plant - EPCOR; Warren Heisler, President - Le Reve Energy Corporation

albertaisenergy.ca

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Observer
20% 700,000 45%
BARRELS A DAY ON THE KEYSTONE XL PIPELINE EXPANSION
T:10.75 B:11.25 S:10.25

N EWS | NUMBERS | PEOPLE | PL AC ES

SPREAD BETWEEN LOW AND HIGH CRUDE OIL GRADES BY 2016

DIFFERENTIAL PEAK IN 2005-06

DEMAND FOR CANADIAN HEAVY CRUDE IS SOARING

A STRUCTURAL CHANGE IN CANADIAN HEAVY OIL

Market Pull

markets supports long-term export plans that would deliver increased oil sands production for processing in the United States, a fall report from Peters & Co. says. The Calgary brokerage predicts the spread between the value of low and high crude oil grades known as the differential will remain narrow, climbing no higher than 20 per cent by 2016. The reason is higher demand for heavier Canadian crude oil in the U.S. Midwest and in the rening corridor on the U.S. Gulf Coast, where TransCanada Corp. hopes to deliver 700,000 barrels of crude per day along its highly anticipated and controversial Keystone XL pipeline expansion.

Import volumes of Canadian heavy crudes into these markets have increased over the past few years, largely due to the additional pipeline takeaway and spare coking capacity, Peters says. As a result, aside from periodic uctuations in the lightheavy differential, we believe that a narrower differential will prevail over the medium term. Upgraders live off the difference between prices for their raw material bitumen and their output of synthetic crude oil. Proposals to build the behemoth plants proliferated in 2005-06, when the differential peaked near 45 per cent. The blueprints were abruptly shelved, however, when the nancial incentive disappeared at the onset of the 2008-09 economic contraction,

CP IMAGES

NOVEMBER 2011

observer

during which the price gap plunged to 12 per cent. Although they are highly subject to market conditions, Peters expects light-heavy differentials to stay in the 19- to 22-per cent range through 2016, in part because expected additions of new pipelines will enhance Alberta producers ability to shop around for the best available prices. On the U.S. Gulf Coast, a historic discount leveled against Canadian heavy crude relative to its Mexican and Arab counterparts averaging US$10.07 per barrel and US$11.58 per barrel, respectively, over the last three years could tighten significantly as Mexican imports to the U.S. dwindle, and are ultimately replaced, by deliveries of Canadian heavy oil, Peters says.

Damn Yankees

Canadian well production in the Bakken falls short of whats happening in the U.S.
activity iN the vauNted bakkeN reservoir has

Generation Gap

As labor shortages loom, the oil patch must mine a challenging demographic
a PetroleuM huMaN resources couNcil of caNada

transformed Saskatchewan from an industry afterthought to a bustling petro-province and has even made Manitoba an exploration destination. Industry forecasts predict even bigger things for the Bakken with daily production reaching one million barrels of oil equivalent (boe) by 2015 and eventually maxing out at 1.5 million boe per day. The Bakken activity has been a good news story for Saskatchewan and Manitoba. But wells drilled in these two western provinces are less prolific than in all but one county in the United States portion of the Bakken, which encompasses North Dakota and Montana.

report released last spring that revealed the Canadian oil and gas industry could be short 130,000 workers in the next decade provided the starkest warning yet that a severe labor shortage is headed the industrys way. Deloitte Canada oil and gas analyst Chris Lee says one avenue to address the problem will be to figure out how to attract and retain the so-called Generation Y demographic the term given to adults born between 1980 and the mid-1990s. Its a potentially rich labor pool for the oil patch, which is why Lee says it is so critical that the petroleum sector tap into it. But Lee cautions it wont be an easy task. The traditional perks that convinced the baby boomers to work in the industry high pay, bonuses, stock options, use of the companys private jet dont resonate with Gen Y workers. Companies have to figure out how they can create cultures that make Gen Y feel more accepted, Lee says. These people work hard, but they work differently. The analyst notes that Gen Y generally has less respect for traditional hierarchical structures within businesses than their parents did. And their motivation for working isnt strictly driven by dollars and cents. Lee says as the oil and gas industry figures out how to woo this demographic to work in the oil patch, it will have to accept that turnover rates will be higher than they have been in the past. But attracting this challenging group of workers isnt impossible. Lee says the companies that do so will be the ones that are advanced in using tools like social networking in the workplace, provide challenging work environments and provide an attractive work-life balance.

