FT SPECIAL REPORT Canadian Energy

Tuesday November 20 2012 www.ft.com/reports | twitter.com/ftreports

bitumen from the oil sands of Alberta to refineries on the Gulf of Mexico. The move provoked furious reac- Inside » tions from some Canadians, and Being a good Stephen Harper, the prime minister, said the delay highlighted “why Can- Oil sands ada must increase its efforts to make sure it can supply its energy outside Environmental of the United States and into Asia in concerns come particular”. The economic issue, while less head-to-head neighbour immediately acrimonious, is poten- with economics tially even more significant. The boom in US shale gas and oil produc- Page 2 tion, made possible by advances in the techniques of horizontal drilling and , has created Carbon capture remains key abundant supplies in the central gets $2bn boost region of the country. This has depressed prices for Canadian exports Power plants and tied up pipeline capacity. show the way on emissions to prospects The big political issue in Page 2 US-Canadian energy ties is still the decision to delay Arctic difficulties the Keystone XL pipeline High cost and With the Asian market yet to take off, Canada dangers of The result has been that the eco- ice cap drilling must put aside any friction with the US, its nomics of Canadian oil and gas devel- can deter opments face a new set of challenges – biggest oil and gas customer, writes Ed Crooks ones that the higher-cost projects may investors not be able to overcome. Page 3 To add insult to injury, the US elec- he 200th anniversary of the of law,” he says. “Calgary has some of tion campaign was full of talk about War of 1812 is an occasion for the best, hardest-working, most inno- “North American energy independ- Canada to reflect on its rela- vative and most entrepreneurial man- ence”, implying Canada’s resources On FT.com » tionship with the US. The agers in the industry, who really would be at the disposal of the US energy business has provided know what they are doing.” without Canadians having much say Tit with plenty of food for thought. Yet even with one of the world’s in the matter. While political and economic tensions most energy-hungry populations – Yet while those comments may between the two countries in recent consumption per capita in Canada is have prompted some wry smiles, they years have not exactly ignited warlike roughly double the average for the pointed to an important truth: Canada sentiments, they have prompted some developed world – the domestic mar- has abundant fossil-fuel reserves and Canadians to reassess their near-total ket is simply not large enough to sup- the US is the world’s second-largest dependence on the US as a market for port a fast-growing industry. energy consumer, and the two coun- Battle lines their oil and gas exports. Canadian oil and gas producers tries have a long history – since 1815 – As a producer of natural resources, must export or die, or at least stag- of friendly relations. The two are inev- The challenge Canada has an enormous amount nate. For the time being, that means itably bound tightly together. facing exporters going for it. they have to sell to the US. Canada’s prospects for diversifying David Krieger, managing director of The big political issue in US- its energy exports seem better for gas and producers energy at Warburg Pincus, the private Canadian energy ties remains the than they do for oil. The co-depend- Pipeline troubles equity group, describes it as a “won- decision a year ago by the US state ency of the US and Canada in natural derful” place for his firm to invest. department to delay approval of the gas is still strong. Last year more will not go away, “It has a great resource base and Keystone XL pipeline, which is part of than half of Canada’s gas production says Robert Wright good access to markets. It has the rule a system intended to carry diluted On stream: pipes carry bitumen from Canada’s crucial Alberta oil sands Bloomberg Continued on Page 2 2 ★ FINANCIAL TIMES TUESDAY NOVEMBER 20 2012 Canadian Energy Investment pays off in the field of CCS Asia beckons as promising

Carbon capture It is because analysts also industry started injecting governments worldwide for province, says Mike Fernan- think three of Canada’s C02 into wells to extract CCS operations during the dez, executive director of market for LNG projects are among the top more oil decades ago, in a past four years. carbon capture and storage Canada invests over six CCS developments fore- process known as enhanced While Saskatchewan may and energy efficiency with $2bn in ‘greener’ cast to become operational oil recovery, or EOR. be the first Canadian prov- Alberta Energy, a ministry over the next five years. But using CCS as a tool in ince to get a large CCS of the province’s govern- mat on the Pacific Coast. electricity generation, And one, at Boundary curbing climate change is a plant operating commer- ment. Natural gas LNG Canada – comprising writes Pilita Clark Dam in Saskatchewan, also more recent – and tricky – cially, it should not be the “We have put some signifi- Royal Dutch Shell, Korea promises to be the world’s development that has been last. cant dollars on the table,” Trans-Pacific plans Gas Corporation, Mitsubishi first commercial-scale coal- pursued in earnest only The neighbouring prov- he says. “We have