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Why Venezuela is Alberta's biggest competitor

Why Venezuela is Alberta's biggest competitor

Alberta's long-awaited and much over-hyped Royalties Framework Report makes the case that the United States, once our biggest customer, is now our biggest competitor in world oil markets. This isn't entirely correct. Although the US has substantially ramped up shale oil production in the past 8 years, much of that oil is far too light for its own refineries. And that's creating a serious imbalance in North America's energy markets. Now that the US has lifted its oil export ban, much of that shale oil will end up in Europe, whose refineries are better suited for light sweet crude feedstock. And that means US demand for heavy oil won't be subsiding anytime soon.

Exxon Mobil surprised economists last month when it released its Outlook for Energy report. Not surprisingly, the company predicts that demand for fossil fuels isn't going anywhere. Another 2 billion people will be added to the world's population by 2040 and the need for oil, gas and electricity will rise with it. And Exxon sees North America becoming largely energy independent by 2025. The forecast was slightly more bullish than expected, but that wasn't the surprising part.

❝ North America, which for decades had been an oil importer, is on pace to become a net exporter around 2020 ... rising oil sands production will enable Canada to continue exporting its surplus heavy crude to the US whose refining system generally is designed to process heavier grades of crude. ❞

- Exxon Mobil, Outlook for Energy

What stood out in the report is that Exxon sees robust growth in the oil sands - more specifically, the Alberta and Venezuelan oil sands. Oil sands deposits, particularly Alberta's, are often maligned for being the highest cost and most carbon-intensive oil barrels on Earth. But these deposits remain very attractive assets for oil majors like Exxon, even at these depressed prices. For one, there's no exploration risk. no dry wells, little reservoir uncertainty. And oil sands deposits have very slow depletion rates, resulting in assets which can operate for several decades versus conventional wells which typically run dry after a few years. That's long enough to ride out peaks and valleys in crude oil prices.

❝ By 2040, oil sands production is expected to grow to nearly 7 Mbbl/day ... near-term gains will likely be led by Canada, while longer-term growth will likely be led by Venezuela. ❞

- Exxon Mobil, Outlook for Energy

Exxon certainly isn't alone. Total, Shell, Chevron and BP have also invested heavily in both the Canadian and Venezuelan oil sands. Every oil major is predicting steady growth in heavy oil production over the next 20 years. That's because 50% of the world's oil reserves are heavy, an estimated 8 trillion barrels of known reserves, a good fraction located in Canada and Venezuela. Combined, the two countries hold 3 trillion barrels of oil-in-place, a lucrative feed stream for US refineries.

How it all fell apart

Venezuela was once the largest supplier of heavy oil to the US. The country took steps to liberalize its petroleum sector in the 1990s, allowing private investment into its oil and gas industry. US Gulf Coast refineries retooled their operations to accommodate this heavy sour feedstock, taking advantage of its discounted price. Imports to the US peaked at 1.8 million barrels per day in 1997. 

But in 1999, Hugo Chavez convinced the people of Venezuela they were being robbed by the greedy oil companies, dramatically raised taxes and royalties on new and existing projects. The government cannibalized its energy sector, diverting oil and gas revenues into social programs. Chavez began exporting more oil to Asia in an effort to diversify away from US customers. Exports to the US declined abruptly in 2002 when the country's 19,000 oil and gas workers went on strike. Thousands of highly-skilled Venezuelans left the country, taking their technical expertise with them. The state-owned oil entity no longer possessed the know-how to develop its resources and production began declining. US refiners who relied on this lucrative heavy oil stream went into panic mode, as their main supplier was dwindling fast. 

Enter Canada

Alberta can thank Venezuela in part for the strong growth in oil sands production seen over the past 10 years. Chavez's erratic behaviour sent many oil majors north to the safe haven of Canada. Although capital and operating costs are much higher in Canada, lower royalty rates, oil-friendly government regimes and excellent proximity to US refineries made Canadian heavy a highly desirable replacement for the heavy sour Venezuelan crude the US so desperately needed.

 
US OIL IMPORTS FROM CANADA AND VENEZUELA, 1993-2014 SOURCE: ENERGY INFORMATION ADMINISTRATION

US OIL IMPORTS FROM CANADA AND VENEZUELA, 1993-2014
SOURCE: ENERGY INFORMATION ADMINISTRATION

 

Oil majors like Shell and Exxon have long had a stake in Alberta's oil sands, dating back to the 1950s. Exxon, through its ownership of Imperial Oil, bet big on the oil sands, launching the behemoth Kearl Oil Sands Mine. French oil major Total bought its way into Alberta's oil sands through the purchase of Deer Creek in 2005, Synenco in 2008 and UTS in 2010. ConocoPhillips, who already owned 9% of Syncrude, divested its mining assets in 2010 and moved its eggs into the thermal in-situ basket through a partnership with Cenovus. BP also joined the thermal in-situ parade, partnering up with Husky and Devon Energy in 2012.

