"Fortress North America" Could Emerge Over Next Two Decades

Abstract: A recent report from Canada's National Energy Board, on energy supply and demand, raises both short- and long-term issues that are going to have a big impact on petroleum companies, consumers, and governments.

Analysis: "Mirror, mirror on the wall, who's got the most accurate scenario of them all?"

While such a question would never trouble Snow White's evil stepmother, a new report from the National Energy Board (NEB), Canada's federal energy watchdog, raises both short- and long-term issues that are going to have a big impact on petroleum companies, consumers, and governments.

Unlike the recent outlook to 2025 prepared by Canada's Energy Information Administration, which provides specific numbers about demand, supply, and prices for oil, gas, and coal, the NEB document is painted in much broader strokes and contains few price predictions.

The lack of detail is deliberate since the NEB wants to stimulate discussion about where the energy industry in Canada is headed over the next two decades. The report will be discussed at a series of meetings throughout Canada before a final version is released later this spring.

The NEB's number-crunchers examined two scenarios.

Under one scenario, called "Supply Push," fears about energy security push the U.S., Canada, and Mexico to maximize production through granting incentives, opening up currently restricted federal lands, and relaxing environmental rules. (Hmm, sounds a lot like President George W. Bush's 2001 energy plan.)

This scenario, also called "Fortress North America," depicts a push up in oil and gas production over the next two decades. However, finite resources and a lack of effective curbs on consumption mean North America would again be dependent on foreign energy sources by 2025.

The other scenario, called "Techno-Vert," assumes, as the name suggests, that public concern and government policy regarding the environment encourage innovation in technology and reduce consumption. A much larger role for alternative and renewable power generation, real penetration of the automotive industry by hybrid gas-electric vehicles, and the commercialization of clean coal power plants are some outcomes of this scenario.

Since the U.S. has opted out of the Kyoto protocol and Canada has said no to energy taxes to curb consumption, the Supply Push scenario is probably the best educated guess on how the Canadian oil and gas sector will evolve over the next two decades.

A few of the long-term projections of the scenario, such as offshore commercial gas projects on the West Coast and High Arctic, are certainly debatable given economic, geological, environmental, regulatory, and even legal challenges. But the blue-sky projections, while fun to play with, are a lot less useful than the NEB's identification of shorter-term problems.

The boom in oilsands operations is going to continue, although skilled labor could limit the expansion. But the multibillion-dollar bonanza will more likely be hampered by a shortage in diluent, the blending agent that enables molasses-like bitumen to flow easily in pipelines. Condensate, a natural gas liquid, is usually used as diluent, but current usage patterns mean a shortfall could occur as early as next year.

The report says possible solutions include redirecting condensate currently going to Sarnia, Ontario for use as a petrochemical feedstock, putting more light crude into the condensate pool or encouraging more liquids from the Shell Canada-controlled Caroline gas development, located northwest of Calgary, to flow into the condensate pool.

"Even with these measures in place, a shortfall of condensate is projected to occur in the 2006 to 2007 time frame," the report concluded.

One potential way of solving the diluent dilemma is mixing synthetic crude with bitumen to produce SynBit. But it's an open question as to whether refiners will want this product. And without the support of U.S. refiners, big consumers of Canadian exports of heavy oil and bitumen, SynBit will remain nothing more than an idea on paper.

Many people are aware of the condensate issue, but neither government officials nor industry executives have articulated a solution. The need for such a remedy becomes more pressing with each passing day.

Another element made clear by the NEB forecasts is the need to improve extraction technologies for the oilsands.

Less than two percent of Alberta's estimated 308 billion barrels of recoverable bitumen reserves have been produced. But only 25 percent of that huge resource is accessible through conventional mining operations - the huge trucks and shovels so often featured in pictures and video.

The biggest chunk of the province's oilsands - an estimated 245 billion barrels - needs in situ recovery methods. A lot of hope has been pinned on Steam-Assisted Gravity Drainage (SAGD), where natural gas is burned to create steam and the steam is injected underground to make the gooey mix of oil and sand easier to pump to surface.

Besides high greenhouse gas emissions associated with SAGD, rising gas prices also threaten the economics of the technique. This means more money and staff resources must be devoted to develop alternatives.

Vapor extraction, or Vapex, is a promising new method that is quite similar to SAGD. A solvent, such as butane or propane in a gaseous state, is injected instead of steam, to loosen the oil. In an effort to try to commercialize Vapex, the Canadian unit of Devon Energy is leading a C$30 million pilot project - which includes participation from numerous other companies and governments.

Coalbed methane (CBM) is another area that the NEB report identifies as a research priority for petroleum companies and their service providers. The Supply Push scenario foresees 3,000 CBM wells being drilled annually by 2025 as higher prices cause unconventional gas (including Arctic reserves) to play a major role in this country.

CBM is expected to account for 300 million cubic feet per day in 2025, or about two percent of Canada's estimated daily output of 16.5 billion cubic feet per day. It's an ambitious goal considering there are no commercial CBM projects in Canada yet and no tax credits, which helped stimulate CBM development in the U.S. so that it now accounts for about seven percent of the nation's daily gas supply.

Questions involving mineral ownership, water disposal, fracture optimization, and other production techniques need to be answered if producers in Canada are to take advantage of CBM reserves in areas with existing pipeline and processing infrastructure.

NEB staffers did not use any magic to come up with their forecast, but the predictions contained in the Supply Push scenario are likely to mirror coming changes to the Canadian energy industry. A copy of the document can be found by looking for a January 7th announcement posted on the NEB's internet site, www.neb.gc.ca/whatsnews/index_e.htm.


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