also spent raise hopes, says and PetroChina – is among Canada’s supremacy in the fired power station to be fit- during the past six or seven ince of Alberta – home to a great deal of time in the consortiums that are pro- fields of ice hockey and ted with CCS, assuming it years. It involves capturing the environmentally con- last two years making sure Michael Kavanagh posing terminals around maple syrup is well estab- begins operating in early emissions from fossil-fuel tentious oil sands industry our regulatory framework is the Kitimat area of British lished. But in the more 2014 as planned. power plants such as the – agreed to spend C$2bn up to snuff, to accommodate Columbia, which would obscure world of climate That will be a big step in coal-fired power stations ($2bn) on four CCS projects and support commercial- As the US shale gas glut make the Pacific coast inlet change policy, the country the troubled efforts of gov- that big emerging econo- that it chose between 2008 scale deployment.” undermines demand for a new global LNG hub. The is fast earning itself a repu- ernments and industry to mies like China and India and 2011. The three remaining Canada’s natural gas, can Shell-led project has been tation in an even more curb the carbon dioxide plan to build at a rate of To put that in context, Alberta CCS projects are all output from above the 49th costed at $12bn. important industry: carbon emissions that scientists about three a week between Brad Page: commitment the UK, which is one of scheduled to come on parallel find a market by The Apache Corporation, capture and storage, or warn are warming the them in the coming years. Europe’s leading CCS pro- stream about 2015, led by going west to Asia? based in Houston, is back- CCS. planet to potentially danger- The trouble is that fitting ponents, has spent about Royal Dutch Shell’s Quest Several projects are pro- ing Kitimat LNG, another “Canada is a leader in ous levels. a CCS plant in a new coal Boundary Dam plant that four years struggling to facility, which will capture posed for exporting lique- consortium seeking part- CCS – there is no doubt It is also critical for a or gas power station can SaskPower, the utility com- choose a project in a £1bn C02 emitted from an oil fied natural gas (LNG) from ners in the development of about that,” says Brad leading oil and gas pro- double the capital cost. pany, is building. Its near- carbon capture contest and sands plant. terminals on the northern another terminal in the Page, chief executive of the ducer such as Canada, Because the CCS plant est rival in the race to has yet to finalise a single Next in line is the Swan coast of British Columbia, area costed at a more mod- Global CCS Institute, the whose national economy requires electricity, the become the first CCS power- development. Hills Sagitawah coal gasifi- to establish Canada as a est $4.5bn. Apache expects Australia-based environ- depends on the fossil fuels amount of power the station generating plant – another Alberta’s C$2bn has since cation plant and another oil leading provider to energy- to make a final decision on mental organisation. that produce those emis- can generate is reduced, coal-fired power station in been scaled back to C$1.5bn sands project known as the hungry Asian economies. development early next The reason is not just sions when burnt. along with its revenues. Kemper County, Missis- after one project – North West Upgrader. The task of finding new year, with earliest produc- that Canada has committed Broadly speaking, CCS That makes CCS hard to sippi, due to come on TransAlta’s coal-fired power That is impressive, says export markets for Canada, tion expected in 2017. more than $2bn to carbon captures carbon emissions justify economically. stream later in 2014 – is plant – was cancelled in Mr Page of the Global CCS the world’s third-largest Further northwest along capture projects, or that from an industrial plant Selling off the captured doing likewise. April because of what the Institute. “It does show you producer of natural gas, is the coast, near the southern those developments account and pipes off the C02 to be carbon dioxide for Both have been benefici- developer called challeng- what is achievable when particularly pressing now tip of Canada’s border with for more than 10 per cent of stored deep underground or enhanced oil recovery is a aries of the $25bn that the ing market conditions. governments are committed that its dominant customer Alaska, BG Group is also the 75 leading CCS develop- below the sea. vital part of the financial Bloomberg New Energy Nevertheless, Alberta has to reducing emissions from – the US – is awash with it. proposing the development ments on the drawing board The basic CCS technology equation. Finance research group committed more to CCS carbon dioxide-emitting Joe Oliver, Canada’s min- of an LNG terminal at worldwide. itself is not new. The oil This is planned for the says has been committed by than any other Canadian plants.” ister of natural resources, Prince Rupert, capable of accepts that the country drawing off up to 4.2bn cu ft must look west across the per day of natural gas from Pacific rather than to the fields in northeastern Brit- south and east to profitably ish Columbia and neigh- extend the exploitation of bouring Alberta. its gas reserves – assuming