 
KEARL EXPANSION PLANT (COURTESY IMPERIAL OIL)

KEARL EXPANSION PLANT (COURTESY IMPERIAL OIL)

 

Not only do these projects produce the right kind of heavy oil, they also add significant long-life reserves to the company's balance sheets. Money flowed steadily into Canada. Heavy oil production, primarily exported to the US, rose proportionately as new facilities came online. Life was good in the oil patch.

But then things changed

The election of a left-wing US president in 2008 sent billions of taxpayers dollars flowing into renewables. The country's largest investment funds scrambled for a piece of the action, pushing the climate change agenda to ensure money would keep flowing their way. Alberta's prosperity and rapid growth touched a nerve in the rest of Canada, still trying to recover from the Great Recession of 2008. The US-funded anti-fossil fuels campaign set its sights squarely on the oil sands and blocked all exits for Alberta's heavy oil. Canadian politicians joined the bandwagon, tapping into voters' frustrations over the country's severely imbalanced economy, blaming high oil prices and the greedy energy sector. Heavy oil production soon outpaced pipeline capacity, forcing crude onto expensive railcars, straining the profitability of Alberta's oil sands operations. And well, we all know how that story turned out.

Could the money reverse flow back to Venezuela?

Many people believe Venezuela's government is far too unstable to attract foreign investment. To be fair, Venezuela's problems began long before the collapse in oil prices. Chavez's successor, President Maduro, is a leftist enforcer of his predecessor's outdated policies. Reckless social spending has rendered their currency worthless, resulting in a 700% inflation rate. Venezuelans are becoming increasingly disillusioned with the socialist government and have elected a right-wing congress who want to bring capitalism, jobs and prosperity back to the country. Their economy is going from bad to worse and the country is at serous risk of debt default. Things couldn't get any worse. But this might just mark a turning point in the country's history.

 
VENEZUELAN REFINERY

VENEZUELAN REFINERY

 

The quasi-democratic government has found unlikely allies in the governments of China and India, who are desperate for energy security. The country has received serious cash injections from China, estimated at $56 billion over the past 9 years, taking oil payments in lieu of cash. The country is seeking $23 billion in funding partnerships to improve its oil extraction technology and boost production. The world's largest oil companies are already there and almost every state-owned oil producer already have stakes in Venezuela's heavy oil fields. 

Alberta vs Venezuela oil sands: What's the difference? 

Venezuela has an estimated 298 billion barrels of proved oil reserves, the largest in the world and almost double Canada's (173 billion barrels). Most of Venezuela’s proved oil reserves are located in the Orinoco Petroleum Belt. Although often referred to as oil sands (or tar sands), Venezuela's oil sands are technically "extra heavy oil" deposits since they don't contain bitumen. 

ALBERTA VS VENEZUELAN HEAVY OIL (COURTESY TOTAL SA)

ALBERTA VS VENEZUELAN HEAVY OIL (COURTESY TOTAL SA)

VENEZUELA'S ORINOCO BELT

VENEZUELA'S ORINOCO BELT

On the surface, Alberta and Venezuelan oil sands appear very similar. Both are unconsolidated sandstone deposits, with similar densities and sulphur content. But there are some important differences. And some of those small distinctions give Venezuela several advantages:

1. Better geography:

  • The Orinoco Petroleum Belt has excellent access to tidewater. And the world's biggest consumer of heavy oil is relatively close-by in the US Gulf Coast, a mere 5 day boat ride.
  • Thanks to proximity to the equator, oil sands deposits in Venezuela are closer to 50°C, much warmer than Alberta's oil sands which tend to average closer to 20°C deep underground and just 5°C close to the surface. That means much less energy is required to bring the oil to a flowing temperature.

2. Simpler geology:

  • Alberta's oil deposit is much older, comprised of a more complex geology, more types of sediments and a wider variety of reservoirs. Venezuelan oil sands is younger, deeper, more uniform, more concentrated and more saturated with a coarser grained sand. This allows for better recovery rates under the same operating conditions. 
  • Viscosities in Alberta range from 10,000 cP in the Lloydminster area, 100,000 cP near Cold Lake and 400,000 cP closer to Fort McMurray. Venezuelan heavy oil deposits in contrast have a more uniform viscosity, typically ranging from 4,000 to 5000 cP. Coupled with the warmer climate, that means Venezuelan heavy oil actually flows under ambient conditions, whereas Alberta bitumen is virtually solid at room temperatures.

3. Smaller footprint:

  • Alberta's Athabasca Basin deposit depth ranges from 400 meters below grade to the surface. Anything deeper than 50 meters is very expensive to surface mine while anything shallower than 200 meters is more difficult to recover using pressurized steam, leaving a large portion of the deposit in a "grey" zone.
  • Venezuelan oil sands in contrast range from 350 to 1000 meters below grade, making it completely recoverable in-situ. The reservoirs are also more compact vertically, making well drilling more efficient.
  • Venezuela's Orinoco belt spans an area of 500 km by 50 km (25,000 km²), much less than the footprint of the Western Canadian Sedimentary Basin (WCSB), which is approximately 1.4 million km² or even the Athabasca Basin, estimated at 100,000 km².