Bakken Breakdown

The average one-month peak oil rate per day of non-vertical wells drilled since 2008 from selected regions in the Bakken reservoir

516

362

258

171

23

79

Mountrail Divide Mercer

Sheridan Roosevelt

Saskatchewan

Manitoba

73
Source: HPDI; Bernstein Analysis

North Dakota

Montana

10

www.albertaoilMaGaZiNe.coM

AVERAGE

345

OBSERVER

Slow Rising

Anxiety returns for cost conscious oil sands projects

COST INFLATION IS REARING ITS UGLY head once again as players in Albertas oil sands look to accelerate growth plans. A summer report produced by Ernst & Young Canada, entitled Opportunities and Risks in Canada Oil Sands, lists cost ination as one of the top 10 risks facing the sector. Despite the efforts by the industry to meet the challenge, operating costs for oil sands projects increased to $25.50 per barrel of oil equivalent in 2010 from $19.60 in 2006. Ernst & Young notes that development and operating costs for oil sands project remain on the high end of the global scale.

COUNT KAREN HARBERT AMONG

the people who think a U.S. State Department approval of TransCanada Corp.s controversial $7-billion Keystone XL pipeline is a foregone conclusion. But the president and CEO of the U.S. Chamber of Commerces Institute for 21st Century recently told the Calgary Chamber of Commerce that President Barack Obama and the State Departments approval wont mean the project has crossed the nish line. Harbert says that milestone will only signify the beginning of the hard work for the pipelines backers, as permits from each state involved will have to be obtained. Its going to be difcult and its going to get ugly, Harbert predicts. It will take us some time to build it.

Operating cost per unit of production (traditional oil and gas)

Cost ($ per barrel of oil equivalent) 20

10

0 1990 1995 2000 2005 2010 2015

focus period

forecast

Operating cost per unit of production (oil sands)

40

Cost ($ per barrel of oil equivalent)

Joint venture spending among natural gas companies in North America will top $11 billion between 2011 and 2013,
BRINGING AN ADDITIONAL 2.6 BILLION CUBIC FEET OF INCREMENTAL SUPPLY TO MARKETS, PETERS & CO. PREDICTS. SO-CALLED FARM-IN AGREEMENTS CAN SIGNIFICANTLY LOWER THE BREAK-EVEN PRICE OF A NATURAL GAS DEVELOPMENT FOR THE ORIGINAL OPERATOR, WHICH IMPROVES HALFCYCLE DRILLING ECONOMICS IN A LOW PRICE ENVIRONMENT, THE CALGARY INVESTMENT BOUTIQUE SAYS. IN THE MARCELLUS SHALE, COST-SHARING DEALS COULD HALVE BREAKEVEN PRICES FOR COMPANIES THAT GIVE UP 50 PER CENT OF PRODUCTION TO GET 75 PER CENT OF WELL COSTS COVERED TO $2.50 PER THOUSAND CUBIC FEET.

30

20

10

0 1990 1995 2000 2005 2010 2015

focus period

forecast

NOVEMBER 2011

11

thE yinka dEnE alliancE rEmainEd lEss than imprEssEd that Enbridge Inc. has struck commercial agreements with shippers to transport crude oil on its proposed Northern Gateway pipeline. Enbridges pipeline isnt happening, period. It doesnt matter who they get a deal with, said Chief Larry Nooski of the Nadleh Whuten First Nation, which is a member of the alliance. The 1,177-kilometer Northern Gateway project has been controversial because of concerns that the line, which would end at a terminal in Kitimat, British Columbia, could lead to oil spills both onshore and offshore. The Yinka Dene Alliance is made up of five First Nations in northern B.C.

magazine.com

albertaoil

ExEcutivE insidEr Only at Alberta Oil will you find Kim Davies, CEO of junior oil and gas company Terrex Energy, providing readers with an inside look into the ultracompetitive oil patch. Read it at albertaoilmagazine.com/execinsider WEb ExclusivE Find out why Hydro-Quebec wont be backing development of the Utica shale any time soon at albertaoilmagazine/hydroquebec EnErgy ink Leave a comment, interact with our editorial staff and get the latest oil and gas news at our blog Energy Ink at albertaoilmagazine.com/ energyink chart of thE WEEk Get your weekly bite-sized infographic snapshot of the industry at albertaoilmagazine. com/chartoftheweek

groWing intErEst in thE Duvernay shale west of Edmonton could see the province back in the black sooner than originally forecast. Provincial revenue forecasts for fiscal 2011-12 jumped $2.7 billion to $38.3 billion from $35.6 billion following strong land sales including one that netted $842 million in the budding shale reservoir this past spring. As a result, the province says its $3.4-billion deficit for the year has shrunk by $2.1 billion to an anticipated $1.3 billion. The rosy forecast is predicated in part on strong oil prices, which have seesawed amid European debt fears and a sluggish U.S. economy.

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services
Mats provide coMpanies safe, all-season access to well sites

A support service keeps rigs on solid ground

Foul weather means good business For Jack Fraser.

