Oil & Gas

Oil & Gas in 2016: The 3 Energy Trends to Watch

Daniel Walsh Energy • Business • 5 minute read

The new year has begun, and with it, an opportunity to think about where the oil and gas industry is today and where it is heading in 2016.

A few months ago we covered some of the lessons the oil and gas industry learned in 2015. One of the takeaways was the sharp fall in commodity prices, the result of a global supply glut and an economic downturn. This perfect storm of economic conditions forced companies to become increasingly lean, changed the geopolitical landscape, and resulted in the development of increasingly sophisticated tools for maximizing efficiency.

It is likely that many of these trends will continue through 2016, with three big stories to keep an eye on in the coming year.

Investing in Efficiency

2015 saw a 20% drop in capital investments by oil companies – the largest in 30 years. This decline is likely to continue into 2016. We’ll likely see short-term cost-cutting measures give way to structural changes as producers fight to remain competitive.

Although many such changes will involve cancelling or scaling back projects, some will be the result of new investments aimed at increasing efficiency.

Modularization - the development of a fleet of standardized, mobile, and versatile equipment units - is one area where research and development is going to lead to lower prices. A recent study of modularization found that most companies could achieve cost savings of up to 15%.

Of course, one of the most important investments companies can make is in hiring and retaining the best available human resources. In addition to reducing mistakes and maximizing worker efficiency, investing in a strong employee pool will ensure companies are well positioned to grow when prices eventually rise.

The takeaway here is that, despite the upfront costs, making smart investments will be the key to staying lean.

Megaprojects: Here to Stay?

As commodity prices fall, low-margin projects are the first to be scrapped, downsized, or delayed. At particular risk in 2016 are so-called “megaprojects” – projects that require more than $1 billion in capital investment. These projects, which access non-traditional resources using complex technology, accounted for around 40% of the capital expenditures of the world’s largest oil companies in 2014.

Megaprojects are exciting because they represent the cutting edge of oil and gas technology. Unfortunately, glamor doesn’t usually equal good business. In 2016, it’s likely that many of these projects – which include arctic exploration, deepwater exploration, and the construction of floating liquid natural gas (LNG) facilities – will be downsized or put on hold.

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One area where the cutbacks in capital expenditures are likely to be particularly pronounced is in the LNG market. LNG megaprojects include the construction of natural gas terminals and specialized ships capable of handling the volatile substance. At the start of 2014, LNG looked like a promising growth market. Since that time, however, prices have fallen from $20/ MMBtu to $7.20 / MMBtu in December. Given the continued fall in natural gas prices and weak demand in Asia, we should expect to see the least profitable LNG projects scrapped this coming year.

Shifting Geopolitics

On the geopolitical front, 2016 is likely to see a continued rise of production in North America, especially in light of recent international events.

In Mexico, the government recently voted to open up the oil market, allowing private companies to compete with Pemex, Mexico’s national oil company. Chevron, Exxon, and BHP Billiton have already expressed interest in Mexico, and its likely production will increase over the next few years.

In the US, Congress has moved closer to eliminating the oil export ban, which would allow producers to sell unrefined petroleum to foreign countries. Since US production costs from unconventional plays are quite low, this would likely lead to a fall in global prices while increasing overall production in the US.

As a result of these two major policy changes and the political desirability of energy independence, trade within the boundaries of North America is likely to increase. Since demand is less than production in North America, we should also see increasing exports outside of North America. Ultimately, North America may come to replace OPEC as the dominant force in the international market.

If you’re interested in a more in-depth assessment of what we should expect for 2016, I recommend this report, published by Deloitte.

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Canada's Oil Pipelines: The Numbers You Should Know

Daniel Walsh Energy • Business • 4 minute read

Canada’s oil and gas pipelines are the circulatory system of the Canadian hydrocarbons industry, transporting 97% of raw hydrocarbons produced. But what does this network of pipes look like on the ground (or, rather, below it), and why is it so important?

These questions became easier to answer recently when the Canadian Energy Pipeline Association (CEPA) published an interactive map of all the primary long-distance transportation pipelines and facilities operated by its members.

The map got me thinking about the importance of long-distance oil pipelines, and how there are still many people in the wider energy industry with limited knowledge of these critical pieces of infrastructure. Given the major role of pipelines in connecting the industry together (and making it more profitable), organizations of all sizes should take the time to properly understand the pipeline trends.

