2020 Top Operators Report: Downstream Integration, Long A Successful Strategy For Oil Producers, Now Creating Value In Natural Gas Complex
Canada’s oil and gas industry is at an inflection point. After five years of wild price volatility, market access issues, and other challenges, it now finds itself in the midst of a pandemic that has driven demand to lows not seen in decades.
This year’s Daily Oil Bulletin Top Operator report reflects the great uncertainty facing the oil and gas sector and tries to make sense of what the industry and successful operators in the post-pandemic future will look like.
To do so, we made some changes to the Top Operator format.
Rather than comparing year-over-year data, in some instances our CanOils analysts compared first quarter 2019/2020 data to measure the impact of the early stages of the COVID-19 pandemic.
We also tapped into the experience of professional services firm KPMG to gain insight into what strategies operators and service companies could pursue to survive and thrive through the difficult days ahead.
Further, we leveraged the reporting power of the Daily Oil Bulletin staff and its ongoing coverage of the industry over the last four months to capture the industry’s response to the pandemic and its future outlook.
Vertical integration has paid off for oil producers who have spread risk throughout the value chain while capturing increased revenues by adding value along the way.
Are midstream and gas producers next in line to successfully use this strategy?
“North America is awash in natural gas. Companies need to diversify the end use of gas,” says Michael McKerracher, national energy lead in Canada for KPMG.
Large natural gas producers are not going to rely on one LNG plant to market their production and need to move closer to the consumer to capture more value, he adds.
Midstream operators haven’t been as hard hit as operators during the COVID-19 crisis. But there is still a need to maintain liquidity through the pandemic while advancing plans to move downstream closer to consumers.
With its pipeline, NGL extraction and storage business providing stable cash flow, Inter Pipeline Ltd. is focused on maintaining liquidity through the pandemic and commodity crunch, while completing construction and finding a partner for its Heartland Petrochemical Complex (HPC) designed to turn Alberta’s oversupply of propane into petrochemicals.
HPC will be Canada’s largest integrated propane dehydrogenation-polypropylene facility when completed. The project is designed to consume approximately 22,000 bbls/d of propane to produce approximately 525 kilotonnes per annum of polypropylene — a high-value, easily transported plastic.
David Chappell, senior vice-president, Petrochemical Development, says it will be the first petrochemical plant in North America — and possibly in the world — to take a fee-for-service type of approach allowing producers to capture any price upside.
Most producers who produce a mixture of natural gas liquids don’t have their own fractionators so they look to a fractionator who turns their mixture into a pure product and sells it on the producers’ behalf, said Chappell. “This is the same thing but we are taking that propane one step further, turn it into polypropylene and sell it on their behalf.”
What that means is the propane producer is getting a much higher value for their propane, he says. “Using historic numbers — and the forecast looks very good too — over the past five years if producers had signed up with us, they would have more than doubled their price compared to Edmonton.”
There are a number of other products such as methanol and ethane that share similar economic characteristics as what Inter Pipeline is doing at the Heartland project.
“There’s a lot of ethane in this province and we are getting gas value for it,” says Chappell, who believes there’s enough ethane for two more world-scale ethane crackers. “More ethane plants and derivatives plants would be great for the province.“
There are other projects under way to leverage increasing liquids production, although the COVID-19 pandemic is stalling progress temporarily.
AltaGas Ltd. is exporting raw natural gas liquids to markets overseas through its RIPET terminal and future ownership of the Ferndale terminal. It expects to have the capacity to export up to 120,000 bbls/d.
“The recent demand destruction we have witnessed in North America highlights the need for access to global markets,” says president and chief executive officer Randy Crawford. “And that's the role that we're playing, creating a new demand for Canadian producers, helping them get better netbacks, and helping them position themselves better to recover from the storm that they're encountering.”
Large natural gas producers are also moving closer to the customer.
Peyto Exploration & Development Corp. recently entered into a supply agreement with a power generator to deliver over 50 mmcf/d of gas beginning in 2022.
Seven Generations Energy Ltd. has entered into an agreement with Énergir, Québec’s main natural gas distributor, to supply responsible natural gas to Quebec consumers. The agreement is governed by the trademark EO100 Standard for Responsible Energy Development. Seven Generations is the first natural gas producer to earn the certification, which provides third-party verification of its environmental, social and governance (ESG) performance. Globally, this is the first transaction of its kind under this framework.
“This is a real milestone that we are proud of,” Marty Proctor, 7G’s president and chief executive officer, says. “I am a Canadian first and I really like the idea of taking gas from one part of the country and people realizing that it’s gas that people need to make their lives better, but it’s also gas that is responsibly developed.”