But if few doubt Canada’s Environmental the tricky problem of potential as a source of nat- extraction and preparation ural gas for Asia’s booming for transocean transporta- economies, questions are tion can be solved. being raised as to whether In recent weeks the min- all Canada’s slated LNG ister has made courtesy projects will proceed. concerns come calls to government and Scepticism on specific industry leaders in Japan, projects mirrors wider con- South Korea and India. cerns over whether the Included in his itinerary country will come too late was a meeting in September to the race to bring LNG to head-to-head with Yukio Edano, the Jap- Asian markets to outscore anese trade minister, to rivals, such as Mozambique gauge Japanese interest in and Australia, in securing purchasing liquefied natu- development backing. ral gas from Canada’s west According to a report with economics coast – an appetite that was released by the energy sharpened by last year’s industry consultancy Wood Fukushima nuclear power plant disaster, which has heightened Japan’s reliance on imported gas. ‘We are poised to Mr Oliver’s aim has been become a new to convince Asian econo- mies, including China, that safe, reliable and Canada is serious in its early-stage ambitions to cost-effective LNG compete against rival sup- supplier to Asia’ Oil sands Industry keeps up the fight despite pliers in the global LNG market. the gains of the campaigners, says Ed Crooks But to deliver on the Mackenzie this month, com- potential of booming inter- petition from US shale gas national demand requires has resulted in western lberta’s oil, or tar, sands – expansion. When the oil price col- Canada to secure tens of Canada gas exports slipping the two terms are synony- lapsed as the world slid into recession billions of dollars of invest- by 4bn cu ft a day in the mous, but more on this later in the second half of 2008, the econom- ment in the infrastructure past five years. This, com- – provide a neat demonstra- ics of the oil sands seemed precarious. required to move large bined with reduced gas tion of both the power and The International Energy Agency, the quantities of LNG out west prices, has seen annual Athe ineffectiveness of environmental think-tank backed by developed coun- via pipelines to processing gross revenue from the campaigning. tries, calculated that 16 oil sands terminals on the coast of region’s gas exports fall by There can be no denying that the projects adding up to $150bn in invest- British Columbia. some US$26bn – or 80 per effort to raise awareness about the ment and 1.7m b/d of production Mr Oliver said in Tokyo cent – since 2008. problems of the oil sands has been capacity were suspended or cancelled in September that Canada Yet some fields could be highly successful – governments in in 2008-09. had plans to liquefy and developed at break-even Europe and California, investors in As the oil price rebounded from its export 9bn cubic feet a day costs as low as US$2.40 per the US and UK, and even some fuel low point below $33, however, the oil of gas if demanded, stating: million British thermal customers, have turned against buy- sands industry recovered. Several of An oil sands age to block the construction of new may look distinctly shaky, but in situ “We are poised to become a units (mBtu). ing or investing in oil from the region. those suspended projects, such as BP operation near pipeline capacity in the long term, projects seem quite comfortable. major new safe, reliable and The main problem facing Bill McKibben, founder of the and Husky Energy’s Sunrise, and Cold Lake, then they will start to have a noticea- The oil transport bottlenecks look cost-effective LNG supplier Canada’s push to beat oth- 350.org campaign to fight the threat of Royal Dutch Shell’s Jackpine Mine Alberta Reuters ble impact on the industry’s growth. fixable, but opposition will continue. to Japan, Korea and other ers – including the US itself climate change, argues that the oil expansion, are now making progress. However, analysts generally believe The planned Northern Gateway pipe- Asia-Pacific nations for – in becoming a leading gas sands are “the biggest carbon bomb But there has been a renewed flurry that the problems are surmountable. line through British Columbia faces years to come.” exporter is the cost of infra- on the planet”, and has made them a of concern. Suncor Energy, one of the The Suncor production projects fac- fierce resistance. Dreams of exporting However, before the trip structure rather than pro- focus of his efforts to curb carbon largest Canadian producers, said this ing delays are both mines, which tar sands oil to world markets may to Japan, he conceded that ducing the gas itself. dioxide emissions. month that it was delaying its Fort involve digging up the oily sand and have to be deferred, and Keystone XL Canada still needed to con- Even so, according to That campaign achieved its most Hills mine expansion development by separating out the bitumen with may also continue to be blocked. vince potential investors Asish Mohanty, analyst for significant success to date when it a year, was giving no firm timetable warm water. The alternative produc- However, other lower-profile pipe- and customers that unnec- Wood Mackenzie: “A well- persuaded President Barack Obama to for another mining project, and