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“Alberta may be conservative, but we’re not reckless.”
BY ERIC BLAIR
When the NDP formed government last May, there was chatter that some E&P companies would shift their capex out of the province and into Saskatchewan. But as it turns out – or, at least, as it’s turned out so far – the bigger threat to the Alberta treasury is Texas. That’s because Canadian producers with acreage in both Alberta and the Lone Star State are choosing to spend most – and in some cases all – of their reduced capital budgets south of the border. Baytex Energy, for example, has decided to reallocate all of its development dollars to the Eagle Ford assets that it picked up when it bought Aurora Oil & Gas in 2014. And while there are those who might be inclined to chalk that up to politics, at an energy conference in Toronto last fall CEO James Bowzer made it clear that it was purely about economics. As the Financial Post’s Yadullah Hussain noted in a story at the time, “The company said it can break even in the Eagle Ford at US$35 per barrel, compared to US$44 at Lloydminster and US$47 in Alberta’s heavy oil Peace River basin.”
Brook Papau, a director of energy at ITG Research in Calgary, also believes that politics have little effect on the capital allocation decisions being made by companies with dual petroleum passports. “Obviously, Alberta’s not without political risk right now, and we know anecdotally that some investors are waiting to see what happens. But I don’t think operators make decisions on that basis,” Papau says. “In the case of Baytex and Encana, you could argue that their most economic and viable plays today, at these oil prices, are in the Eagle Ford and in the Permian Basin – especially if, as in Encana’s case, their goal is to get more oily.” And while the favorable geology of those two monster shale plays is part of what’s driving those superior economics, so too is the relative lack of regulation. “They are unquestionably structurally more appealing and less expensive. Part of that is because it’s Texas – there’s quite a bit less regulation, and so there’s less red tape. In Canada, we have a strong regulator, and that tends to slow things down a bit.”
Canada’s also been slow, relatively speaking, when it comes to reducing prices on the service side. “When oil prices declined earlier this year, we saw that the U.S. operators were almost immediately able to lower well costs,” Papau says. “Canadian operators, and I think the Canadian space in general, is a little bit slower to shed extra costs.” That’s in part due to the fact that while Canadian operators were asking for – and getting – price cuts from their suppliers, the sinking Canadian dollar raised the price of equipment and steel they generally source from the United States. “Canadian operators are now at that 20 per cent level,” Papau says. “So they’ve been a little bit slower to react that way.” But perhaps the biggest advantage the U.S. plays have over Canadian plays is the access to infrastructure and proximity to both refineries and tidewater. There are no interstate pipelines that need presidential approval, and there is no need to move crude by rail or other similarly expensive modes of transport over long distances. Indeed, the United States has the most robust network of energy infrastructure in the world – and that gives its basins a cost advantage that’s hard for those north of the border to compete with.
If there’s a play that theoretically could compete on cost and deliver production on the same scale as the Bakken, the Eagle Ford and the Permian, it’s Alberta’s various SAGD operations. But right now, at least, it’s nowhere close to being competitive on a dollar-for-dollar basis with U.S. shale plays, and Papau doesn’t see it closing the gap any time soon. “That would be a pretty major leap for it to make. I would never write it off, because SAGD is a technology – and it’s a ‘you don’t know what you don’t know’ technology. But then there could be that same breakthrough in other play types that are a glimmer in someone’s eyes today.” And while additional pipeline outtake capacity would certainly help SAGD’s internal economics, it wouldn’t be nearly enough to close the distance between its cost profile and that of the shale plays to the south. “Nothing is going to change a $70 breakeven SAGD play into a $35 breakeven Permian play,” Papau says. “And that’s what you’re competing with now – that $35 to $45 breakeven Permian well versus the $65 to $75 breakeven SAGD project. A new pipeline isn’t going to reduce the cost of that project by 30 bucks a barrel. It’s just not. If it’s five bucks a barrel it’s hugely material, but it’s not going to change the fundamentals of the space today.”
One thing that might change them is a serious reduction in the environmental regulations and oversight that make doing business in Alberta more onerous and expensive than it can be in Texas. And while it’s almost certainly not in the cards, given the presence of an NDP government in Edmonton and a Liberal one in Ottawa, it’s also not something that Papau thinks most Albertans would want to see. “Alberta may be conservative, but we’re not reckless. And having a strong regulator is one of the things that gives us the social license to go and exploit these plays on Crown land. Lightening that may reduce costs, but I don’t think it would be a choice many people would want to make.”
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