Lloydminster– After roughly 30 years working in the heavy oil business and tracking the industry around Lloydminster all that time, Rob Morgan has come to the conclusion that technology is the key.
The keynote speaker for the Sept 13 banquet preceding the Lloydminster Heavy Oil Show, Morgan is senior vice president and chief operating officer with Crew Energy, a heavy oil producer active in the Lloydminster region. His career as a professional engineer has focused on heavy oil, including a previous stint as COO with Harvest Energy. He was vice president of operations and corporate development for Viking Energy Royalty Trust, and has also worked with CNRL, Petrovera, PanCanadian, CS Resources and Murphy Oil.
“I was a summer student in Lloyd here in ’83-’84. I started with Murphy in ’85 and lived in Lloyd until 1990. They said, ‘Once you get heavy oil on your boots, you never get it off.’ I sort of took that with a grain of salt, but, my gosh, it’s absolutely true. Over the 30 years I’ve been in the industry, every company I’ve worked at has been in heavy oil. Twice, I’ve been in companies that had no heavy oil when I started, and the next thing I knew, we had heavy oil at the end of the day.”
Speaking metaphorically, Morgan said, “Heavy oil doesn’t only get onto your boots, it kinda get’s into your skin, it gets into your head. There’s a lot of challenges in heavy oil. When people say, ‘How do I learn in the oil industry?’ I say, ‘Go work in heavy oil.’
“It’s challenging. It’s not easy. Anyone who thinks heavy oil is easy needs to be shown the door. But there is such innovation that happens because it’s tough. There are so many things that get developed by people. There’s so much learning that can happen.”
You also get to work with amazing people who solve technical challenges working with heavy oil, he added.
It’s with that long experience that he was able to gain some insight into getting more out of the ground. He kept a file on the local heavy oil price from 1983, as a summer student in the area, until now, and presented numbers up to June 2016.
He pointed out that in 1983, heavy oil was going for $25 per barrel, and a vertical well cost about $180,000 to drill and put online. That’s equal to about $60 per barrel today. “Those were good times. The industry was doing very well, up until 1985,” he said.
But when things are going well, silly things start to happen. As an example, he noted an operator was going through a fire tube a month on a 750 barrel tank near Kitscoty. But instead of aligning the burner, the response was, “It doesn’t matter, we’re making money!”
Morgan said, “That’s the problem when times are good. We lose our efficiency, we lose, in some perspective, common sense about how to run our business and what’s involved to make our business work.”
He noted it’s a cyclical industry, stating, “In 1986, that was the time OPEC decided it was losing market share, and they opened the taps. Sound familiar?”
A period of nine years followed with relatively low oil prices, with war in the Middle East as the notable uptick during that time.
He recalled how the president of PanCanadian pointed out in 1998 that the company was going through mechanical pencils at a rate of 60 per employee per year. “He wasn’t doing a presentation about mechanical pencils. He was making a point, and that point was there was far too much waste going on,” Morgan said.
After 1998, heavy oil prices started to rise due to growth in China and growth in general. The Second Gulf War led to a spike in prices, followed by a short-lived drop in 2008 with the global recession. Prices were then high until the recent downturn.
Some people have told Morgan that this current downturn is worse than 1986. To some degree, he feels that’s true. “It’s been a significant impact.
“These adjustments in price are never easy. They’re very tough on people. But there’s a good that comes out of it,” Morgan said.
He’s tracked production in the conventional heavy oil region centred around Lloydminster, extending south towards Kindersley and northwest towards Vermillion, but excluding oilsands regions. In the 1980s, that region produced around 50,000 bpd of heavy oil. It grew to a peak of around 350,000 bpd.
Comparing this production to his price chart, he noted in the late-1970, early 1980s, heavy oil production grew almost three-fold to 150,000 bpd by 1986. The exponential growth curve was related to new drilling techniques and the introduction of cyclic steam stimulation.
After 1986 there was a period of “reality check and technology advancement.” After hope for prices to recover faded, businesses had to find a way to work in the low-price environment.
“The result of that period of time, which I had the pleasure of living through, was an amazing growth related to technology,” Morgan said. Production grew from 150,000 bpd to almost 250,000 bpd due to technological advancement in horizontal wells, 3D seismic and progressive cavity pumps. “All of it led to the cold heavy oil production wormhole enhancement.”
“It was an amazing time because the changing technology was phenomenal at that time. The result was amazing growth in the heavy oil industry.”
He pointed out this happened at a time when there was no ramp-up in price. “No, we got smarter. We figured out how to do it and run a business at low commodity prices.”
The crash in 1998 saw production drop, in part to early horizontal wells declining very quickly. But when prices recovered, production grew again.
The next plateau, a “technology plateau,” as Morgan described it, saw prices increase dramatically, but production didn’t go up.
“Why? Because we tapped out our ability to extract oil with the technologies we had at that point in time,” he explained. “We had to develop new technologies, we had to work through those technologies.
A decline by 2008 was not so much price related, but technology limited.
By 2013-14, growth was driven by the very high prices. Also, instead of drilling horizontally into a five-metre thick McLaren sand, it was now possible to do so into a two-metre thick sand formation, and do it economically.
In the background, there was a lot of work being done with small-scale SAGD. Waterflooding pressures grew. High volume lift became economic.
But in the last two years, prices have come down dramatically. “We have to put our thinking caps on. The entrepreneurial spirit is very alive and well with the people I work with,” Morgan said. “The people in this room will drive us forward.”
“And why do we keep going? Because technology is the answer. It has been the answer all through my career, and it will continue to be the answer as we move forward.”
With roughly 40 billion barrels of heavy oil, only about 8.5 per cent has been produced. If 350,000 bpd of current production is maintained for the next seven years, that will only increase recovery another two per cent, leaving roughly 90 per cent of the oil still in the ground.
Early in his career, some people said that three to five per cent was all they were ever going to get out of the ground, but a lot of people said, “Nope, we’re not done yet.” And they weren’t.
Leaders
“We need to be proud of our industry again. Canadians are leaders, particularly in heavy oil,” he said to applause. “We are also leaders in environmental and regulatory stewardship. Not many people talk about that.”
He talked about having worked for the Korean National Oil Corporation (which bought Harvest) for 18 months. They had assets all over the world. “I can tell you, they were shocked at what we go through from a regulatory standpoint, emergency preparedness, how much the environment is part of what we choose to do, how much the environment is driven by the technologies we have. They have assets all over the world. Don’t let anyone tell you we’re not leaders on the environmental side or the regulatory side.”