Welcome Mats

While torrential spring floods this year may have cost operators by forcing some production to be shut-in, purveyors of rig and access mats were prepping for new sales. This year especially, if you didnt mat you didnt do anything, Fraser, co-founder of Nisku-based Little Guy Oilfield Rentals Inc., says. Not all oilfield business involves drill bits and rig rentals. As drilling seasons get longer and operations grow more complex, the business of rig matting is expanding, too. Setting up and running a drill site in remote parts of Western Canada can be challenging at the best of times. Inclement weather can quickly turn access roads and northern leases into mud pits and bogs.

But Mother Nature alone doesnt drive demand. Fraser says hes doubled his inventory from three years ago to 3,700 mats as drilling contractors take a more proactive approach to well-site safety. You can work faster and safer on a nice floor, instead of slogging around in the mud, Fraser says. Maybe its fairly dry now, but when youre working on a project and it rains for two weeks, you can shut down or try and get matting in on top of the mud. Strad Energy Services Ltd. has likewise been able to grow its matting business during the past three years. In 2009, the Calgary-based oilfield services company had 10,000 mats. Today, the companys inventory across North America totals 30,000 pieces with two-thirds of it in Canada. Its grown every

photographs courtesy of little guy oilfield rentals inc.

november 2011

13

SERVICES

after reMoval, land is left relativelY unscathed, with grading kept undisturbed

year, but especially in the last two or three years, company president Andy Pernal says. Much of Strad Energys inventory growth has been in rig mats. For years, the companys inventory consisted primarily of eight-foot by 14-foot access mats, which were rented out to create temporary roadways over mud and bog, so vehicles wouldnt get stuck en route to a drill site. The inventory of rig mats larger eight-foot by 40-foot mats that help support a rig on rough terrain was much smaller. Now, the inventory is split pretty much right down the middle. People talk about the need because of wet weather and thats true, but theres an underlying trend [focused on] the environment and safety, Pernal says. Another driver is drill programs that are getting more complex. Matting companies have benefitted from the proliferation of horizontal wells and multi-stage, hydraulic fracturing operations. Contractors increasingly drill multiple wells from a single pad in a manufacturing approach to development. Before, if they needed access, a matting company would come in. Now, they need a pad because theyre drilling 10,000 feet vertically and 10,000 feet horizontally, Pernal says. Its a temporary manufacturing facility, rather than just three to five days of drilling. The requirements have increased and the need for matting has increased dramatically. While the derricks and drilling programs they support have changed, mats have remained decidedly less complex. Its one reason Fraser likes the business so much. Mats are mats. You can only improve them or modify them so much, he says. Plastic mats made from composite materials are starting to replace older, steel-framed wood units, which are prone to water damage. The plastic units are thinner and lighter, which helps reduce transportation costs. A single lease can require up to 1,000 of the eight-by-14 foot interlocking mats. Thats a lot

of truck loads and a lot of money, Fraser says. He doesnt expect plastic mats to replace wood mats altogether, insisting each has its own place in the industry. You probably dont want to put a drilling rig on the lightweight ones, he says. The plastic mats, however, do have an environmental benefit over their wooden counterparts. Because they are one solid piece, there are no cracks for produced liquids and potent chemicals to seep through, making the plastic mats better for spill containment. The feature makes plastic mats ideal in environmentally sensitive regions, Fraser says. We did a job in Saskatchewan and the only reason we were there was to cover some grass that they didnt want disturbed, he says. When you pick the mats up, you can barely see we were there.

Mats are Mats. You can onlY iMprove theM or ModifY theM so Much.
At Strad Energy, Pernal doesnt see business letting up any time soon. Matting is just one of five business units the company operates, but it attracts a fair share of attention. Strad spent some $8 million of a $50 million capital expenditure program in the first half of 2011 on new ventures. One of those initiatives was developing a line of composite mats. We spent a number of years developing our composite mats, finding the right resin, the right manufacturer and the right surface tension, Pernal says. Demand far outstrips our rental fleet and we see that continuing moving forward. Certainly the wetter weather accentuates the requirement for mats and we experienced that in North Dakota and Canada this year, but there are underlying fundamentals of the environment and safety. If we have a dry 2012, we dont see demand decreasing.

14

www.albERtaoIlMaGaZINE.CoM

advances

First Step

Slowly but surely, West Coast export plans gather momentum

Even before TransCanada Corp.
secured a favorable environmental review from the U.S. State Department this summer for its hotly contested Keystone pipeline expansion, industry participants were assuming the export project would be built. That would be the producers assumption today, Ian Anderson, president and chief executive of transportation rival Kinder Morgan Canada, told Alberta Oil during a lengthy interview last summer. If that somehow changed, and either it didnt occur or it occurred much later than planned, I think that will do nothing but increase pressure to add more pipeline capacity sooner to the West Coast. That pressure was already building as officials with the State Department issued their third environmental assessment of the $7-billion Keystone application last summer. As officials at the State Department weigh final approval of the Gulf Coast delivery system, a suite of West Coast expansion plans are quietly gathering momentum. Enbridge Inc. says its multibilliondollar Northern Gateway project is now supported by so-called precedent agreements with prospective shippers. And a group of oil sands producers including

Cenovus Energy Inc. and Nexen Inc. has told the National Energy Board (NEB) that an application for firm service on Kinder Morgans Trans Mountain pipeline (TMPL) to Burnaby, British Columbia, amounts to a first step in opening up Asia-Pacific markets to increased deliveries of Canadian crude oil.

