With record natural gas prices and analysts predicting record home-heating prices for American consumers this winter, Canadian producers are looking to quickly increase natural gas production. Greg Stringham, vice president of markets and fiscal policy at the Canadian Association of Petroleum Producers, says Canadian energy companies may be able to boost natural gas output by 200 million cubic feet per day. Stringham also explains Canadian efforts to increase coalbed methane development and build liquefied natural gas terminals. Plus, he explains the future for oil sands development in Alberta and why U.S. energy companies should upgrade refineries and pipelines to handle heavy oil from Canada.
Brian Stempeck: Hello and welcome to OnPoint. I'm Brian Stempeck. Joining us today is Greg Stringham, vice president for Markets and Fiscal Policy and the Canadian Association of Petroleum Producers. Greg thanks a lot for being here.
Greg Stringham: My pleasure.
Brian Stempeck: Let's start off, you're in Washington this week to talk about oil sands development and meet with a number of DOE officials and other high ranking policymakers in Washington. Give us a sense of what we can expect from the oil sands in Canada and where you guys are now and where you're headed.
Greg Stringham: Well the oil sands have become mainstream oil right now. From the Canadian perspective, right now, it makes up about one of about every two barrels that we produce, but we've now hit a million barrels a day coming out of the oil sands. This is no longer a small experiment up in northern Alberta, it's actually mainstream.
Brian Stempeck: What are the long-term plans? How do you plan on ramping that up?
Greg Stringham: Well, the projects are lining up now to go ahead and go forward. Now these are very high capital cost projects as they go forward. They're funded somewhere between $6 and $8 billion apiece, but the forecast that we have, which is even a moderate case forecast, sees us going from a million barrels a day this year to 3 million barrels a day by 2015, in the next 10 years.
Brian Stempeck: Now people have pointed out that there are some barriers to the Alta oil sands development. Clearly with the price of oil as high as it is that's a big driver behind future development, but how do you, I guess, where are the major problems you're facing right now as you try to expand from one million to three million to five million?
Greg Stringham: Well that's right, we've overcome the resource challenge. They've got the technology that can get the oil out of the oil sands and they've overcome the financial challenge. They've got costs down to the point where these projects are completely economic, including return to the producer, taxes, royalties and costs, at about $25 a barrel. So that's not the constraint. What's the issue now that by think we're facing? Although it's on a stumbling block it's one thing we have to overcome, is the issue of workforce. We need to have enough people to implement these projects and that becomes from the plumbers and the pipe fitters to the construction folks as we build two or three of these billion dollar projects at the same time.
Brian Stempeck: Now you're seeing a bunch of boom towns essentially spring up in Alberta right now. How are you trying to manage that? You know these workers seem to be coming from all over the world really.
Greg Stringham: They are. I mean we're using all the workers that we can in western Canada. We're looking beyond that through Canada. We're looking actually, some of the unions are looking, and beyond that to workers from the United States coming up and helping out with that. As they go forward, what they're looking at is a number of strategies to try and deal with it, so it's not all concentrated in one area. So a couple of the companies have looked at modularizing their construction, building the units down in the major centers and then training them or trucking them up and assembling them on site, which takes less manpower.
Brian Stempeck: Now as you discuss oil sands with DOE and other major officials this week in Washington, what are your priorities? Why come down to D.C. and make this pitch?
Greg Stringham: I think one of the biggest reasons we're here is we've been here for the last five or ten years talking about this. Most people still believe that the oil sands is a very high cost, expensive, non economic resource. So in all my visits down here what we continue to push is that message, but this one's a little different. Now that we've had the potential visit of Vice President Cheney, that unfortunately got canceled because he had to pay more attention to the hurricane, which was an important thing for him to do. We've also had a lot of international attention come to the oil sands. It's got 175 billion barrels of reserve there, which is about 150 to 200 years worth of reserve. A lot of people are paying attention to it right now. And what we're down here doing is saying it's going to grow in production. We need to make sure that the US market is ready to receive that kind of oil, because it's not just the regular West Texas oil. It's either quite heavy oil or it's very light oil that's been upgraded and the refiners in there and the transportation systems need to be able to handle that to make sure it comes to the market.
