Oil and Gas:

EnCana's Protti stresses increase in refining capacity as Canadian oil supplies grow

With Canada as the main foreign supplier of energy to the United States, the Canadian tar sands are quickly becoming a popular source of oil. During today's OnPoint, Gerry Protti, executive vice president of corporate relations for EnCana Corp. discusses challenges facing his company as they try to steadily increase production in the oil sands. He talks about the large-scale effort to improve emissions reducing technologies and discusses the Canadian government's focus on supply development.

Transcript

Monica Trauzzi: Welcome to OnPoint. I'm Monica Trauzzi. Joining me today is Gerry Protti, executive vice president of Corporate Relations for EnCana Corporation. Gerry thanks for being here.

Gerry Protti: I'm pleased to be here Monica.

Monica Trauzzi: Gerry, there's a new report out by the U.S. Congress that basically says that the Canadian tar sands could potentially reduce OPEC's dominance and also affect its ability to raise prices. EnCana is involved with the oil sands in Alberta. How is your company responding to this latest report?

Gerry Protti: Well we're quite excited about the potential, the opportunity, and the report is accurate. There's a real role for Canadian oil sands to supply additional oil into the U.S. and other markets. And we have a tremendous asset in the oil sands, about 40 billion barrels of oil in place. There are two types of oil sands. One is mining oil sands and I'll describe that in a moment. And another one's in situ. And all of our oil is in an in situ formation. So with a mining project, and that's most of the oil that's produced right now in the oil sands are from mining projects. The overburden is stripped off and the sand is mined and the oil is contained in the sand. And then the oil is separated from the sand using heat and chemicals and a method. And then the result is bitumen, a tar like substance. And it's upgraded to a synthetic quality crude oil, slightly better in quality than West Texas intermediate. So a very light oil and it's shipped to refineries in Canada and the U.S. With an in situ approach what happens is in situ means in place. The oil's recovered in place. And you recover that oil through use of a technology called SAGD, steam assisted gravity drainage. And we've been one of the pioneering companies in developing it. We're currently producing just over 40,000 barrels a day using that technology. And what you do is you drill two wells, in well pairs, and the first well steam is injected into it and it's above the second well. And it heats a reservoir in the sand and essentially liquefies the oil and it melts, literally, and that's why they call it gravity. It then drips down to the formation to the producing well where it's pumped to surface. So it arrives as bitumen. The sand doesn't arrive with it. And so then the company has the option of mixing it with a diluent to put it in a pipeline to move it to North American refineries or upgrading it as well in the field or on location.

Monica Trauzzi: Well let's talk a bit about production numbers. Where does production stand right now for the overall oil sands process? And where would you like it to be in 15 years?

Gerry Protti: It's about a million barrels a day. And expectations are, over the next 15 years, it should be relatively straightforward to add two million barrels a day to that total. Now for our company we're at 40. We announced to the marketplace that we were going to, by 2015, take our production into the range of 500,000 barrels a day. We feel we've got the potential to go above that, but initially our target is 500,000 barrels.

Monica Trauzzi: What are some of the challenges that you're facing as you try to increase output?

Gerry Protti: So the challenge currently in the environment is there isn't a problem with capital to do it. We understand the technology. The challenge is really around labor in terms of these projects and making sure that you can organize them in a way that you're not going to drive your costs up to too great a degree. The other challenge that we have, and which is I think quite unique with the oil sands, is given the heavy tar like nature of the bitumen you have to have an integrated strategy. You either have to be processing it through a field upgrader or delivering it to a refinery either in Canada or the U.S. that has the capability to take it. We are an upstream company. And so what we're doing is we've indicated to the marketplace, we're in the middle of a process right now, where we said we're prepared to partner and essentially give a company access to up to 50 percent of this oil sands resource of 40 billion barrels. But what we want is a downstream solution. And we have a data room in place earlier this year, in the spring. We've shortlisted a group of companies. We're hoping in the third quarter we'll be able to announce a partnership that will be quite innovative, that will allow us to move aggressively to that 500,000 barrels a day mark or higher. So I think the issue is not technology, its access to labor markets, infrastructure to make sure it's done and then having that downstream solution.

Monica Trauzzi: At the same time we have President Bush calling for a reduction of foreign energy sources. The U.S. continues to rely heavily on Canada for oil. Why do you think that Canada doesn't necessarily apply to this rule that he set?

Gerry Protti: Well, the U.S. relies heavily on Canada for oil as well as natural gas. We're the number one supplier of both commodities to the United States. And I think - and it's interesting, Monica, that this week we have Alberta week at the Smithsonian. And what it does is it reinforces the strong partnership and cultural relationship between Alberta and Canada and the United States. So when you look at the issues around reducing foreign oil I think you can look at Canada differently because we don't have the issues of geopolitical risk that exist in many other parts of the world. So you've got a stable government, a culturally very similar society, and primarily and most importantly for producers and consumers, rule of law and sanctity of contract. So if the deal is done you know that rules aren't going to change part way through. When you look at what's happening around the world so many areas now have additional geopolitical risk that they never had before. But it just makes sense to increase production from Canada.

Monica Trauzzi: What do Canadian companies, such as EnCana, need from the U.S. lawmakers in order to increase cross-border cooperation?

