Without Higher Prices, North America Could Face Oil Supply Crunch
Oil prices need to rise substantially for North American operators to start exploring, drill lower quality resources and put money in longer cycle projects, the audience at the annual Society of Petroleum Engineers (SPE) Canadian Energy Technology Conference and Exhibition, heard.
Without that investment, the continent could face a supply crunch in the next 10 years, said Brian Hamm, president and chief executive officer of McDaniel.
U.S. tight oil operators will need much higher prices to keep drilling and growing production as they run out of Tier 1 targets and start exploiting more plentiful but less productive development areas, said Hamm. Oil production south of the border has climbed from five million bbls/d to 12 million bbls/d in the last 10 years or so on the back of tight oil plays. The EIA is forecasting production will remain in that 12 million bbls/d range for the next 20 years if oil prices remain in a US$70-$90/bbl range.
McDaniel’s own production forecast tells a different story, said Hamm. “When we do it, the EIA forecast isn’t even close. We think 10 years from now some of these plays are done at $75 oil. The Bakken is done in six years. The Eagle Ford is even less.”
The forecast changes, however, with higher prices, as less productive areas come into play that could raise production, said Hamm. “There’s lots of other sticks — Tier 3, 4 and 5. They’re just not going to happen at $75 oil.”
Enhanced oil recovery (EOR), which was given a financial boost through the new Inflation Reduction Act (IRA), could also add production. The IRA provides incentives for CCUS that encourage the use of CO2 in EOR schemes. “Recovery factors in these plays are low,” he noted.
But what’s really needed is an effort to explore for new supply, he said. “We haven’t found a big new reservoir in North America in 10 years. The Clearwater is at 100,000 bbls/d but we haven’t found a million bbls/d reservoir in 10 years.”
Higher prices could increase exploration, he said. “At $110 cash flow goes into the ground.”
Getting investors to shift focus from returns on investment to back exploration and supply growth will be difficult, said Steve Buytels, chief financial officer for Tamarack Valley Energy Ltd.
“Companies are cutting capital to save dividends. People are willing to shrink to secure returns to shareholders. I’ve never seen that before. The return on investment [the] last 10 years was on average one per cent. Some companies did better, some worse, but the last 10 years were terrible. Why would you invest in this business? We need to win back shareholders.”
Without higher prices, the future looks difficult for some operators, he added. “Companies that have quality resources will survive. But we’re going to see more M&A. It’s survival of the fittest.”
Aligning Canada’s CCUS plans with the U.S. IRA would help, said Buytels. “U.S. companies are lining up for billions in subsidies for carbon capture to enhance productivity. Here, we can’t qualify if it’s EOR. We have to take carbon and put it in the ground and enhance oil recovery.”
But managing ESG challenges could positively impact investment, he added. Tamarack Valley was the first company in North America with a sustainability-linked loan tied to emissions and ESG goals. At its Clearwater assets, it is working with 14 different Indigenous partners. It also recently built out gas processing facilities to limit flaring and other emissions. The goal is to manage full-cycle emissions while ensuring efforts generate returns. “At the end of the day, the cost of producing a barrel goes down.”
Higher prices and CCUS could result in a resurgence of SAGD development in Canada’s oilsands, said Hamm.
“Within 10 years we’re going to be talking about SAGD again. More geopolitical issues are coming, and security of supply will become more important. We’re going to bring supply chains closer to home,” he said. “$85 oil with CCUS can make SAGD go.”
CCUS integration into upstream oil operations will be crucial for selling Canadian production, he said, using the example of how organic produce like bananas get a premium in markets. “CCUS would be good. It would allow us a credible way to sell ‘organic’ oil. It’s way more important for the oilsands that have big CO2 emissions. The organic barrel should be a premium barrel.”
Supply shortages could also have a positive impact in making the oilsands palatable in the U.S., Hamm added. “As Americans haven’t found any major new reservoirs and are going to Tier 3, 4, 5 targets, and as demand goes up, where are they going to get their oil?”
Despite this potential, Hamm said it’s hard to see big supply growth coming from Canada in the next four to five years. “In 10 years, we’ll be looking at a supply crisis. Geopolitics will become even more toxic. Then the U.S. will be looking for oil in their backyard. People will care about reserves.”
“Inventory is going to matter again,” said Buytels.
- Tamarack Valley Energy Ltd.