Copyright of the Daily Oil Bulletin 2017
Technological Success, Refinancing Transform MEG Energy, CEO Says
As low oil prices constrain significant growth in Alberta’s oilsands, one SAGD producer is both growing and cutting costs.
Bolstered by technological success and a major refinancing, MEG Energy Corp. has entered what CEO Bill McCaffrey called “a transformational period” designed to raise output to 100,000 bbls of bitumen a day in 2019.
MEG's first quarter 2017 production averaged 77,245 bbls per day.
The technological transformation began about six years ago when MEG started working on a SAGD modification that would dramatically reduce its energy costs, development times and growth risk.
While several producers add small amounts of non-condensable gas (methane) to the steam injected into SAGD reservoirs that are late in their productive life, MEG developed a patented process that co-injects the natural gas much earlier in the SAGD process and in conjunction with infill wells.
The natural gas expands as it is heated, replacing steam as the agent that maintains reservoir pressure. MEG starts methane co-injection and the drilling of infill wells after about 30 per cent of the bitumen has been extracted from the reservoir.
While the idea of adding small amounts of methane to the steam injected into SAGD wells has been around for years, it was MEG that came up with the modifications that achieved a technological breakthrough.
(The late Roger Butler, who patented the SAGD process decades ago for Imperial Oil Limited, came up with a process called steam and gas push (SAGP), which involves co-injecting small amounts of a non-condensable gas such as methane. The purpose of injecting gas that won’t condense is to replace the pressure that’s lost when steam eventually condenses into water.)
MEG calls its modification of SAGP “enhanced modified steam and gas push,” or eMSAGP.
The company first pilot-tested eMSAGP on three well pairs at its Christina Lake SAGD project in January 2012. So far, the technology has been applied to wells accounting for about a quarter of its production. It is in the process of being implemented on the rest of MEG’s wells.
Capital costs cut by up to 50 per cent
At MEG’s annual meeting on Thursday, McCaffrey devoted most of his presentation to how eMSAGP has enabled the company to fundamentally change how it grows.
Where eMSAGP has been implemented, MEG has cut its steam/oil ratio by half. That means these well pairs now need only half as much steam to produce the same amount of bitumen. This frees up steam-generating capacity that can be used on new wells, allowing production to grow without investing in new steam capacity. Also, production increases as the gas pressure pushes bitumen to the infill wells.
Since eMSAGP has been deployed on Christina Lake SAGD Phases 1 and 2—which together account for about 25 per cent of MEG’s companywide output—its overall steam/oil ratio has averaged 2.3. But on the 25 per cent of its assets where eMSAGP has been implemented, the company has achieved an enviable steam/oil ratio of one to 1.25.
The capital-cost reductions associated with eMSAGP are allowing MEG to lower its development costs by more than 50 per cent in some cases, McCaffrey told shareholders.
“The last time we completed a greenfield expansion, we did so at a cost of approximately $42,000 a flowing barrel which was considered at the time to be an industry norm. The expansions we’re currently working on are estimated to cost in the range of $20,000 a flowing barrel.”
Well-by-well SAGD growth
MEG has also dramatically reduced the development timeframe for its growth projects.
“Previously oilsands growth required large greenfield expansions where the projects could [take] anywhere from three to four years to construct and bring onstream, and its economics were driven by higher oil prices,” McCaffrey said. “A project would be planned in one [oil price] environment, built in another and come onstream in a market that could be fundamentally different than the one that we had conceived it in.”
eMSAGP enabled MEG to shrink its investment-to-cash flow timeframe to 12-18 months, the CEO said.
“We get to the same place, but we do it through a series of incremental steps that significantly de-risk the overall project,” he said. “We can now develop projects not just pad by pad, but well by well—with each well almost its own micro-project.”
“This way, our growth plans can quickly adjust to sudden fluctuations in oil prices, if necessary, without getting caught in the middle of a large construction project. ... We’re comfortable that we can speed up or slow down our pace of development, depending on market conditions.”
Over the next two years MEG will implement eMSAGP at Christina Lake Phase 2B. This is expected to increase total production capacity by 20,000 bbls a day in 2019.
Separate from the planned eMSAGP growth, MEG also plans a brownfield expansion at Phase 2B which is designed to add another 13,000 bbls a day of production capacity.
“We anticipate that these two projects would be the first of a series of growth projects that, once implemented, will reduce our corporate cash costs by $6 to $7 a barrel,” McCaffrey told shareholders.
He added: “eMSAGP has enabled us to cut the amount of steam required to produce a barrel of oil by nearly a half. Less steam means less energy requirements and lower greenhouse gas emissions.”
“So if you put all the advantages together, you can see that the returns of our Phase 2B eMSAGP and brownfield expansions are exceptional, ranging from 30 to 50 per cent on a [West Texas Intermediate oil price of US$55 a bbl] and approximately 20 to 30 per cent at a $45 WTI.”
Phase 2B on time, on budget
Earlier this year MEG began the rollout of eMSAGP at Phase 2B which accounts for the remaining 75 per cent of its production capacity.
“This expansion is proceeding on time and on budget,” McCaffrey said. “And in the first quarter we drilled 14 of a total of 39 infill wells that are planned for the year, with as many as 28 additional SAGD wells also planned for the remainder of 2017.”
“We expect to see production increases from eMSAGP in the third quarter which will enable MEG to exit 2017 at 86,000-89,000 barrels a day.”
Phase 2B eMSAGP growth is expected to be fully ramped up in 2019, which is expected to boost companywide output to about 100,000 bbls a day and further cut the steam/oil ratio.
The company will then complete its current eMSAGP growth plan with the brownfield expansion on Phase 2B, raising total production to 113,000 bbls a day.
Ultimate aim 210,000 bbls a day
Following completion of these two projects, MEG’s longer-term goal is to gradually grow to 210,000 bbls a day.
“We will accomplish this by developing a series of high-return, short-cycle brownfield development projects, each in the range of 10,000 to 20,000 barrels a day,” said McCaffrey. “And each project will involve new SAGD wells, additional eMSAGP expansion and modifications, as needed, to the central plant.”
“And because eMSAGP requires less steam per barrel of oil, we need less capital to increase production. And as production grows, we spread our fixed costs over even more barrels and further reduce our per-barrel costs with the incremental production.”
McCaffrey said eMSAGP, along with cogeneration technology, has enabled MEG to reduce its greenhouse gas emissions by 22 per cent below the industry average. “And we believe we can go further with this as we expand our program.”
He added: “The ratio of water we use, compared to the bitumen we develop, is about 50 per cent lower than the industry average, and significantly lower than the oilsands mining average.”
“Since 2011, by using eMSAGP and optimizing recycling technology, we reduced our total water withdrawal intensities by 53 per cent.”
Balance sheet strengthened
As a rapidly-growing producer with a significant debt load, MEG was body-slammed by the collapse in world oil prices that began in mid-2014. But earlier this year the company restructured its credit facilities, extended its debt maturity and raised $518 million in equity capital to help launch its growth plan.
“Our recent comprehensive refinancing has significantly strengthened our financial position and is enabling MEG to increase our production rates while reducing our per-barrel costs and steam/oil ratios,” McCaffrey told shareholders.