Gerry Protti: Actually very little. If you look at the flow of goods and what's occurred since the North American Free Trade Agreement's been put in place, the stage has been set very well for an integrated North American marketplace. And in oil and in natural gas that's what we have. And increasingly we're seeing it in power as well. There's one area where probably some work could be done, is making sure that there's timely additions to refining capacity. Because, in both U.S. and Canada, conventional oil is declining, that's what refineries were configured for to take as feedstock. So a lot of capital has to go into upgrading the capabilities of the refineries to take heavier slates of crude and bitumen. So lots of capital has to go through and lengthy environmental processes. I think expediting those processes to make sure that we've got a match between the oil supply, which is getting heavier, and the refining capacity and capability. Making sure those are well integrated is probably the most important job.

Monica Trauzzi: Do you see Canada as a long-term solution for the U.S. in order to help with our current energy crisis, energy needs? We have high energy needs right now.

Gerry Protti: It's often said, by those people who know the oil sands, the expression we use is there's more oil in the oil sands than exists in the Saudi Arabia's reserves. So when we talk about one company having access to recoverable oil in the range of, you know, 40 billion barrels, and you look at an asset that people don't even know what the real potential is, but it's probably in the order of 300 to 400 billion barrels of productive capability, it's going to take a long time to get that resource out. It has to be done in an environmentally responsible manner as well. So it's going to be there for an extended period as a hydrocarbon source for North America.

Monica Trauzzi: Former Vice President Al Gore has been quoted as saying that the Canadian government is a slave to oil sands' interests. He's also directly correlated the Canadian election results to oil sands projects in Alberta. How would you classify your relationship, your company's relationship, with the Canadian government?

Gerry Protti: I think it's excellent both with the current conservative government, as well as the previous liberal government. I think there's no question that the current government is very much focused on supply development and that's been an anchor of their policy position. But we haven't had significant difficulty in developing projects, even with the liberal government. I think what we have to demonstrate, from an environmental perspective, is -- I mean there is no question there are environmental impacts associated with this development. But we have to do it in a responsible way and one that, over time, mitigates the impacts of additional greenhouse gas emissions. EnCana, we also have a project in Saskatchewan and Weyburn, where we're injecting CO2 that we take from a coal gasification plant in Beulah, North Dakota. And it's the largest EOR, enhanced oil recovery, CO2 miscible flood. And companies are really looking at technologies like that to reduce emissions from the oil sands.

Monica Trauzzi: By agreeing to help the U.S. meet its energy needs is Canada dismissing its goals to reduce greenhouse gas emissions and, more importantly, adhere to Kyoto?

Gerry Protti: Oh not at all. I think right from when the Kyoto agreement was signed it was recognized that given that Canada is an exporting nation, both in terms of oil sands and natural gas, and there had been significant growth in both of those commodities since 1990 when the Kyoto agreement was first being considered and entered into through the 90s, it was going to be very difficult to reach those targets. The current government has said we're clearly not going to meet the goals that we have set out for Canada in the Kyoto agreement. But that hasn't stopped, for a moment, the investment in technology and research to reduce emissions. And the Weyburn project is a perfect example. So we've got research institutes, the International Energy Agency, U.S. DOE studying back technology and other technologies that will allow us to reduce emissions. So I think that you can absolutely increase oil supply and natural gas supply out of Canada and still move forward and make a contribution on a global basis to develop new technologies that will make for cleaner coal burning plants and lower emissions per unit of output from hydrocarbon producers.

Monica Trauzzi: Of course EnCana, as you said earlier, is not just known for production from oil sands. I mean basically you are the largest natural gas producer. What's the main strategy that you're using now for development and what can we expect to see next from EnCana?

Gerry Protti: We are a significant natural gas player. We are increasing this role in the oil sands. And our focus on natural gas is on unconventional natural gas. And I just want to just take a moment to describe the difference between the two. A conventional reservoir is one where you've got a trapping mechanism and the natural gas in a reservoir, where the whole aspect of the business is the hunt for the reservoir. So you're searching throughout North America and around the world. And once you find one of these you stick a few straws in and you pull out the gas. Unconventional resources are very broadly distributed in producing basins around the world, but the technology has just been initially developed in the U.S. and Canada. And the natural gas is not contained in a trapping mechanism or a traditional reservoir. It's spread over multiple layers of a broad distribution underneath the earth's surface. So the technology is to be able to complete over multiple zones, each one of them producing a small amount of gas into the well bore. And typically these formations are called tight sands or shales or coals. And it's, the technology, is all around fracturing the rock to allow the gas to be produced. 70 percent of our gas is now from these types of deposits. And we see the ultimate potential across North America is huge. There's much more gas in these types of reservoirs than in conventional reservoirs.

Monica Trauzzi: We're just about out of time. I want to get this last question in. It can cost up to four times more to pull oil from oil sands than traditional methods, like in Saudi Arabia. So how do you convince Americans that this is the way to go?

Gerry Protti: I think, you know, when people originally looked at oil sands they said this was never going to be an economic source. And when the initial development started it wasn't economic relative to conventional sources. But what's occurred over time is costs have been reduced as people have experimented and tested in the field different technologies, different approaches. We haven't even begun to understand what we can do in terms of further reducing the costs. It still remains one of the most expensive sources of oil. But the potential, in terms of the available resource base is so huge that we'd be doing a disservice to the people of North America if we weren't developing those technologies to produce it. It's safe, secure and it will be economical over the longer term.

Monica Trauzzi: Gerry thanks for joining us.

Gerry Protti: Thank you Monica.

Monica Trauzzi: This is OnPoint. I'm Monica Trauzzi. Thanks for watching.

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