Other firms that have entered into agreements for firm service on the halfcentury-old pipeline system include U.S. Oil & Refining Co., PetroChina International America Inc. and Astra Energy Canada Inc. The five firms have together committed to ship 54,000 barrels per day following an open season

IllustratIon by luc melanson

november 2011

15

advaNces

conducted last fall that drew a total of 95,000 barrels per day of support for guaranteed access to the Westridge marine terminal. Since 2003, space on the pipeline has been allocated between uncommitted shippers and dock users using a bid premium method. Kinder Morgan wants to fund future expansions on the West Coast pipeline to 700,000 barrels per day, up from a capacity of 300,000 today using firm service fees paid by shippers. Although the issue drew criticism from common carriage users of the line in hearings before the NEB, there remains broad consensus that reaching Pacific tidewater is in the industrys best interests.

Its become ever more evIdent that Its Important that canadIan producers get access to dIverse markets.
Kinder Morgans expansion plans are the next or the very first step in the West Coast piece thats already played out in the U.S. Gulf Coast, offered Paul Reimer, senior vice-president of marketing, transportation and power at Calgarybased Cenovus. In testimony before the board, he predicted expansion of the TMPL system would precipitate increased exports to Asia-Pacific markets just as the ExxonMobil Pegasus pipeline, foreshadowing Keystones ultimate delivery capacity of 1.1 million barrels per day, successfully relieved congestion in the U.S. Midwest by delivering 100,000 barrels per day from Patoka, Illinois to refiners on the Gulf Coast. [T]hat enabled that market to understand what Canadian heavy crude was like, Reimer told the board. Deanna Zumwalt, Nexen Inc.s vice-president, North America, crude oil and marketing, said that getting firm access to the Westridge dock, as opposed to nominating monthly for it, allows us to begin to build those relationships, and prove up the concept that West Coast access makes sense for producers. I think, given recent market developments, that its become ever more evident that

its important that Canadian producers get access to diverse markets, she added. Its clear today. It will likely be clear in the future. For its part, China National Petroleum Corp. appears keen to repatriate anticipated production volumes from its oil sands properties. Infrastructure that connects the Alberta basin with China is a priority, Stephen Dove, a senior oil trader with subsidiary PetroChina International America Inc. testified. Big firms are not alone in pursuing offshore market development strategies. Much smaller oil sands producer Osum Oil Sands Corp., citing strong interest in firm service offerings on TMPL in the future, is looking to the Far East, too. Osum has received a number of enquiries from Asian interests concerning both the purchase of our oil production and investment in our projects and it is clear to us that enhancements to export capacity are vital to the growth of our business, company manager of marketing and commercial development Murray Morrell wrote in a letter filed with the NEB as part of the TMPL hearings. Much of the interest in developing new markets for oil sands-derived crude has come from producers keen to avoid the price discounts leveled against their output in saturated markets in the U.S. Midwest. But not everybody is convinced that firm service on the TMPL system would automatically lead to higher producer netbacks and a positive price surplus for Canadian crude oil as Kinder Morgan has suggested it would. Chevron Resources Canada trading manager Geoff McCutcheon, whose firm uses the West Coast pipeline to feed its refinery in Burnaby, noted in testimony to the board that TMPL is primarily used by refined product shippers and refineries in Washington State, whose traditional feedstock from the Alaska North Slope is in terminal decline. He said firm shippers would capture any available arbitrage, and questioned whether benefits would accrue in equal measure to the industry as a whole as opposed to a handful of individual players. In the future that money will roll to the firm shippers, he told the board. It will not flow back to the producers unless the shipper itself happens to be a producer and moving his own barrels.