Brian Stempeck: Looking specifically, what needs to happen for the U.S. to be able to get that oil? I know that there is some concern in Washington that Chinese oil countries have shown a lot of interest in the oil sands, talking about potentially building a pipeline to the western part of Canada. And that's a concern as the U.S. looks out 20 years in terms of where we're getting our oil from. What does the United States need to do in order to get these refiners, to get the transportation system ready for Canadian oil from the oil sands?
Greg Stringham: Oh the first thing I'd say is the market works, right? There is no political intervention on this. The market will drive the oil to wherever the market is best for it and when it comes to the transportation of oil the shorter the transportation distance the lower the cost for the consumer and the better the net back for the producers. So that's really what's got to happen. The challenge that we have in the United States right now is making sure that the infrastructure, both the upgrading refiners and the pipelines are going to the right places. We've moved about as much of the oil sands into the kind of Midwest refineries, which is the main market for us, as we can possibly get into there without them doing some refinery modifications. We've actually just started to reverse some pipelines down to the Gulf Coast to take Canadian oil all the way down to the Houston area. You think, well, that's a long way to go, but it's one of the areas that has that upgrading capacity that can handle heavy oil. If that was moved into other areas of the United States then that would be one of the primaries where we would go as well.
Brian Stempeck: So as we see lawmakers in the House and Senate and the U.S. Congress working on refinery legislation which just passed the House, is that something you're looking towards working on? Is trying to get more incentives or more things in that bill to help get Canadian oil into the US?
Greg Stringham: Yeah and whether it's incentives or whether it's simply the fact that the government then recognizes that this change needs to happen in order to access this growing supply of oil, that's more of the point we're trying to get at. Is to make sure that there are not obstacles, roadblocks, delays in what the refineries would normally do under market conditions in the way.
Brian Stempeck: I want to turn to another issue we look at when we talk about oil sands and that's that in some of the environmental groups one of the concerns they have raised is that the primary feedstock really going into the oil sands development is natural gas. It seems like kind of a waste to be using a very clean fuel to essentially clean this very dirty oil and then you get it towards a more distilled type product. Is there going to be an effort to switch away from natural gas as you try to develop these oil sands?
Greg Stringham: Already under way. The big driver, again, behind that is these higher gas costs have affected all of us. So they're affecting the oil sands producers in the same way. They are big consumers of natural gas and they've already started to use alternate technologies and reduce the amount of gas that they're using. But there's three or four or five projects that are underway in commercial sense right now that use no natural gas at all. Now the existing projects, that were built in the '60s and '70s, they're starting to wean themselves and reduce the amount of gas they used per barrel. But we used to use well over a half of a 1000 cubic foot of gas to make one barrel of oil. Now they're getting down below that and some of new technologies, whether it be the Nexen OPTI project that they're using or some of the other technologies that are using underground heating mechanisms, they don't use any gas at all. And there's a twofold win there. Number one, they lower their costs by not using expensive natural gas and number two, they free up that natural gas to go to the rest of the market in North America. So it's a win-win.
Brian Stempeck: Now what are the alternatives? I mean one idea that I saw talked about recently in a New York Times story was saying that the potential might be there for building a nuclear power plant to actually do some of the oil sands development. Is that something that you're looking at?
Greg Stringham: It will be eventually. I think it's further down the road. The ones that are being looked at right now are taking some of this heavy, heavy oil and burning it or else gasifying it and burning it just like natural gas when they spray it out and mix it into one of their burners. The nuclear option has been looked at, but right now one of the big things that the oil sands needs is steam. And the nuclear plant can create electricity and steam, but that steam can only go about 10 miles, 15 km, before it turns into water. Well these plants are all in about 100 km or about an 80 miles radius and therefore they don't need water, they need the hot steam to get the oil out of there. So the nuclear industry said, well, we're looking at building smaller ones, but right now, to get the economy to scale and to get a nuclear plan that works, we really need to build one big one. So before we even get into the question of public reaction to a nuclear reactor and those kinds of things, they've got to solve that technical issue. And that's probably another decade away. In the meantime, they're focusing on these other alternatives, like bitumen and gasification, which are commercial today.
Brian Stempeck: Getting back to that natural gas question, as prices have gone higher we've heard a lot of talk about what to do about this in Washington. And one issue that's been raised is the idea that Canada can actually provide more natural gas for the US. There's certain industry groups out there in the United States who have said that they've had assurances, specifically from your organization, that Canada can provide more natural gas. Is that accurate?
