Industry continues to prove itself despite regulatory interference

The midpoint of 2024 arrived with the convergence of many factors. Most noteworthy are the growing public understanding of the role of hydrocarbons in day-to-day life; the real costs associated with eliminating their use; the industry’s ability to achieve emissions reductions; and the federal government’s realization that the primary outcome of their policies targeting oil and gas producers has done nothing except increase costs for taxpayers. The result has been the so-called “affordability crisis,” with the federal carbon tax front and center as a contributing factor.

REGULATORY/POLITICAL

In addition, multiple provincial governments and First Nations have vowed to oppose the ill-conceived, heavy-handed, and punitive federal policies that have unfairly targeted their constituents, without achieving the objectives that ostensibly justified their creation.

Most recently, the deal struck by the federal Liberals and left-wing New Democratic Party to keep the Liberals’ minority government in power was cancelled by the NDP in early September. Oddly, the reasoning was that the federal government would always “cave to corporate greed.”

This despite increasingly harsh and targeted attacks by Liberals on the oil and gas industry, attacks wholeheartedly supported by the NDP. In June, the federal government passed Bill C-59, which requires that any claims made about the environmental benefits of products or technologies must be proven in accordance with “international standards.” It is unknown which standards are referenced, although they clearly would not favor hydrocarbon producers.

The penalties for not meeting the unknown standards are substantial: up to $10 million for the first offense and up to $15 million for a second. In addition, starting in 2025, activists can bring claims against oil and gas companies for “greenwashing,” aka having the audacity to publish results from emissions reduction efforts. In response, many oil and gas companies have pulled all environmental reporting from their websites and publications.

Desperate to retain power, the feds have reached out to the Bloc Quebecois, a federal party that exists to promote Quebec’s interests at the national level, regardless of the potential impact or cost to the rest of the country. It is feared that any such deal will further impact oil and gas producers, as Quebec has repeatedly stated its staunch opposition to hydrocarbons and could push for further sanctions. Ironically, Quebec has arguably benefited more from hydrocarbon production than any Canadian province, as the federal equalization program has transferred almost C$120 billion to Quebec over the past 10 years, with Alberta and its hydrocarbon industry as the largest contributor.

GROWTH VS. COSTS

One of the key growth areas for industry this year is in the development of LNG facilities in British Columbia (Fig. 1), which should alleviate some of the downward pressure on Western Canadian natural gas prices, which have been unnaturally low for years, due to insufficient market access. Further exacerbating the situation are federal policies that heavily penalize the use of natural gas to produce electricity, which has driven electricity prices up, particularly in Alberta, further impacting Western Canadians’ cost of living.

On the negative side, costs are expected to increase significantly later this year, when several tariffs on Chinese goods (including steel and aluminum products) are set to begin. The move is expected to increase costs in multiple industries, including oil and gas, sawmills, and utilities.

Despite the ongoing market and political obstacles, the Canadian industry continues to grow, as faith in its technical capabilities and global market forces strengthens. Carbon Capture and Underground Storage (CCUS); hydrogen production; transportation and storage; and emissions reductions have all progressed substantially, as producers have embraced the challenges associated with evolving public expectations.

PRODUCTION/DRILLING

Alberta has posted several production records this year, with crude oil output reaching a new high of 3.9 MMbpd in August, Fig. 2. This is thanks largely to a big boost in export capacity from the expanded Trans Mountain pipeline, which will reach maximum capacity in 2028. Meanwhile, the International Energy Agency is predicting that Canadian crude oil supply will increase almost 10% by 2030.

The uptick in production is matched in a number of key areas, including drilling, land sales, and spending. But with costs rising, and given that the attacks on industry from the federal government continue unabated, caution remains the most common stance for producers.

Drilling totals have slipped slightly since last year, with 1,923 wells drilled in the first half of 2024, a 3.6% decrease from 1,995 in 2023, according to Daily Oil Bulletin records. This included 1,180 wells drilled in Alberta, down 11% from 1,331 last year, 520 wells in Saskatchewan, up 6% from 489 in 2023, 144 wells drilled in British Columbia, a 31% decrease from 208, and no wells completed in Manitoba or Newfoundland, which had 48 and one, respectively, in 2023.