1.1

million barrels
The ulTimaTe delivery capacity of The KeysTone Xl pipeline

esTimaTed CosT of TransCanada Corp.s Keystone Xl pipeline

$bILLION

300,000
current daily oil shipping capacity on Kinder morgan Canadas Trans mounTain pipeline

16

www.albertaoilMaGaZiNe.coM

policy

Safety First
Can behavioral science prevent
a repeat of the tragic blowout and oil spill that killed 11 rig workers last year in the Gulf of Mexico? The question is one of many being weighed by Canadas National Energy Board (NEB) as part of an ongoing review of the hazards, risks and mitigation measures associated with drilling offshore in the Canadian Arctic. Behavioral issues are important, because behavior turns systems and procedures into reality, says a report submitted to the federal regulator under the title Changing Minds; A Practical Guide for Behavioral Change in the Oil and Gas Industry. It is not enough for an organization to have good systems, because performance is determined by how organizations actually live or act out their systems. The prescription is not at all frivolous. In a separate report submitted to the NEB offshore review, Norwegian risk-management specialists Det Norske Veritas highlight the role systemic organizational deficiencies played in a series of fatal disasters, ranging from the Texas City refinery explosion in 2005 to the collapse of the Ocean Ranger drilling platform in the icy waters offshore Newfoundland and Labrador in 1982.

Understanding management systems takes on new significance

Described in the document as the largest self-propelled, semi-submersible offshore drilling unit of its era, the Ocean Ranger, officially launched in 1976, began drilling in the vicinity of the Hibernia oil field on the Grand Banks in 1980. It was owned by Ocean Drilling and Exploration Co. (ODECO), which operated the rig on behalf of Mobil Oil Canada Ltd. None of the 84 crew survived after the rig capsized and sank in a storm on February 15, 1982. Officials determined it went under after seawater entered the ballast control room through a broken porthole, causing an electrical breakdown that affected stability. Much like in the aftermath of the BP Deepwater Horizon accident, Newfoundlands offshore tragedy initially raised questions about the technical capacity to drill in harsh maritime environments. But unlike the BP incident, the Royal Commission on the Ocean Ranger Marine Disaster ultimately determined the shortcomings onboard had little to do with technology. The failure of the crew to adopt and follow a proper and prudent operation practice allowed the first link in the chain of events to be forged, the report stated.

IllustratIon by luc melanson

november 2011

17

policy

Among deficiencies cited by the Royal Commission and recalled by Det Norske was a lack of adequate marine training for key personnel. Formal training policies at Ocean Drilling and Exploration Co. followed the industry pattern of learning the job from the bottom up. No specific training was provided for abnormal conditions, and Mobils contingency plans, although outlining emergency procedures in case of oil spills, iceberg encroachment, severe weather, loss of a supply vessel and even a helicopter crash, offered no clear procedures on how to evacuate the rig.

Behavioral issues are important, Because Behavior turns systems and procedures into reality.
Policies that encouraged employees to learn by doing were not supported by sufficient training measures which showed a lack of commitment to formally improve employees and overall company performance in the area of safety, Det Norske writes. Severe storm conditions played a role in the tragedy, to be sure. But design shortcomings on the rig were compounded by human error, poor judgment and a lack of marine training, Det Norske says in its analysis. In effect, the offshore drilling semi-submersible was regarded as an industrial operation in a marine setting with no marine training for its crew. Inadequate training likewise contributed to the deaths of 165 crew members out of 226 on an oil platform operated by Occidental Petroleum Ltd. in the North Sea called Piper Alpha. On July 6, 1988, a condensate leak triggered a massive explosion on the platform. In addition to design flaws including firewalls that

could not withstand the pressure of a blast and inadequate fire insulation an inquiry later found poor communication between shift workers and a lack of site-specific training was in part to blame for the disaster. The decisions and actions taken by management directly compromised the safety of the platform and its crew, Det Norske says. The risk agency offers a similar conclusion in assessing the deaths of 26 miners in the 1992 Westray coal mine explosion in Pictou County, Nova Scotia, and again in the deaths of 15 refinery workers at BPs Texas City facility in 2005. The theme shows up in filings submitted to the NEB offshore review on behalf of companies actively looking to tap Canadas Arctic waters. Human factors are acknowledged to be potential contributing causes to accidents in all offshore operations, not just those in an Arctic environment, ConocoPhillips Canada says in a written submission to the board. But a potential lapse is no reason to implement a temporary or long-term moratorium on Beaufort Sea drilling, Imperial Oil Ltd. contends. Both Conoco and Imperial have joined Shell Canada Ltd. and Chevron in urging the board to drop a requirement compelling them to drill a same-season relief well to protect against a blowout. Imperial has dismissed the provision as neither practical nor necessary, while Conoco, in filings with the board, maintains relief wells offer little real protection to the environment since a significant spill would likely occur before a relief well could be drilled. Among other technical safeguards against disaster, Imperial instead points to a track record of 80-plus years operating in harsh northern conditions dating back to its 1920s pioneer discovery at Norman Wells without incident. Time will tell whether the company can trade on its name alone in the post-Macondo era.