A pro-energy government open to foreign investment

There's no anti-pipeline and anti-tankers propaganda machine in Venezuela. The country has learned its lesson and is now painfully aware of what happens when you throw your most valuable asset under the bus. In contrast, Canada's government has embarked on a witch-hunt of the oil and gas sector which shows no sign of relenting any time soon.

Foreign investment in Canada's energy patch became a taboo subject after CNOOC's takeover of Nexen in 2012 and Talisman Energy was acquired by Repsol in 2014. Prime Minister Trudeau stated at the WEF16 in Davos that Canada welcomes foreign investments - provided it's outside of the energy and natural resources sector. In contrast, governments like Venezuela and Mexico are openly asking for help in developing their oil and gas resources. Countries like China, Spain, Russia, Iran, Brazil, Norway and India are already active in Venezuela's heavy oil fields. Perhaps desperate times call for desperate measures, but the stark differences in government policies will likely drive energy investments away from Canada.

BOLIVAR COASTAL FIELDS

BOLIVAR COASTAL FIELDS

VENEZUELAN OIL FIELDS

VENEZUELAN OIL FIELDS

Step change in technology badly needed

Venezuela uses conventional heavy oil production methods such as water-flooding or CHOP (Cold Heavy Oil Production), where oil flows to long horizontal wells with a large number of multi-lateral branches, without the use of heat or steam. Venezuela's oil recovery is quite low, often less than 10%, and there has been little incentive for producers to improve production rates.

CHOP accounted for 15% Alberta's heavy oil production in 2009 but has recently fallen out of favour due to its low recovery rates. Most of Canada's heavy oil producers, including Imperial, CNRL and Husky prefer thermal in-situ, which boosts recovery to over 50%.

SAGD: STEAM-ASSISTED GRAVITY DRAINAGE (COURTESY TOTAL SA)

SAGD: STEAM-ASSISTED GRAVITY DRAINAGE (COURTESY TOTAL SA)

VENEZUELAN HEAVY OIL RECOVERY (COURTESY TOTAL SA)

VENEZUELAN HEAVY OIL RECOVERY (COURTESY TOTAL SA)

Alberta is an industry leader in the field of thermal in-situ and heavy oil upgrading. Imperial invented Cyclic Steam Stimulation (CSS), the core technology behind its massive Cold Lake operation, the largest in-situ heavy oil project in the world. Imperial is also the original patent holder for Steam-Assisted Gravity Drainage (SAGD), another form of thermal in-situ recovery. The company is now focused on Solvent-Assisted SAGD (SA-SAGD), which has the potential to dramatically boost recovery and lower energy intensity.

 
COLD LAKE RECOVERY PROFILE (COURTESY IMPERIAL OIL)

COLD LAKE RECOVERY PROFILE (COURTESY IMPERIAL OIL)

 

Alberta's oil sands have the distinct advantage of being water wet - that gives them a good affinity for steam and hot water, making recovery easier. But other oil sands deposits aren't so lucky, tending to be more water-repellant. Thermal and solvent-assisted in-situ recovery might just be the technology step change needed in Venezuela. Companies like Exxon, Total and Chevron use learnings from the Alberta oil sands to crack heavy oil production around the world, including Venezuela, which has the potential to be bigger and more profitable.

So what does this mean for Alberta?

For oil majors like Exxon, a good fraction of their growth in the past few years has come from Canada. But Canada's production will likely get maxed out in the next few years, or at least grow at a much slower pace, unless more pipeline capacity is added. The future of energy will likely still be in the oil sands - the Venezuelan oil sands, that is.

THE 30 SECOND TAKE-AWAY:

Venezuela holds the world's largest oil reserves, specifically heavy oil comparable to the oil produced in Alberta. Once the largest supplier of heavy oil to the US, production and investments declined rapidly after Hugo Chavez's government raided oil funds to pay for social programs. Alberta's oil sands greatly benefitted from Venezuela's demise as energy investments fled north to the safe haven of Canada.

But the tide might be turning. The South American country has hit rock bottom and will likely default in the next year. Disillusioned with 20 years of failed socialism, the people want to see the return of capitalism, prosperity and jobs, seeking out partnerships with foreign oil nationals and energy majors.

In contrast, Canada's governments have moved sharply to the left and are becoming increasingly anti-energy. Some believe that oil companies have no choice and will continue to do business in Canada regardless of policy. But that simply isn't true. Even though our oil sands deposits aren't going anywhere, our world-class technology to extract heavy oil can easily be exported. Lack of pipeline infrastructure will likely cap growth in Alberta and send investment dollars back to Venezuela, which has a much lower cost structure. Venezuela's downfall should serve as an important lesson for all levels of government.
Devon Energy declares net loss of US$4.5b in Q4 2015

Devon Energy declares net loss of US$4.5b in Q4 2015

Shell surpasses Chevron as world's second largest oil company

Shell surpasses Chevron as world's second largest oil company

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