Business of Energy - February 2019

OF ENERGY

FEBRUARY 2019

ALBERTA MUST STAND UP FOR ITSELF CODY BATTERSHILL - FOUNDER, CANADA ACTION

OF ENERGY ISSUE 1 | FEBRUARY 2019

PUBLISHERS

Canadian Oil and Gas Industry Down But Never Out

by David Yager

Alberta Must Stand up for Itself

by John Hardy

04 08 14

Every Day is a Strategic Day byFEBRUARY Chuck Bean 2019

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David Yager | Canadian Oil and Gas Industry Down But Never Out

CANADIAN OIL AND GAS INDUSTRY DOWN BUT NEVER OUT

by David Yager

T

he title of the 1990 Steven Seagal movie was “Hard To Kill.” The action hero played a cop gunned down by really bad guys and left for dead. Seagal emerges from a coma after seven years and settles the score. Justice prevails as, needless to say, the good guy wins.

So it goes for Canada’s huge upstream oil and gas industry. To forward the cause of saving the planet, environmental activists have been trying to kill it for years by blocking pipelines, disrupting hearings, pushing obstructive and expensive regulations, litigation, misinformation, and supporting politicians who share and enforce politically correct anticarbon beliefs.

Judging by the chaos and challenges in the Canadian oilpatch in recent years, the enemies of Canada’s oilpatch have enjoyed some success. But like the bullets that struck down Seagal’s character, they have only inflicted injury, not death.

Because the fifth-largest oil and gas production jurisdiction in the world is hard to kill. On a barrel of oil (BOE) equivalent basis, Canada produces about 7.6 million BOE/day, behind only the U.S., Russia, Saudi Arabia and Iran. Even at these depressed gas prices and volatile oil prices, ARC

Energy Research Institute estimates the value of Canadian production in 2018 was $110 billion. This is still the largest resource industry in Canada by a wide margin. On a GDP basis for the private sector, it is second only to real estate.

According to the Canadian Association of Petroleum Producers, just keeping the darn thing going cost $83 billion in 2017. This includes direct operating costs for oilsands, conventional oil and gas, and capital expenditures for both. The total is greater than the combined annual spending of the governments of Alberta, Saskatchewan and Manitoba which provide essential services for nearly seven million people.

Certainly, the oilpatch of 2019 is not what it was.

But any idea the combined efforts of so many to either destroy or cripple this huge industry will succeed is preposterous. What makes the domestic anti-oil movement so frustrating is Canadians inhabit the only major oil-producing jurisdiction in the world conducting economic self-immolation on its oil and gas industry. Every other producer is going flat out trying to keep up with growing global demand.

There are over 7.4 billion people in the world.

Here’s what the 7.37 billion who don’t live in Canada are doing.

4 • Business of Energy • February 2019

There are multiple credible forecasters prognosticating about the future of energy and fossil fuels. They include multinational oil giants Royal Dutch Shell, BP and ExxonMobil. Two non-commercial agencies that study this subject are the International Energy Agency (IEA) in Paris and the Energy Information Administration (EIA) in Washington D.C. All five have publicly released forecasts to 2040 and beyond. All five forecasts see total energy consumption in 2040 being 30 per cent higher than 2015.

The fundamental drivers of future energy demand are population and economic growth. ExxonMobil sees world GDP in 2040 double that of 2010. Its economic growth forecast is OECD countries (Organization for Economic Co-operation and Development, the 34 countries widely considered to be “developed”) growing at an average of 1.9 per cent per year through to 2040 while the rest of the world’s annual growth rate is more than twice that at 4.1 per cent. OECD countries contain about 1.2 billion people, 16 per cent of the world total.

Energy demand growth will not come from OECD countries as they already have developed energy infrastructure including renewables. Growth will come from the other 84 per cent, about 6.2 billion people. The majority are so-called “developing” nations trying hard to be as prosperous as OECD countries.

The EIA demand growth forecast sees Asia’s energy needs growing by 50 per cent from 2015 in the 25 years to 2040, accounting for half of the total demand increase of 29 per cent. The other areas requiring more energy are Africa and the Middle East.

The composition of the anticipated global energy demand growth varies somewhat, but fossil fuels remain essential. BP sees less than 30 per cent supplied by renewables, hydroelectricity or nuclear power. Coal as a percentage of the energy mix will decline as it is replaced by natural gas or more electricity is generated by renewables, wind and solar. Actual coal consumption will still increase slightly. Natural gas growth is anticipated in all models as a replacement for coal for electricity generation.