saw tion technique is to extract the oil in lines to the US will be more likely to essary delays to planning managed western Canadian delay a decision on approving the as “challenged” the economics of a situ, often by pumping steam under- go ahead. Rail shipments out of consents could be avoided. LNG export development Keystone XL pipeline, intended to possible new upgrader that would ground to warm the oil so it collects Alberta are likely to increase. Securing domestic sup- could achieve costs of deliv- bring oil from the tar sands to refiner- convert heavy bitumen from the in pools and can be pumped out. Ms Forrest says: “We don’t see a lot port for the development of ery into Asian markets sim- ies on the Gulf of Mexico. sands into a form of crude oil. Jackie Forrest, senior director for of new mines going ahead, but we do LNG appears to be an easier ilar to those from major Yet whatever successes the cam- The region is facing new challenges. global oil at IHS Cera, the research see a lot of production growth.” task than for schemes competing options.” paigners have had, their impact on The shale in is group, says the capital costs of an in The terminology “oil sands” against aimed at piping bitumen- An aggressive approach the level of activity and output in adding competition for space on pipe- situ project are typically no more “tar sands” reflects the contentious- rich sand oils for export by federal authorities could Alberta has been negligible. lines to refineries further south, and than 60 per cent of those of a mine of ness of the issue. “Tar sands” was the across large swaths of Can- also favour Canada’s ambi- Oil sands production, which was at depressing prices in the central US. equivalent size, and operating costs traditional phrase, but the industry ada, which have roused tions if competitors lose about 1.47m barrels per day in 2010, The fact that western Canadian oil are also slightly lower. and Canadian establishment pro- environmental protest. their way. will average about 1.78m b/d this year, trades at a discount of about $10 per John Dunn of Wood Mackenzie, moted “oil sands”, since it sounded Two months ago the gov- “A combination of pro- and is on course to reach 3.17m b/d by barrel to US benchmark West Texas another research company, says that more appealing. They have had some ernment of British Colum- longed high-cost environ- 2020, and keep on rising in the subse- Intermediate (WTI), which itself is at where a typical mine might need a success: Google returns about 4.3m bia reached a further agree- ment in Australia, east Afri- quent decade, according to the Cana- a discount of about $20 per barrel to WTI oil price of about $80 per barrel hits for “oil sands Alberta”, and only ment with the Haisla First can delays and US regula- dian Association of Petroleum Produc- internationally traded Brent crude, to break even, an in situ development 1.1m for “tar sands Alberta”. Nation native tribe that tory uncertainty could pass ers, the industry group. makes the economics of investing in might need just $60. That may be further evidence that allows more coastal land to the impetus to Canada,” It is economics, not politics, that Alberta that much more challenging. With WTI at about $85 per barrel in the battle over the region’s future, be opened up for LNG concludes the consultancy’s has had the best shot at derailing that If environmental campaigners man- today, higher-cost mining projects the industry is winning. export projects from Kiti- report. Being a good neighbour will remain the key to prospects

Continued from Page 1 accessible in a few years’ faction plant and terminal some oil imports, cutting coast of British Columbia block the proposed takeover ber 10. (Petronas is also Obama, the US president, was exported to the US, and time. planned for British Colum- net exports to about 65 per has drawn opposition from by Petronas, the Malaysian attempting to change his mentioned the issue in his Canadian gas supplied Unlike the US, Canada bia, backed by Apache, cent of production. Canada Canadian and US campaign- oil and gas company, of mind over its Progress victory speech on election about 13 per cent of US has not paid much atten- Encana and EOG is also the largest source of ers, and has had a bumpy Calgary-based Progress deal.) night, and it may be one demand. tion to the idea that cheap Resources, has been put on US oil imports. ride through the review by Energy Resources. The result is that Canada area where he will hope to As US gas prices have natural gas should be hold, but another, backed If, as Canada’s oil indus- the National Energy Board, A $15bn bid by China still cares deeply about make some progress in his slumped, Canadian prices retained in the domestic by Royal Dutch Shell, try hopes, the output of the Canadian regulator. National Offshore Oil Cor- what happens in US politics second term. have followed suit, drop- market and made available PetroChina, Mitsubishi and Alberta’s oil sands The prime minister Mr poration for Nexen of Can- and US markets. Whatever happens in ping in April to a low equiv- to local manufacturers to Kogas, is still making increases significantly over Harper, who will make the ada is under intense scru- None of that means good Washington, some US states alent to about $1.50 per mil- improve their competitive- progress. the