In this post I want to take you through some of the most interesting and important numbers at play.

Bringing the Goods to Market

Canada has the world’s 3rd longest pipeline system (after the United States and Russia). This system includes 114,000 km of primary transmission pipelines and around 720,000 km of gathering and distribution lines, enough to reach from the earth to the moon and back.

In 2014, the average barrel of Canadian crude travelled through 583 km of pipeline on its way to a refinery or international border. Vast distances and difficult weather conditions make pipelines the most reliable means of transit throughout Alberta. In the tar sands, long production curves make investments in expensive permanent infrastructure elements such as pipelines even more worthwhile.

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The six major crude oil pipeline systems linking Canada to the United States can carry a combined total of around 4 million barrels per day. Thanks to the recent growth in tar sands production, production has exceeded this capacity, meaning that the excess product must be dumped on the local market at discounted prices or shipped by more expensive means such as rail. In 2012, the Canadian Imperial Bank of commerce estimated that the inability to reach foreign markets is cost Canada $18 billion per year in tax revenues.

Needless to say, the pipeline capacity shortage is widely seen as one of the major challenges currently facing the industry in Canada.

The Environmental Impacts of Pipelines

One of the main reasons that new Canadian pipelines have been a tough sell is that they would carry unconventional products that many associate with heightened environmental risks. In 2014, over half of the petroleum products produced in Canada were sourced from the Athabascan tar sands – and despite the recent fall in the price of oil, production from the tar sands along is expected to grow to 3.8 million barrels per day by the end of the year. The bitumen produced from the tars sands is too viscous to flow through pipelines, meaning that is must be mixed with other petroleum products to form “dilbit”, or diluted bitumen. Studies have found that dilbit is significantly more difficult to clean up than conventional oil in the event of a spill.

As a result of the pipeline capacity shortfall, on the average day in 2014, 185,000 barrels were shipped by train in 2014. This is unfortunate because a recent study by the Fraser Institute found that transporting a given volume of oil by pipeline is 4.5x safer than transporting it the same distance by train.

The issues surrounding the construction of new pipelines in Canada are complex and will have to wait for another blog post. Hopefully, the statistics here serve as a useful reminder of the significant challenges and opportunities pipelines present for all of us in Canada’s oil industry.

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Big Data: What Every Oil & Gas Company Needs to Know

Daniel Walsh Energy • Technology • 4 minute read

A lot of media attention has been given to “big data” in the past few years, but little of this attention has filtered down to the bulk of small and medium-sized companies in oil and gas. 

You might think it's a topic just for the C-suite or IT departments, but everyone in the industry has a lot to gain from the big data mindset, if they can start to make better use of the information that matters to them.

Today we’ll take a closer look at why big data matters, and how all oil and gas companies can shift their thinking and apply the lessons to their business.

It's about answers and awareness

Data has always been the most sought-after asset in the oil and gas industry. That’s because it has the power to reduce the uncertainties associated with the relatively high-risk investments that make the industry tick. 

In the early days, drillers were concerned primarily with the underlying geology of a region and used hand-collected data to answer questions such as: “how thick and extensive are the oil bearing layers?” and “What is the thermal maturity of the source rock?” As the “easy” hydrocarbons were depleted, it became necessary to delve into increasingly robust data repositories to figure out how to profitably extract oil. At the same time, an increasing emphasis on safety, liability, and environmental responsibility forced companies to keep a closer eye on their operations.

With the advent of computers and associated proliferation of sensors, telemetry equipment, and networked data repositories, the oil and gas industry entered a new era – the era of so-called “big data”.

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Big data is a mindset, not just a technological system

Big data in oil and gas rests on a myriad array of sensors, ranging from the data collection systems integrated into a $250,000 MWD kit to relatively simple and cheap sensors used to measure temperature, pressure, or hydrogen sulfide concentrations. Even smaller companies are finding it relatively easy to collect increasing amounts of data during operations. Critically, modern software and systems are making it increasingly affordable and manageable to store, examine, and analyze all that data.