11

Number of workers killed on BPs deePwater Horizon drill rig due to the macoNdo disaster

80

Number of years imperial oil ltd. has beeN operatiNg iN caNadas territories witHout a major safety incident

year tHe ocean ranger drilling unit sunk off the coast of NewfouNdl aNd aNd l abrador

1982

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transactions

Branching Out
Enbridge Inc. takes over a troubled power project
Strong fundamentals is how Enbridge Inc.s Lino Luison describes the rationale behind his employers decision to buy Toronto-based Tonbridge Power Inc. and dip its toe into the power transmission business. The deal, which was approved by Tonbridge shareholders in late September, would see the Calgary-based pipeline company acquire all common shares of Tonbridge for $20 million and repay the companys $50 million in debt. The transaction means Enbridge would take the reins of the Montana-Alberta Tie Line (MATL). The 345-kilometer, 300-megawatt (MW) capacity power line would connect Lethbridge, Alberta, with Great Falls, Montana the first transmission line of its kind connecting the United States with Alberta. One of the things that attracted us was the fact that the growth potential in this sector is so enormous, says Luison, Enbridges vice-president of financial partnerships. Investment in transmission infrastructure over the last generation has been underserved and largely inadequate. Thats certainly true in booming Alberta. The province has only had a
IllustratIon by luc melanson

handful of transmission upgrades since the early 1980s, yet demand for electricity is growing. The Alberta Energy Systems Operator (AESO) which is responsible for the planning and operation of the provinces electricity system and energy market predicts the provinces demand for electricity will nearly double in the

next 20 years. That demand is being driven by oil sands development and related economic development and population growth. AESO says the province must add about 13,000 MW of new generation over the next two decades to meet expected load growth in the province. Its a daunting task, as Alberta currently has

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traNsactioNs

26,000 kilometers of transmission lines capable of delivering 13,500 MW of electricity. So the province will have to nearly double its electrical capacity over the next 20 years if AESOs forecast proves correct. Enbridge, which posted a profit of $964 million in 2010, has made its bones in building pipelines and shipping oil and gas to markets. But the firm clearly sees an opportunity outside of its petroleum comfort zone. In a recent report, the Conference Board of Canada estimates that the electricity sector is expected to invest $293.8 billion from 2010 to 2030 to replace or update aging infrastructure, and accommodate a changing generation mix and market requirements.

Its a formIdable Industry and there are formIdable challenges. but were a formIdable company.
Enbridge has already invested $2 billion in renewable energy projects in the U.S. and Canada. But the acquisition of Tonbridge and the MATL project is its first foray into power transmission. Once the domain of large, government-owned utilities, non-traditional players are starting to enter the power transmission business and with the need for electricity growing all over North America, Luison says his firm is getting in on the ground floor. A lot of new entrants are starting to look at this sector, he says. Were going to be one of those industry players and well be able to establish ourselves at the front end of the growth curve. Standing in the way of that growth are landowner disputes that have plagued a project Enbridge would like to get completed by 2012. Construction of the line has been hampered by disputes between Tonbridge and Montana landowners over the location of the power lines. One of the most publicized disputes was settled in August when Tonbridge and landowner

Larry Salois reached a settlement on a lawsuit he had filed because he said the proposed power line route would go through historic tipi rings and a wetland. The line will now be built to avoid the cultural sites. But several other lawsuits still before the Montana courts have not been settled. Enbridge is no stranger to facing stiff public opposition to energy infrastructure projects, as its proposed Northern Gateway pipeline illustrates. Luison thinks the companys expertise in dealing with landowner concerns and regulatory issues means it has a better chance of getting MATL built than Tonbridge ever did. Weve shown the ability to execute on the planning, building and operating of large infrastructure projects, Luison says. Those skill sets reside in our company and can be adapted and utilized for this new platform. FirstEnergy Capital analyst Steven Paget says the acquisition is not a risky one for Enbridge. The total investment for the MATL project and a future upgrade that would add another 250 MW of transmission capacity to the line would be $300 million. The line already has customers, chiefly wind power generators in Montana, who have signed long-term contracts to pay to ship power to Alberta on the line. The deal also sees the firm acquire Tonbridge staff, giving them in-house expertise in the power transmission business. This gives Enbridge an ability to work in this space and see if there are more opportunities there, Paget says. And its acquisition provides more horsepower to the MATL asset than Tonbridge was able to bring. Could this be the start of Enbridge gradually transitioning from a pipeline giant to an electricity transmission powerhouse? Its too early to make that prediction, but Luison points out that Enbridges investment philosophy is to go big or stay home. Its definitely our intent to grow this business. Were very hopeful this is the first of many investments to come and that it will become a fairly large platform within the Enbridge structure, he says. Yes, its a formidable industry and there are formidable challenges. But were a formidable company. Were up for the challenge and well see where we get to.