coming decade, the US final decision on whether tiny. Mr Paradis has said he oil and gas companies in are likely to continue push- lion British thermal units ness in world markets. But even if the latter will have to be the principal the pipeline will proceed, will rule on that by Decem- Canada cannot succeed. It ing for more action. for the AECO-C Alberta gas Plans to export LNG from project, known as Canada market for that oil. has in the past stressed his does mean, however, they With some of the world’s benchmark. This represents British Columbia have LNG, goes ahead, the US For all the Canadian rhet- support for the project. will have to keep a close largest fossil-fuel reserves, a fall from a peak of more attracted little criticism on will remain the principal oric about finding new mar- Over the summer, however, eye on what is happening Canada has a powerful than $11 in summer 2008. that score. market for Canadian gas for kets after the US adminis- he played down that enthu- If the output of south of the border. incentive to explore how to Canadian gas prices have There has been resistance the foreseeable future. tration delayed Keystone siasm, suggesting he would Alberta’s oil sands In particular, they will reconcile their continued since rebounded, but only from environmental cam- For oil, hopes of market XL, progress in putting in follow the verdict of the need to take into account use with a reduction in cli- to about $3.40 per mBTU. paigners, but the conse- diversification look even place the facilities to make review panel. rises significantly US attitudes to the threat of mate change. Asian markets, where quences of an LNG leak more remote. Roughly that possible has not been Meanwhile, Canada’s tilt global warming. Moves by Two centuries after repel- buyers will pay the equiva- would most likely be rela- three-quarters of Canadian smooth. towards Asia has not been the US will have to the US federal government ling the last US invasion, lent of about $14 per mBTU tively benign compared oil production was exported The proposed Enbridge helped by the recent deci- be the main market to curb greenhouse gas Canada still needs to for cargoes of liquefied nat- with an oil spill. to the US last year, Northern Gateway oil pipe- sion by Christian Paradis, emissions have so far been respect the wishes of the US ural gas (LNG), may be One proposed gas lique- although that was offset by line from Alberta to the the industry minister, to minimal, but Barack people. FINANCIAL TIMES TUESDAY NOVEMBER 20 2012 ★ 3 Canadian Energy Ice cap region offers cold comfort for oil explorers

Arctic Harsh, remote conditions and transport dangers deter investors, writes Robert Wright

t is one of the keenest ironies of natural resources consultancy, says Cold front: oil drilling degree of reliability – there is nobody region, declined to take part. It most recent winter. But the shallow global warming. As the ice recedes working in the Canadian Arctic is off Cape Helket in the up there to fix it.” remains unclear how easily Franklin waters and densely packed islands of in the Arctic, vast reserves of the “undoubtedly challenging”. Beaufort Sea Alamy The concerns about remoteness will be able to fund exploration work. the Canadian Arctic continue to be very oil and gas that helped to “There is certainly potential,” he mean, according to Mr Dunn, that Mr Dunn says there has been a “hia- ideal environments for creating large cause the melting will become far says. “You have players chasing those drilling for hydrocarbons in the tus” in drilling in the region as a quantities of ice. Imore accessible. International oil and something here. We will know more region are seeking oil in significant result of a Canadian government “This year was supposed to have gas companies will rush in, eager to as we start to see some wells drilled quantities. Smaller oilfields or gas, review of oil drilling safety in the the least ice ever and yet we had the grab the hitherto hidden riches. once again.” the price of which has been depressed wake of BP’s Gulf of Mexico oil spill latest start ever at Red Dog [a zinc But, in Canada’s section of the Arc- At the heart of energy companies’ by the US shale gas boom, are in 2010. Many observers expect the mine in Alaska],” Mr Paterson says. tic, two recent developments suggest calculations about efforts to extract unlikely to cover the high costs and review to raise the costs of operating Exports from the mine could not the balance between risk and reward hydrocarbons from the Canadian Arc- risks of operating in the area. in the Canadian Arctic still further. begin until June. when seeking hydrocarbons in the tic lies the region’s extreme remote- BP, Imperial Oil and Chevron, how- “There has not been a lot of drilling “Yes, the ice is melting and [then] it area is likely to remain a delicate one. ness – even by the standards of other ever, have all purchased licences and activity there just yet,” Mr Dunn says. is gone,” he says. “But it is only gone When the country’s most recent parts of the fast-developing region. intend to drill in the Beaufort Sea. The region also has a long history for a six-week period and then it is round of bidding for Arctic explora- The waters of the Beaufort Sea, one of “It is in the realms of the bigger of disappointing results from explora- back