Greg Stringham: It is, but it's going to be remembering that we're producing full out on the natural gas side of things already. But we are doing some things with our governments and with our regulators to say in order to assist with hurricane Katrina relief and hurricane Rita, is there any little thing that we can do on the margin that would help bring on some additional gas or advance some production that may not have come on until next spring, that might happen this year? Now we're not talking about BCF's of gas, we're talking about small amounts at the margin, could it be 100 million to 200 million cubic feet a day. But just by eliminating some paper backlogs, there's some projects that are sitting there that are all approved and just haven't made it through the regulatory process yet. Or whether it be by doing things like lifting the maximum rate limitations on oil, to simply say, well gee, normally you would only produce at a certain rate, but for this short period of time, over a month or two, we'll remove that limitation, because we don't think it's going to damage the reservoir. And let you produce a little bit more, kind of full out, but then we'll put it back on to make sure the reservoir isn't damaged. Those types of little things, there's five or six of them that we're working very hard on to add some gas to the market, again, not major things, but every little bit counts.
Brian Stempeck: If you had to ballpark it, if you gave us kind of an example of how much more gas would we be talking? You know are we talking about 5 percent more than what Canada is already producing? Can you give us kind of a number there?
Greg Stringham: Yacht, the number that we're, it's still very early days, but the number that we're seeing is probably a 100 million to 200 million cubic feet a day.
Brian Stempeck: OK. Also on natural gas, in the United States we've seen a major push now for more offshore development. Is that something that's happening in Canada as well? I mean what new places are you looking as the market sends prices higher?
Greg Stringham: Over the longer term, instead of just this winter, I mean the big thing that's hitting in Canada right now is the development of nonconventional gas. So that's first and we do have some offshore development, offshore of Nova Scotia, of natural gas. And there's a lot of oil offshore in Newfoundland that's coming on stream, but right now the coal bed methane, or natural gas from coal as we call it in Canada, is just really starting to develop. In the United States you're about 15 years ahead of us on that. It's just waiting for the price signal. We didn't have a section 29 tax credit that caused it to move forward, but the prices now are seeing drilling just take off in those areas. So that will be the next source of resource that comes on and that's coming on this winter over the next four to five years. And then after that we'll be looking north. And the Mackenzie Valley pipeline and the Alaska pipelines are being looked at, Mackenzie first, then Alaska. And then beyond that, then we're starting to look at other regimes that could be offshore East Coast or West Coast that could come forward.
Brian Stempeck: Now I was going to ask you about the Mackenzie pipeline. This is a fairly controversial project. You tested with the tribal groups in northern Canada, who said they oppose this. I believe it's gone to court as well. What's the current status of that? I mean how far ahead at you looking in terms of getting that bill?
Greg Stringham: It was on track for about 2010, which I mean it takes about two years for regulatory approval and about three years for construction. So that's about on track as fast as it could go right now. Recently there have been some developments where our federal government has stepped in to help solve some of the Aboriginal or First Nation's issues, as we call them in Canada. There are still some negotiations going on in that and so it's all primed and ready to go to the regulatory phase, whether it be weeks, months or perhaps until just beginning of the new year, we're not sure exactly. But it's on that track and once that gets on that track we're looking at about four to five years before the gas starts flowing.
Brian Stempeck: What about liquefied natural gas? Isn't that the major issue in the US in terms of trying to build terminals to accept these imports? What's progressing on that front in Canada?
Greg Stringham: Well as you well know, there's the 40 odd, or maybe even higher than that now, proposals in the United States. In Canada we have our share as well. There's about eight proposals in Canada right now for LNG receiving terminals to come in. Two of them are actually underway, both on the east coast of Canada, which is right close to the big consumption areas of Boston and New York in the United States with a pipeline that already accesses them. So they have found some sites that are acceptable and they're building and under construction right now. They started off with two that were about half a BCF a day each. They've now doubled them, so we're talking about two at a BCF a day each that are under construction and would be able to supply some gas on the market. Again, the timeframe on construction is about two to three years.
Brian Stempeck: All right Greg, we're out of time. We're going to stop there. Thanks a lot for coming in today.
Greg Stringham: My pleasure, thank you.
Brian Stempeck: I'm Brian Stempeck. This is OnPoint. Thanks for watching.
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