The hardest carbon resource to replace will be oil because of its pivotal role in petrochemicals and transportation.

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Canadian Oil and Gas Industry Down But Never Out

“

The composition of the anticipated global energy demand growth varies somewhat, but fossil fuels remain essential. BP sees less than 30 per cent supplied by renewables, hydroelectricity or nuclear power.

David Yager | Canadian Oil and Gas Industry Down But Never Out

One-quarter of crude oil production is used as feedstock for petrochemicals resulting in products essential to everyday life such as plastics and chemicals. There is no substitute.

Demand for oil as petrochemical feedstock will grow with the economy and population.

About 70 per cent of oil is used as transportation fuel in three main areas. Airplanes and ships consume about 25 per cent. The next big block of transportation fuel powers heavy trucks and trains, another 25 per cent. There are no practical substitutes today.

The dynamic portion of petroleum demand comes from light cars and trucks, currently about 20 per cent. This is the riskiest element of the forecasts. Depending upon the rate of adoption of electric vehicles, peak oil demand for light-vehicle transportation could be reached by 2035 if not sooner. Better and cheaper batteries will set the pace.

The IEA summary reads, “…it is too early to write the obituary of oil. Global oil demand continues to grow to 2040, although at a steadily decreasing pace … other sectors – namely petrochemicals, trucks, aviation and shipping – drive up oil demand to 105 million barrels a day by 2040.”

This view is shared among all five forecasters.

Despite warnings from climate change alarmists to abandon fossil fuels as soon as possible, oil demand – which will exceed 100 million b/d in 2019 – will be 105 to 110 million b/d by 2040.

Natural gas, the most carbon-benign fossil fuel, has a very promising future. The IEA wrote, “…a strong emphasis on cleaner energy technologies, in large part to address poor air quality, is catapulting China to a position as a world leader in wind, solar, nuclear and electric vehicles and the source of more than a quarter of projected growth in natural gas consumption.”

Shell is particularly bullish on natural gas having made significant investments in global gas supplies and LNG while abandoning Alberta’s oilsands. On its website, Shell reports only 100 million tonnes of LNG were produced in 2000 versus 300 million tonnes in 2017. Shell sees 40

per cent of energy demand growth in the next 20 years coming from LNG. This would take the annual global LNG market to over 600 million tonnes by 2037. This explains why Shell and partners sanctioned the Canada LNG project at Kitimat last October.

The good news is the economy of the developing world is forecast to grow at over four per cent per year through to 2040 and the energy mix will be making the largest transition in history away from high carbon fuels such as coal and oil which, at least percentage wise, will shrink.

The bad news is that despite all the improvements that will and have been made, GHG emissions will rise for the next 20 years.

The IEA wrote, “While carbon emissions have flattened in recent years, the report finds that global energy-related CO2 emissions increase slightly by 2040, but at a slower pace than in last year’s projections. Still, this is far from enough to avoid severe impacts of climate change.”

ExxonMobil sees CO2 emissions from energy demands continuing to rise with transportation, electricity generation and industrial demand (petrochemicals) being the primary drivers. All the forecasts figure CO2 emissions will be higher in 2040 than today. This is sharp contrast to media reports that claim this must not happen and global climate conferences assuring us this will not happen.

Meanwhile, Canada is going down two opposing and irreconcilable paths.

On the one hand, we are a safe, honest, reliable, ethical and transparent supplier of the carbon energy the world needs. If Canada’s 7.6 million BOE/day of oil, liquids and natural gas were removed from markets, prices would spike immediately resulting in massive damage to the world’s economy and immeasurable suffering to the billions who depend on carbon energy to survive. Excessively high energy prices have been a problem in the past. It can happen again.

At the same time, too many Canadians, environmental activists and politicians are

6 • Business of Energy • February 2019

pretending one small country can make a difference on global GHG emissions and the climate of the future.

Employing a patchwork of poorly conceived policy initiatives and obstructionist tactics, climate salvationists are impairing our economic competitiveness and hobbling our major resource industry in a purely symbolic, enormously expensive and ultimately meaningless attempt to save the world.

The current disastrous oil price differentials caused by years of pipeline opposition are breathtaking in their financial devastation and their immaterial reduction in global CO2 emissions.

Fortunately, common sense and economic reality are still powerful forces.

