Corrections were made June 9 to this article.
Speaking to a half-empty auditorium that reflected the tough economic environment of the North American onshore market, Janeen Judah, the incoming president of the Society of Petroleum Engineers, addressed the problems facing heavy oil.
Despite the Group of 7 (G7) passing a resolution calling for member countries to be fossil fuel-free by 2100, hydrocarbons will be in demand until there are technical breakthroughs in alternative energy, said Judah. It’s easy, she added, to live in a G7 country where energy is abundant and make such proclamations.
More difficult is the developing world where inexpensive fossil fuels are the backbone of what little industrial development there is. Judah, who is general manager of Chevron Corp.’s southern Africa business unit, and spends much of her time in the developing world, said such views could be seen as “elitist.”
The demand for such hydrocarbons is increasing, she said, and only about one third of what’s available is conventional. Developing the hard-to-get resources, like heavy oil, will be critical and will require technical expertise as well as political will over the long term.
Judah warned that indicators point to a more protracted downturn in prices than the industry saw in 2008, which was more of a response to the overall economic malaise. The inventory problem of today is more reminiscent of the 1980s, and could be a harbinger of a systemic problem lasting several years.
Heavy oil, however, is too massive a resource to ignore, said Judah. Even though the Alberta oil sands have a breakeven point of about $70-80/bbl, roughly the same as other challenged environments such as deepwater or shale by taking a long view, like companies do for deepwater and other challenged developments, the industry can move forward. It will take innovation.
Judah pointed to research by Independent Project Analysis (IPA) that showed the oil and gas industry, overall, is bad at developing long-term megaprojects. Two-thirds fail. The one-third that succeed, do very well. The ones that fail do so spectacularly.
In Alberta, this is also true. She pointed to IPA data that showed big projects, such as tar sands, have cost growth of 70% and 30% schedule slippage. Oil majors can survive these kinds of over runs but they are life and death for smaller companies that have different financial backing. “What can we do as engineers to make that happen better,” said Judah.
The election of Alberta’s New Democratic Leader Rachel Notley as premier is another change for heavy oil development, according to SPE’s new president. The more left-leaning premier may not be as friendly to oil as the previous regime and a change after 42 years.
This adds political risk to an area that has not been known as such in the past. “It will not be business as usual,” said Judah. The new risk is something that could impact investment in the region.
In America, she added, environmental pressures persist, including the Keystone XL Pipeline expansion project, the best and most obvious solution for bringing Alberta oil to its largest market.
Despite the technical, economic, and geopolitical issues, Judah sees a strong future for heavy oil. She said industry projections show continued growth in North America, South America, and the Middle East, though the latter two face unique problems, such as political instability in Venezuela.
“Good or bad, this is your future,” said Judah to her mostly Canadian audience. It’s a huge resource and it needs to be tapped, she said, adding that Canadian production growth is all in the oil sands.
To be able to overcome challenges will take a long-term view that focuses on driving down operating expenses, one thing the industry can control through innovation and collaboration.
Contact Michael T. Slocum at [email protected].