Meanwhile, the Canadian Association of Energy Contractors is sticking with its original 2024 drilling forecast of 6,229 wells—an increase of 481 wells, up 8% from 5,748 in 2023. And equipment/service association Enserva originally issued a forecast of 6,300 wells for 2024 but has not updated that number since. In the absence of additional input, World Oil is going with a number in-between the two estimates at 6,265 wells. It should be noted that though the first eight months of 2024, Canadian rig activity was running about one unit higher than 2023’s pace, with further growth likely.

OFFSHORE ACTIVITY

Offshore Newfoundland and Labrador, work remains fairly steady. Cenovus said in mid-summer that construction work for its West White Rose development is progressing. The concrete gravity platform is close to its final height, and the structure of the topsides is complete. At this juncture, the project is now roughly 80% complete and advancing on schedule. First oil is slated for 2026.

Meanwhile, Equinor has still not announced formal approval for the Bay du Nord development project offshore Newfoundland, but has indicated that it is considering restarting the project. Back in May 2023, Equinor and partner BP announced that the project would be delayed for up to three years, due to high inflation and changing market conditions. However, in January 2024, Equinor indicated that it was restarting the project by sending out an expression of interest (EoI) for development of an FPSO.

In the meantime, Equinor has continued exploration drilling around the field in 2024. Using the Hercules semisubmersible (Odfjell Drilling) Equinor drilled the Sitka C-02 well in about 2,790 ft of water. While the well found hydrocarbons, the company has classified it as a technical discovery and not commercially viable. Equinor has moved on to drilling the Cappahayden South prospect, about 3 to 5 mi from the Sitka well. The Hercules is drilling this well in about 2,950 ft of water, and the project may take up to six months. While the wells are not part of the Bay du Nord project, they will help the operator to understand the area’s resource potential and thereby optimize the development.

Elsewhere, a highly anticipated exploration well drilled by ExxonMobil and partner Qatar Energy did not produce good news. An ExxonMobil spokesperson confirmed to local media that the Persephone C-54 exploration well in the Orphan basin did not find any commercial hydrocarbons. The well was drilled in a challenging water depth of 2,970 m (9,744 ft) by the StenaDRILLMAX drillship, Fig. 3. The vessel was released from its contract on Sept. 8.

M&A ACTIVITY

Merger and acquisition activity got off to a slow start in 2024, but pundits believe that there will be more action on that front later this year and into 2025, although overall M&A spending should be down from 2023. Highlights in the second half include Tourmaline Energy Corp.’s C$1.3-billion deal to acquire Crew Energy Inc. in August, and Advantage Energy Ltd. picked up assets from a private seller for C$445 million. Both deals enhanced the companies’ Montney positions.

CAPITAL SPENDING

Spending has flattened out somewhat from the heady increases seen in 2023, as oil prices have dropped this year. But spending on natural gas is expected to increase, as operators look to take advantage of a firmer Western Canadian market, particularly when LNG Canada’s Kitimat project comes online in early 2025.

Second-quarter results indicate that overall, spending is up from last year, with aggregated second-quarter expenditures hitting a nine-year high. Suncor Energy leads the pack, with spending pegged at C$6.3-6.5 billion this year, up approximately 14% over last year’s $5.6 billion. Canadian Natural Resources Limited plans to spend C$5.4 billion this year, unchanged form 2023 spending levels, and Cenovus Energy Inc. has maintained its previously announced capital program at C$4.5 – 5.0 billion, up approximately 10% from 2023 spending.

LAND SALES

Crown land sales continue to show growth, reaching almost C$300 million across Western Canada in the first half, an increase of more than 35%. Alberta brought in $263.7 million ($794.76 per hectare) up over 36% from $193 million ($394.44/ha) in 2023. Saskatchewan collected $32.9 million ($763.95/ha), up almost 40% from $23.6 million ($489.81/ha) last year. In Manitoba, there was only one sale, which brought in not quite $29,000 ($85.86/ha), down 94% from last year’s total of $488,100 ($315.21/ha).

Another positive note is that British Columbia will resume land sales this December, their first since May 2021. Dispositions were halted after a BC Supreme Court ruling upheld an appeal by the Blueberry River First Nations in June 2021. The Supreme Court ruled that the provincial government breached the treaty agreement signed over 120 years ago by permitting development without the community's approval.