Imagine if the combined spending of the governments of Alberta, Saskatchewan and Manitoba went to zero.

This would be regarded as disastrous but is the definition of success for the enemies of fossil fuels.

Fortunately, it will never O happen. &G David Yager is an oil & gas writer and energy policy analyst. His book “From Miracle to Menace – Alberta, A Carbon Story” will be released in 2019.

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7 • Business of Energy • February 2019

John Hardy | Alberta Must Stand up for Itself

ALBERTA MUST STAND UP FOR ITSELF C

by John Hardy

ody Battershill has passion. A unique Calgary and Alberta passion. And he vents it loud and proud, any chance he gets. Not only about Calgary being a great place to live but also about some urgent Alberta issues and how to achieve effective solutions.

A respected and successful Calgary realtor with Re/Max House of Real Estate, Battershill is also the founder of Canada Action, a volunteer-led grassroots movement urging Canadians to take action to support Alberta as the vital lifeline of Canada’s natural resources sector.

Despite tremendous supply potential, Alberta oil is landlocked. The push to get it “unlocked” and build a pipeline to move it to markets west, instead of just south to the U.S., is at the core of contentious Canadian discussions and standoffs.

Even with Alberta moving more oil by rail than ever before, transportation bottlenecks have pushed down prices for western Canadian blends. Battershill says the lack of market access to customers other than the U.S. has widened the price differential to such an extent that Canada is losing upwards of $100 million a day.

The most recent lightning rod was the 2018 Federal Court broadside to quash the Trans Mountain expansion pipeline project. The Explorers and Producers Association of Canada (EPAC) – which represents about 160 Canadian

companies in the oil and gas sector – called it a devastating decision: “It’s hard to conceive of a project that could have had more layers of review, consultation and approvals at the NEB and the federal cabinet.”

Whenever Battershill jumps into discussions about the energy situation, and particularly Alberta’s role and true potential, he morphs into a cross between an evangelist and a sharp lawyer delivering a closing argument.

His frequent targets include various Canadian environmental activist groups and what he calls their well-funded and organized obstructionist campaigns to keep Alberta oil landlocked.

“There are a lot of people and groups slandering the energy sector and a lot of people are being misled,” says Battershill. “We must keep trying and we must inoculate people against misinformation and intentional deception.

“How can the government be expected to consult with a First Nation that has received funding to obstruct the pipeline? A couple of the groups behind the pipeline appeal have received significant funding from non-Canadian sources to block Canadian trade. We also can’t forget there are 43 First Nations that do support the project.”

Tankers are a key issue for many protestors which he animatedly counters with the logic that whales don’t differentiate between cruise

8 • Business of Energy • February 2019

Alberta Must Stand up for Itself

9 • Business of Energy • February 2019

John Hardy | Alberta Must Stand up for Itself

“

“But Alberta must stand up for itself. What we have done for the last decade has not worked. We need to fight back because we cannot allow misinformation and fear to go unchallenged. We must stand up for our citizens and for our resources and make sure that the facts are known. Proud, positive and proactive.” ships, cargo ships, bulk carriers or barges while mentioning there are currently 23,000 ship movements per year in the port of Vancouver.

Industry guesstimates Trans Mountain would add about 750.

He emphasizes that natural resources are one of the strengths of the Canadian economy, accounting for 17 per cent of our GDP while employing more than two million people directly and indirectly across the country.

Exceptionally well-informed and knowledgeable of Alberta’s contentious and crucial energy situation, the triple-A personality Battershill speaks out not for attention seeking or idle venting. Instead, he is a key part of an informed, committed and uniquely Canadian movement – whether conducting a one-on-one interview, posting on the stimulating Canada Action website (www.canadianaction.ca) or firing up a rally of more than 2,700 bundled and chilly cheering Calgarians outside city hall.

“For the past 10 years, we have not been having balanced conversations. It’s important to keep the discussions positive, proud and non-partisan.

It’s not West versus East or oil versus solar.”

Never one to mince words, he suggests Alberta’s oil and gas sector has itself to blame for being too nice and accommodating, and advocates shaking the “softball syndrome” that exists in some corners of the energy industry. “There are people in positions of influence and policy direction bending to obstructionist protest groups. They must be held accountable and explain their role in the policy obstruction.”

Battershill consistently reinforces the forceful message that Alberta oil is a vital Canadian topic because it is critical to Canada’s economy.