again.” tion licences closed in September, all the main exploration areas, are players – with experience but also tion. Drilling there in the 1970s and Those continuing challenges are those on offer went, for just $7.5m, to treacherous, poorly charted and far with the financial firepower to exploit 1980s encountered significant geologi- likely to make the decisions facing Franklin Petroleum, a privately held further from potential help than other it,” Mr Dunn says. “It is cold and it is cal difficulties and discovered large exploration companies more difficult UK company. Arctic exploration areas such as the a harsh operating environment.” quantities of gas rather than the oil if they do find quantities of oil worth Meanwhile Fednav, the Montreal- Greenland coast, northern Alaska and Yet the question of whether to the majors were seeking. exploiting, Mr Dunn says. based shipping company that serves Russia’s far north. invest up to C$500m, which a single Nor, according to Fednav’s Mr The choice is likely to be between a all the mining operations in the Cana- Tom Paterson, vice-president of Arc- well offshore in the Canadian Arctic Paterson, is global warming so far very expensive option – building a dian Arctic and northern Alaska, says tic operations at Fednav, which serves can cost, remains finely balanced, to making it significantly easier to oper- fixed pipeline – and the more flexible that, despite this year’s record sea ice three mines in or near the Arctic Cir- Smaller oilfields or gas judge by the most recent round of ate in the area. but riskier one of loading the oil on to shrinkage, persistently dangerous cle, describes the region as a “very, are unlikely to cover the offshore leases in the region. A complete melting of Arctic sea ice ice-class shuttle tankers. conditions meant it began operations very hostile environment”. Franklin Petroleum, founded by in summer – a phenomenon some “If a field is developed after a dis- in some areas this year later than “Getting to and from the Arctic is high costs and risks of Paul Barrett, a geologist, snapped up experts expect within a few years – covery, the question is, how do you ever before. very demanding,” he says. “You need all the licences on offer in September would make navigation easier by get a discovery to market?” Mr Dunn John Dunn, lead analyst for Canada specially built ships, constructed operating in the area after oil majors, many of which have destroying long-lived ice, which poses says. “That is one of the key things and Alaska at Wood Mackenzie, the properly, with a very, very high exploration projects pending in the a far greater danger than ice from the the players will be struggling with.” Pockets beneath the prairies pose questions for developers

ducers predicted the coun- tial is for shale oil. “There affiliate of ExxonMobil. The Shale oil try’s overall crude oil pro- are growing shale oil plays company has just com- duction would increase in Canada but we don’t pleted a nine-well pro- may be a from just over 3m barrels expect them to be on the gramme in the Cardium nascent growth story per day in 2011 to 4.7m same scale as in the US,” region and is in the process b/day by 2020. Although oil says Hugh Hopewell, senior of “assessing the resource but things could yet sands areas will continue to upstream research analyst potential” says a spokes- take off, writes comprise the bulk of the for Canada and Alaska at man, adding that “we anticipated future increases Wood Mackenzie, the con- believe it to be significant”. Sylvia Pfeifer there has been a resurgence sultants. The biggest play- Other areas look promis- of conventional production. ers today are domestic com- ing. A recent study by the The association said panies such as PetroBakken Alberta Energy Resources Alberta’s oil sands have fracking and horizontal Energy and Crescent Point Conservation Board and captured the attention of drilling techniques applied Energy. Alberta Geological Survey the world’s energy industry to tight oil plays and liquid Presently tight oil produc- suggests the province’s in recent years but other rich shales were one of the tion is just over 200,000 b/d, shale formations, including parts of Canada have drivers behind the increase. compared with total Cana- the Duvernay, Montney and resources of their own. Given today’s low natural dian liquids production of Muskwa, could contain The prairie province of gas prices “everybody is around 3.6m b/d, according 3,324 trillion cubic feet of Saskatchewan is seeing an diverting capital to oil or to Wood Mackenzie. The natural gas, 58.6 trillion of oil boom centred on the liquid rich shales,” says consultancy expects tight gas liquids and 423.6 billion Bakken shale formation Paul Smith, executive vice- oil production to increase to barrels of oil. which also straddles president for North Ameri- 450,000 b/d in 2020, com- Duvernay and Montney Alberta and the US states of can operations at Talisman pared with a total of around have seen a boom with Montana and North Dakota. Energy which has invest- 5m b/d. Encana Corporation, Chev- Just as in the US, where ments in both US and Cana- Other industry experts ron and Talisman Energy the combination of hydrau- dian shale areas. make a similar assessment. amassing land positions to lic fracturing and horizon- Yet despite the optimism, Mike