It's clear that big data wouldn’t work without the marvels of modern technology. But what every company should understand is that big data isn’t just a technology system – it’s a mindset. It’s a way of scientifically managing operations and capturing the information that matters, to maximize efficiency and minimize risk. And contrary to what you might think, operations of all sizes can benefit in their own ways by approaching problems with a big-data mindset.

For example, models developed by geologists can be calibrated to collected data and made more realistic. As more data comes in, adaptive management can be used to continually optimize operations. Adaptive management powered by big data is also effective during stimulation and production.

Big data can also reduce technical risks. For example, automated pattern recognition systems can alert operators when a piece of equipment is near failure or conditions in the borehole are problematic.

Defining the path to big data opportunities

While big data shows great promise, successful implementation can prove difficult.

A brief published by Bain in 2014 made this fact clear:

We often find that senior executives understand the concepts around Big Data and advanced analytics, but their teams have difficulty defining the path to value creation and the implications for technology strategy, operating model and organization.

To overcome these challenges, the best starting point for companies large and small is to change the way they think about the role of data. In particular, as highlighted in the Bain report, the acquisition and analysis of data should be central to a company’s business plan, not just a compliance-centric task handled exclusively by IT.

The Bain report should be required reading for anyone hoping to learn more, or successfully integrate big data into their company’s decision-making. By first thinking of big data as a mindset, oil and gas companies of all sizes can start to focus on the information that matters most to them, and start taking steps to capture and leverage that data.

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Six Lessons the Oil & Gas Industry Learned in 2015

Daniel Walsh Energy • Business • 3 minute read

It’s been a tumultuous year for the oil and gas industry, with crude oil prices falling from over $100 per barrel last summer to a low of just over $40 in late August. This decline is largely due to decreased demand from China and OPEC’s strategic refusal to cut production in the face of a supply glut. Despite the sharp fall in prices, some companies have been able to remain profitable by taking advantage of new technologies and niche markets.

We thought we'd take a look at some of the most important lessons the industry has learned in the past twelve months.

The growth of new technologies doesn’t always increase hydrocarbon demand

Much of the recent decrease in demand for hydrocarbons can be linked to a slowdown in the global economy. However, some of the lost demand is associated with structural changes related to the adoption of technologies that make more efficient use of fuels and feedstocks. Ironically, many of these technologies were developed to cope with the high hydrocarbon prices that prevailed until recently.

OPEC isn’t as unified as it once was

Some cracks have begun to appear in the foundations of the once-unstoppable cartel. The gulf members, led by Saudi Arabia, have maintained production in the face of a supply glut and prices that have consistently been below $50/bbl. The Gulf States might be able to hold out for a while at such prices, but poorer OPEC members are hurting. Recent diplomatic attempts by Iran and Venezuela to convince OPEC to cut production are a sign of internal dissent and may portend future weakening of the cartel.

New technologies don’t always require high prices to flourish

Low prices have spurred investment in cost-reducing technologies and techniques. Most prominent this year are zipper fracking, in which two parallel wells are fractured simultaneously, and stacked laterals, in which many parallel wells are drilled to different depths from the same pad.

There is money to be made (and lost) in water

A prolonged drought in North America combined with an attentive public and increasingly tough regulations have brought water to the forefront. The cost of obtaining, storing, treating, and getting rid of the billions of liters of water used for drilling and stimulating wells in Canada and the US is measured in tens of billions of dollars, which is a boon for servicing companies. Producers will need to manage water-related costs efficiently in the coming years to remain lean.

It’s worth giving tight oil wells a second lease on life (and a third, and a fourth)

Refracking – stimulating declining wells that have already been fracked once - is on the rise. The fact that refracking is typically carried out on horizontal wells less than ten years old shows just how quickly our knowledge of fracking in tight oil shales has improved.  Refracking makes even more sense given today’s low prices – companies can increase production on existing wells for a fraction of the cost of drilling and fracking a new well.

New pipelines are a tough sell

The vast majority of oil consumed in North America has spent some time flowing through a pipeline. Despite the importance of these critical conduits, they have become a tough sell in Canada in recent years. Projects stymied by public opposition in 2015 include TransCanada’s Keystone XL and Energy East pipelines, as well as Enbridge Inc.’s Northern Gateway pipeline. Companies will need to work with the public if they hope to win support for the projects by the end of the decade, when production is expected to exceed existing pipeline capacity.

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