345

megawatts
of electrical transmission capacity on the Montanaalberta tie line

300

$mILLION
estiMated cost of building the matl transmission line and upgrade

26,000 kilometers
of transmission lines are located in alberta

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alternatives

Renewable energy proponents face an uncertain future in Ontario

Scott Smith expresses no angst
about the future of renewable energy in Ontario. Thats impressive, because the recent provincial election saw Premier Dalton McGuinty and his chief rival for the post Progressive Conservative Party leader Tim Hudak repeatedly trade barbs over the provinces controversial Green Energy Act. The ambitious some would say foolhardy program was unveiled in 2009 by McGuintys governing Liberal Party. Its goal was to eliminate carbon emissions from the electricity system (Ontario has 34,882 megawatts of installed electrical capacity) and position the province as a hub for green energy development. Hudak vowed to scrap the program if his party won the election. McGuinty, who was re-elected for a third term, but with a minority government this time, vowed to stay the course sort of. During the campaign, McGuinty did pledge to reduce subsidies to the programs signature feed-in-tariffs if he were elected to a third term. The tariffs guarantee green energy producers above-market rates for their power on 20-year contracts in return for buying up to 60 per cent of their project materials in the province. Yes, its uncertain times for the renewable energy industry in Ontario, but Smith, vice-president of policy at the Canadian Wind Energy Association (CanWEA), is putting on a brave face. He says CanWEA and its members, which include wind energy owners, operators, manufacturers, project developers and service providers, are ready to roll up their sleeves and get to work. We were prepared to work with whatever party was in place, he says. In the short term there is political uncertainty and thats the nature of political campaigns. Longterm, the government has to look at what is the benefit of wind energy and what are the economics of it. At the end of the day, wind energy development is the right thing to do. For better or worse, the greening of Ontarios electricity grid seems poised for a shakeup, one that could jeopardize some impressive investment numbers. CanWEA states that every 100 megawatts (MW) of new wind energy capacity built

Hard Road

IllustratIon by luc melanson

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alterNatives

in Ontario represents 250 jobs per year during the development phase and 18 permanent operations and maintenance jobs. A recent study commissioned by CanWEA on the economic impacts of the wind energy sector in Ontario contends that meeting the wind energy targets in Ontarios long-term energy plan would result in more than 80,000 person-years of employment and more than $16 billion in private sector investment, with more than $8.5 billion invested directly in Ontarios manufacturing, construction and service sectors. Smith says

Im very confIdent solar power has a future. we have to dIversIfy our energy mIx In ontarIo so we can get off coal.
environmentally and economically, it would be folly for McGuintys Liberals to backtrack in any way on the green power goals set in 2009. Those numbers cant be ignored by any government, Smith says. Those involved in Canadas budding solar energy sector likewise watched the Ontario election results closely. Hudaks vow to do away with feed-in-tariffs was a concern, but so were the struggles of the McGuinty government in implementing its lofty green energy policies. The solar industry has faced its share of challenges in Ontario. Last summer, it was revealed that 1,500 micro solar projects conditionally approved were stalled because there was no capacity to connect them to local electricity grids. That was resolved when Brad Duguid, the energy minister at the time, subsequently directed the Ontario Power Authority to allow the owners to move their projects to a spot where it

was possible to feed solar power into the grid and generate revenue. There have also been complaints about long waits for regulatory approvals. The delays and uncertainty have caused customers to cancel orders for solar panels, leading to layoffs among some of the provinces solar panel manufacturing businesses. Canadian Solar Industry Association (CanSIA) president and CEO Elizabeth McDonald has watched the situation and the provincial election closely. She agrees there have been rough spots in implementing the Green Energy Act, but insists it will get better with time. This is really new. It hasnt been perfect and to me thats not unexpected, McDonald says. But Im very confident solar power has a future. We have to diversify our energy mix in Ontario so we can get off coal. All the parties were in agreement on that. According to CanSIA figures, each megawatt of newly installed solar photovoltaic capacity requires approximately 44 jobs. Under optimal conditions, the solar sector in Canada could employ up to 41,000 people by 2025. The leadership from these associations may not sound worried about the state of their industries in Ontario, but the view from the trenches is somewhat different. The uncertain future of Ontarios renewable energy sector is even being felt in Alberta. Michael Carten, chief executive of Calgary-based Sustainable Energy Technologies remains uneasy about what is in store for his company. The firm makes solar inverters and the company was focusing its efforts on the Ontario market because the feed-in-tariff was driving demand for its product. But the recent struggles in Ontario for the solar sector has Carten thinking hard about the wisdom of that strategy. He told the Globe and Mail in August, If I had thought that the utilities would simply not obey the rules and the government would do nothing about it, I would never have started here.