Hardy, director of unlock its liquids-rich tal drilling has unlocked questions remain about just energy at RBC Capital Mar- reserves. ExxonMobil this previously inaccessible how big the growth poten- kets, only expects “modest year agreed to buy Celtic shale oil and gas, explorers levels of Canadian shale oil Exploration for C$2.6bn in Canada are hoping to production over the next which has acreage in both. develop their own resource. three-to-five years, low sin- Tight oil may be a nas- The bullish forecast from gle-percentage growth”. cent growth story but the International Energy On FT.com » A common theme is that things could yet take off, Agency this month that the companies are expanding in say experts. Greg Pardy, co- US will be the largest gas Shale gas areas that are developed “in head of global energy producer by 2015 and the the conventional sense,” research at RBC Capital largest oil producer (includ- The ups and adds Mr Hopewell, where Markets, says there is “not ing other liquid hydrocar- downs of a the infrastructure is already a lot of shale oil to focus on bons and biofuels as well as in place but new techniques right now” but still poten- crude oil) by 2017, only boom time are now allowing them to tial for significant techno- underline the scale of the More oversight is explore for tight oil. logical advancements”. energy revolution. A case in point is the Car- “It will depend on the In its report, the IEA needed, writes dium prospect in central opportunity set that a com- noted that the growth of US Alberta which has been pro- pany is presented with,” he “tight oil” such as shale oil Michael Kavanagh ducing oil by conventional says. “While oil sands had been “nothing short of means for more than 50 development typically spectacular”. The question years. Now, companies have requires a bigger, longer- in Canada is whether it can started work on under- term commitment by com- follow or even match this standing what the potential panies, it can be easier to shale oil boom. might be for tight oil devel- dial up and dial down In its most recent forecast opment using the new tech- investment in what are usu- in June, the Canadian Asso- niques. Among these is ally smaller shale oil ciation of Petroleum Pro- Imperial Oil, a Canadian projects,” he adds.

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Buyers chase gas Shift to shale across the border

Political boundaries ernment has said it plans to puts revitalised block the Petronas bid for Progress, though it has Shale areas attract given the companies time to foreign interest, change its mind. But if that decision is upheld, analysts carrier on track writes Ed Crooks say a new bidder is likely to emerge. Murphy Oil, the US group Sometimes an international that announced a spin-off of border is important for its downstream business in for profit growth energy companies, some- October, is also looking at times it is a line on a map. possibly selling its assets in Geological conditions the Montney shale. respect no political bounda- A significant part of the ries, and it is no surprise reserves in Canada’s shales that resource opportunities are gas. The Montney and available in northern states Duvernay assets acquired of the US are replicated in by Exxon in the Celtic deal, southern Canada. for example, are about 76 Just as once inaccessible per cent “dry” gas, as meas- oil and gas reserves in the ured by energy content. US have been unlocked by However, unlike the US, Transport Move from coal to new market has hydraulic fracturing and where it is oil and natural horizontal drilling, compa- gas liquids such as ethane revived railway operator, writes Robert Wright nies are now developing that are attracting most Canada’s similar resources. interest, companies are also It has an estimated 388tn interested in acquiring s North America’s freight Tony Hatch, an independent rail- Strong link: a allowed it to originate light, medium road most dependent on the commod- cubic feet of technically reserves of western Can- railroads changed in the road analyst, says energy markets Canadian and heavy grades of crude oil. The ity. Pacific’s coal revenues – which recoverable shale gas, the ada’s shale gas. The differ- past decade from underper- have been “a big win” for it and that Pacific crude company not only saw opportunities come mainly from the relatively resil- US Energy Information forming utilities to solidly Mr Harrison will encourage the com- carrier in North to move crude oil to the eastern US – ient market for export metallurgical Administration says, almost profitable success stories, pany to develop the market faster. “I Dakota where it has moved large quantities of coal – rose 10 per cent to $161m, while half as much as the US. Aone famous name tended to be absent believe this win has legs,” he says. ethanol in recent years – but also to those of Norfolk Southern, which is These would give 70 years Canada has some from discussions. At the heart of the company’s the US west coast and the Gulf of dependent mainly on the slumping US of supply at present rates, 388tn cubic feet of It was less, observers say, that improved prospects is its unique bal- Mexico. utility coal market, were 22 per cent compared with an equiva- Canadian Pacific, one of two railroads ance of a significant exposure to one “We feel confident that the