“Alberta is Canada’s economic powerhouse! We produced 238,000 more barrels per day in the first eight months of 2018 than we did over the same time frame the year before. Extraction is also on the rise. Since 2010, Alberta has gone from producing under two million barrels per day up to more than 3.7 million barrels a day. And global oil demand is expected to grow nearly 12 per cent by 2040.”

His sentiments are echoed by the Canadian Association of Petroleum Producers (CAPP) which emphasizes investment in Alberta oil

10 • Business of Energy • February 2019

Alberta Must Stand up for Itself is crucial because investment creates jobs, economic growth and revenues for governments to help fund schools, hospitals and roads. CAPP says a global plunge in oil prices in 2014 triggered a worldwide decrease in oil and gas investment. Recently, rising oil prices have helped spur a recovery in investment – except here in Canada.

There is industry consensus – and concern – that the quashing of the pipeline and the way Alberta is treated is sending a long-term negative message to investors both at home and around the world about Canada’s regulatory system and the ability to get things done.

“Numerous international investors have said Canada is not competitive,” Battershill points out. “Companies have been voting with their investment decisions as they sell Canadian assets and look to invest in other jurisdictions. We have heard these concerns from banks, auto sector, cleantech sector, tech sector, finance sector and the resource sector. Our international investment reputation is in tatters due to bad government policy and the lack of support for pipelines.

“After all,” he says, “supporting Canada’s natural resource industries – oil and gas, mining and forestry – is extremely important not only for our current economic prosperity, but for our future as well.

“But Alberta must stand up for itself. What we have done for the last decade has not worked. We need to fight back because we cannot allow misinformation and fear to go unchallenged. We must stand up for our citizens and for our resources and make sure that the facts are known. Proud, positive and O proactive.” &G

11 • Business of Energy • February 2019

RAZOR ENERGY REINVENTS JUNIOR O&G ROLE

By Rennay Craats

Alberta’s economic downturn has created an opportunity for companies to reinvent how they do business in order to succeed, especially in the post-2014 oil and gas marketplace. Razor Energy Corp., formed by Doug Bailey, Frank Muller and accompanied by a group of distinguished executives and employees, went public in February 2017. Since then, Razor has embraced the challenge, emerging as a unique and aspiring energy company within a still-bleak landscape.

“We’re a small junior with the goal of consolidating assets, lowering costs and enhancing production through reactivations and utilizing existing well bores not necessarily through the drill bit,” says Doug Bailey, president and CEO of Razor Energy.

The fledgling company launched with its acquisition of a Swan Hills site producing sweet light oil and three

months later added nearby Kaybob Triassic to its portfolio. For now, Razor is focusing on reactivating and repurposing existing wells within these legacy fields instead of drilling, as there is an abundance of oil and other natural resources at existing locations.

“As a junior we are nimbler, a little more willing to do some dirtier work in the well files and in the field, and we were able to find a series of wells that had a lot of economic oil available to us to reactivate and produce,” he says.

The South Swan Hills site has more than one billion barrels of original oil in place (“OOIP”) alone, with East Swan Hills adding 110 million barrels OOIP and Kaybob representing 240 million barrels OOIP. Razor has reactivated 81 gross (64 net) wells for a result of nearly 2,400 boepd for $17 million. This boils down to an average capital efficiency of $7,100

per boe, average expenditure per event of $265,000 and an average production event of 37 boepd.

“That’s an extremely efficient use and return on capital,” Bailey says. “And there’s still lots of juice left to bring to the surface. It’s just a matter of finding economic ways to do so in the right environment.”

Innovation and investment are how Razor sets itself apart.

For example, the team quickly recognized the main asset operating cost was power and set out to change how Razor operates.

The company installed cleaner, natural gas power generation for the South Swan Hills field to replace buying grid electricity, which is still biased to coal generation. Now, Razor is taking power generation a step further by initiating the country’s first commercial geothermal electricity project.

Razor’s waterflood activity produces 120,000 barrels of hot water every day, and there is enough volume and enthalpy (heat energy) available in the water to generate commercial power. Razor can use the power to operate the asset, sell to the grid, or both. The innovation is using reservoir heat transported to the surface by the hydrocarbon waterflood activity to generate green power.

“This will be a fully operational, self-contained geothermal operation in the next few years,” says Bailey. “We’re looking for a green solution to power consumption.”

These benefits impact investors too. Razor implemented a share dividend in October 2017.