34,882 megawatts
of installed electrical capacity in OntariO

18

permanent jObs created for every 100 megawat ts of new wind energy capacit y installed in ontario

8.5

$bILLION

invested in OntariOs manufacturing, cOnstructiOn and services sectOr if wind energy targets are met

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CHAMPIONS

New School
Dan Allan goes to bat for a scorned sector
By Darren Campbell

Dan Allan is bullish when asked

about the impact unconventional oil and gas will have on the Canadian and North American supply picture. I dont see any indication that the train is going to stop, says the chairman of the Canadian Society for Unconventional Resources (CSUR). Unconventional will become conventional and it will be the dominant force for the foreseeable future. Recent production statistics bear out Allans bold statement. In the Canadian Association of Petroleum Producers (CAPP) 2011 crude oil forecast, it estimates conventional crude production in Canada production coming essentially from non-oil sands and the offshore has increased from 900,000 barrels per day in 2010 to one million barrels per day in 2011 after years of declining production. The reversal in fortunes is mainly due to sector players using unconventional technology horizontal drilling, hydraulic fracturing and enhanced oil recovery methods to extract more oil from western plays bearing names like the Bakken, the Viking and the Cardium.

PHOTOGRAPH BY JOHN GAUCHER

NOVEMBER 2011

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chaMpioNs

The story is the same on the natural gas side, where horizontal drilling and fraccing have unlocked large stores of the cleanest burning fossil fuel. North America has gone from a continent looking to import natural gas to one that now has a surplus. Prices for the commodity have sunk below the US$4 mark as shale gas from the United States floods markets. Canadian shale basins have also been getting plenty of attention with the likes of Encana Corp. and Talisman Energy investing in the Montney and Horn River basins in northeastern British Columbia and the Duvernay in Alberta. The prize is a huge one. In a resource assessment report released last summer, the National Energy Board pegged the marketable natural gas in the Horn River

too hasty to do its work. If anything is pushed too quickly or rushed, its never a good thing, Allan says. Youve got give people time to get comfortable. Allans perspective is colored by his 35-year career in the oil patch. He got his first glimpse of the unconventional sectors potential during a 14-year stint with Dome Petroleum in Colorado, where the company was drilling for coalbed methane another unconventional resource characterized by gas trapped in coal seams. Allan caught the unconventional bug. When he returned to Canada in the 1990s, he founded CanScot Resources Ltd, as well as Rockyview Energy. He held senior management positions with those two juniors, as well as APF Energy Trust, which snapped up CanScot in 2003. All of the companies were focused on coal-

The old rules arenT applicable anymore. we have To do a beTTer job.

basin alone at 78 trillion cubic feet (tcf). The U.S. Energy Information Administration estimates there is 862 tcf of technically recoverable shale gas reserves in place in the lower 48. Meanwhile, on the oil side, some estimates say there are 77 billion barrels of already discovered oil still stuck in the ground in Western Canada. But industrys grand plans to develop these resources via unconventional means could be waylaid by one big roadblock: public opposition. There are concerns that fraccing contaminates drinking water and that the large volumes of water needed to pull off unconventional drilling programs can stress local supplies. These issues and others have led to frequent dustups between the public and the oil and gas industry, in part because industrys been bed methane development. Allan has since founded another junior, Calgary-based Cumberland Oil and Gas Ltd., this time concentrating on light oil and shallow gas. But he remains intimately involved in the unconventional sector through his work with CSUR. The moniker is a new one for the organization. Since its inception in 2002, its been known as the Canadian Society for Unconventional Gas based on the fact that in Western Canada, unconventional exploration methods were being used almost solely to extract stranded gas reserves from tight rocks. But with companies now using these methods to extract oil as well as gas, Allan says the decision was made to change the name. We are now covering the whole spectrum of both commodities, Allan says.

The future of those commodities may very well rest on its proponents convincing the public that exploring for unconventional oil and gas can be done safely and wont harm the environment. That means being up front about what it is doing and how it will do it something Allan admits the industry hasnt been adept at. The industry in the past, we kind of felt we were able to do our own thing and let the government regulate us, Allan says. But that started changing due to worldwide events and the entire industry has been held to a higher standard. The old rules arent applicable anymore. We have to do a better job. Theres more sensitivity to spills and groundwater protection. This is a natural evolution occurring and I think the industry was slow to react to that. Considering how important unconventional oil and gas could be to Canadas petroleum future, being slow to react might be costly. Industry appears to be wising up, though. In September, CAPP introduced new guiding principles for hydraulic fracturing to guide water management and improved water and fluids reporting practices. And Allan says CSUR is continuing its efforts to educate the public about the unconventional sector, including setting up an eastern chapter, a region where shale gas exploration has sometimes encountered stiff opposition, particularly in Quebec. We find its a lot easier to be proactive when you have a collective force behind you, Allan says. When one company goes into the limelight, it can have a lot more resistance. Weve got to get areas in North America and overseas comfortable with what we are doing. Were something new that they dont understand. We have to earn their trust.

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