product down at $701m. lent 40 years for the US. technically that span the country, performed of North America’s fastest growing we are putting there is putting value The risk remains that the Bakken The Bakken shale, which poorly. It was more that it was in the energy markets – the shipping of in the market,” she said. “I think the oilfields’ growing significance will has been the source of recoverable shadow of Canadian National, the shale oil by rail – and a minimal expo- real test we are seeing is not only are lead to the construction of pipelines North Dakota’s oil boom, shale gas former nationalised company that was sure to shrinking coal markets. we providing it, but we are seeing real that take volumes away from the rail also stretches across the privatised in 1995, went on an acquisi- The company, which moved just investments by the customers in companies, which offer many produc- Canadian border into Sas- tion spree and reached levels of effi- 13,000 carloads of crude oil in 2011, crude by rail, in cars, in facilities and ers their only route to market at katchewan. There are other ence is in the opportunity ciency and profitability that made it announced this year that it expected in terminals.” present. promising regions in Can- to target more lucrative the industry’s envy. to meet its target of shifting 70,000 The opportunities go beyond crude Mr Hatch, however, insists that, ada’s southern provinces, Asian markets. Yet a rare successful effort this year carloads annually by 2013, a year ear- oil. Pacific also has some of the best even once pipelines reach some of the including the Montney Gas in Canada or the by Pershing Square Capital Manage- lier than planned. access of any North American rail new oilfields, rail operators are likely shale, which straddles the “lower 48” states of the US ment, a US-based hedge fund, to It has better access to the main operator to the highly specialised to offer greater flexibility and speed border between British can today be sold only unseat the management has put shale oil source – the Bakken oilfields sand mined in Minnesota that is used for shipments to some areas – such as Columbia and Alberta, and there. A liquefied natural Hunter Harrison, the chief executive of North Dakota – than any other rail- in hydraulic fracturing. It moves the the Canadian east coast port of Hali- the Duvernay shale in gas export terminal is being credited with much of Canadian way except Burlington, Northern and sand to oil and gas wells throughout fax – that may prove hard to reach by Alberta. Although shales built in Louisiana, but its National’s success, in charge of Santa Fe, operator of the US’s second- its service area. pipeline. provide a smaller propor- initial capacity will be Pacific. Even more strikingly, Pacific largest rail network. Pacific’s access is “[Pacific] participates both in mov- “Even after the pipeline is built, you tion of oil and gas produc- about only 1.5 per cent of looks to be one of the biggest rail a result of its $1.48bn purchase, com- ing materials that are necessary for are going to be moving oil by rail tion in Canada than in the US production. There are at beneficiaries of the continent’s revolu- pleted in 2008, of the Dakota, Minne- production and the products them- because of the flexibility of moving it US, there has been intense least 13 other US projects tion in energy production and con- sota and Eastern Railroad. selves,” Mr Hatch says. straight to the Gulf of Mexico or Hali- interest in the formations. under consideration, but sumption resulting from the spread of Pacific also has access to areas of The company, meanwhile, is suffer- fax,” Mr Hatch says. The Montney shale has federal government is pre- hydraulic fracturing techniques. the Bakken over the Canadian border ing far less than many other North Mr Harrison appears to share the been the focus of two signif- varicating over approvals. The combination of the two has led in Alberta and Saskatchewan, American rail operators from the optimism about Pacific’s prospects in icant attempted acquisi- In Canada, projects to to a flurry of interest in Canadian although it declines to break down decline in coal volumes that has energy. He told participants in the tions by international export LNG from British Pacific. Christian Wetherbee, an ana- how much of its traffic comes from resulted from the growing abundance third-quarter conference call he had groups: the $5.2bn bid for Columbia, such as Royal lyst at Citigroup, suggested the com- each side of the border. of natural gas. heard so many stories about the Progress Energy Resources Dutch Shell’s, face chal- pany might be the most interesting Jane O’Hagan, Pacific’s chief mar- Pacific earned only 11 per cent of its opportunities that it scared him. by Petronas of Malaysia, lenges, but government has story in North American transport keting officer, told investors at its third-quarter freight revenues from “If you put it all together, it will and the $3.2bn takeover of been more supportive. when he named it as one of his top third-quarter earnings conference call coal, against 26 per cent in the same make people forget the in Celtic Exploration by Exx- Sometimes boundaries do share picks. that the range of areas it served period for Norfolk Southern, the rail- 1849,” he said. onMobil. The Canadian gov- matter.