The assets have a manageable base decline of seven to 12 per cent and are relatively predictable and low risk, which allowed the company to confidently include a cash yield in the stock. Razor also hedges anywhere from half to almost all of its forecast oil. With floors between US$54.50 and US$59.50, Razor shareholders are benefiting with production just under 5000boepd.

In two short years, Razor Energy has positioned itself for success in oil and gas with green practices, a new reclamation and remediation initiative, and efficient well reactivation and repurposing. As it grows, Razor aims to become a full-cycle comprehensive energy company built for 2040, rather than 2000. This includes efficient hydrocarbon production, “energy as power generation” projects, vertical integration of environmental aspects, and social and economic responsibility to meet the needs of Albertans, Canadians and the world.

This initiative aligns Razor with local, national and international mandates for cleaner energy, attracting more attention to the small company. Unlike many junior companies that subscribe to the build-to-sell model, Razor is favouring a build-to-build model. To date, an investment of nearly $13 million in a leading SCADA monitoring system and power generation will allow Razor to better manage sites long term.

With investment, innovation and investor incentives, Razor Energy presents a provocative value proposition to new investors and is redefining junior oil and gas in Canada.

“Those are hard cheques to write because they don’t increase production, but we felt it not only provides real economic benefits, it also reduces environmental impacts,” he says.

Ste 800, 500 – 5th Ave. S.W. Calgary, Alberta T2P 3L5 info@razor-energy.com Phone: (403) 262-0242 RZE:TSXV

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Chuck Bean | Every Day is a Strategic Day

EVERY DAY IS A STRATEGIC DAY

by Chuck Bean

B

usiness in the energy industry has changed pretty dramatically over the last few years and business leaders need to get more strategic than ever before.

competitive in the energy space, we need to change things up.

Historically, strategic planning for oil and gas companies was an annual event. Sometime in July teams would gather their facts, fiction and formulas, meet in August, pound numbers in September, reconvene for the corporate retreat in October, agree to outcomes in November and deliver the plan in December for a January execution.

It starts with scratching your goals on the back of a napkin, sharing them with your team, gaining agreement from the team, and taking action. Do it now and do it often! Fast growth means fast change. Don’t wait and don’t hope.

Just get going.

Sound familiar?

But inevitably sometime around spring breakup, many would realize: a) nobody really knows what is going on; and b) the numbers are being missed.

I have seen this repeat hundreds of times.

Many companies may blindly continue on this path, yet I argue this is a mistake. Business cycles are getting faster and faster especially since companies need to constantly adjust to changing commodity prices and economic conditions. This traditional planning cycle needs to be set aside and if we want to be more

How should strategic planning look today?

Timelines and assignment are next. Assign a deadline to each goal, consign it to the right person, let them run with it and step aside. If a problem comes up, and they always do, let the person learn and ask, “What do you think you should do?” Guide and support to get to the right answer. Help the team get outside assistance or training if needed. In this fastchanging environment, people need to learn on the fly.

With our oil and gas space needing greater attention to detail than ever before, review strategies weekly, monthly or at the absolute least quarterly. Gather your team and have each team member report on their progress. Critique if necessary; compliment whenever you can. DO NOT, at whatever cost, have someone other than the person responsible present findings. Ensure

14 • Business of Energy • February 2019

the people responsible own the challenges, successes and the failures. Failing fast is just as important as succeeding.

Create competition and, if you can, divide up duties so one goal requires at least two or more people working together to achieve the outcome. Peer-to-peer accountability is often more powerful than anything the boss can do. Michael Dell, founder of Dell Technologies, calls it “two in the box.”

What gets inspected gets done. Monitor goal success and revise resource allocation as required. If a goal is not being met, reallocate resources and pour them into goals being achieved to build a track record of success. For those goals not being met, determine if it’s a people or a goal issue. Change it up as required and do it fast!

Carry the wounded and shoot the stragglers. If people are working hard with minimal but increasingly effective results, support them. If people don’t want to participate or perform, then say goodbye. This is a military strategy that works.

Follow this and every day will be a strategic day. In these highly challenging times, you’ll be more focused, your team will be more disciplined and you’ll O achieve greater success. &G

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Every Day is a Strategic Day

“

What gets inspected gets done.

Monitor goal success and revise resource allocation as required. If a goal is not being met, reallocate resources and pour them into goals being achieved to build a track record of success.

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