By DAVID EBNER
Saturday, December 1, 2018
CALGARY -- A tanker truck in the Lloydminster region on the Alberta-Saskatchewan border gets loaded up. Its destination is some eight hours to the southeast. The cargo is unusual: 200 barrels of heavy oil.
It's not a cheap operation. Trucking the oil costs about $16 a barrel. But in Estevan, in southeast Saskatchewan, Gear Energy Ltd. blends the heavy oil with some of its light oil from the area and puts it on a pipeline. The elaborate contortion to move oil nets the company a profit instead of losing money on the depressed price of heavy crude. Gear is sending a truck down the highway every second day.
Ingram Gillmore, Gear's chief executive, can hardly believe it has come to this. "It's not a lot of oil, because it's an eight-hour drive, and that costs a lot," Mr. Gillmore said. Trucking oil across Saskatchewan, he said, is "ridiculous."
Mr. Gillmore started Gear eight years ago. The idea was to make money on an unloved commodity: Alberta heavy oil.
Gear rode the last boom, early in this decade, then toiled through the bust after 2014. It was hard, but the company never once booked negative cash flow. Today, with the province's oil prices near record lows, Mr. Gillmore is facing red ink in November and December.
For Gear, business is the worst it's ever been. Mr. Gillmore has taken an array of emergency measures. He shut down two rigs drilling new wells in early October. He put some 40,000 barrels of oil into storage tanks instead of selling them. He killed plans to add staff at head office. And he turned off the power to engines at some sites drawing the viscous oil from underground. Gear's oil production should be upward of 10,000 barrels a day. Instead, it is about two-thirds that.
Alberta energy companies are resorting to extreme measures to survive a crippling industry downturn. Oil prices in Western Canada have collapsed owing to a shortage of pipeline capacity. The resulting oversupply has nowhere to go. Oil companies are shutting in or reducing production, storing existing supplies in the hopes of better prices in the future, and increasingly turning to railways and even trucks to move oil, even though transportation costs - and risks - are higher. Some companies are shifting work to the booming U.S.
The price of Western Canadian Select - a heavy oil benchmark in Alberta - traded less than US$20 most of this week, compared with the U.S. benchmark of more than US$50 and even higher abroad. The low price is expected to persist for months and could generate sizeable losses for many producers. And because oil companies already slashed costs during the downturn a few years ago, there isn't much left to cut this time.
The Alberta psyche is rattled these days - and its fragile nature has fostered an embattled mentality. Albertans feel alone in their struggle, sensing that the rest of the country doesn't understand or care.
In 2015, when the most recent price bust took hold, the province remained confident - it had lived through such downturns before. In 2016, when unemployment hit 9 per cent - a level not seen since the early 1990s - that confidence waned as the pain spread. But over the past couple of years, it looked like things were getting better, even with challenges. Alberta's unemployment rate was down to 6.2 per cent this spring.
Now, however, this latest blow feels like the hardest one. Unemployment climbed back to 7.3 per cent in September - while the national rate was at its lowest in decades. House prices throughout the oil patch are down over the past three years, a period during which the rest of Canada saw home prices boom.
The oil-price collapse has opened a rift in the industry and put politicians under pressure to find quick solutions. Several major Alberta oil producers are urging the provincial government to institute mandated production cuts as a way to boost prices; others resist the idea. Premier Rachel Notley is set to decide on the issue soon.
Meanwhile, Alberta is being held "hostage" by the lack of progress on new pipelines - and the situation is "fiscal and economic insanity," Ms. Notley said in a speech in Ottawa on Wednesday.
Her words are echoed across the oil patch. There is a deep anger in downtown Calgary these days.
Mr. Gillmore, as with many in Alberta, hopes the crisis will force other Canadians to appreciate the seriousness of the province's plight.
"I hate to say this, but it's almost good that pricing is so insanely terrible, because I hope it comes to the attention of people east of Manitoba," Mr. Gillmore said in an interview at his office in downtown Calgary, where the equivalent of one out of four buildings is completely empty.
"All the anti-oil rhetoric, which is mostly fictitious, is suddenly going to become a lot less meaningful to people when they realize the Canadian economy is suffering.
I hope that this is so bad that the rest of Canada wants to elect people who are going to support the energy industry."
'SOME PRETTY DRASTIC MOVES' Whitecap Resources Inc. had never shut in a barrel of oil production until late November. The company, launched in the depths of the 2009 global financial crisis, should have an advantage because it produces higher-priced light oil. But these days, Alberta oil of all types is facing transportation bottlenecks. Whitecap pored over operational data and identified areas where production no longer made sense financially. The company cut power to some pump jacks in the field and shut down about 500 barrels a day of production.
It is also resorting to trucks to get oil moving. In October, it launched a convoy of rigs to get its light oil down the road to a rare opening in a pipeline. The company is moving roughly 7,500 barrels a day - a fleet of some 30 trucks, each carrying about 250 barrels of oil.
"Now you've got diesel trucks running down the highway," CEO Grant Fagerheim said.
The company's capital budget is $450million this year, and in early November, Mr. Fagerheim was figuring a ballpark of $600-million for 2019. Now, he doesn't know. Whitecap had planned to tell its investors on Dec. 5 about its plans but this week abruptly delayed that "until further notice."
"There's some pretty drastic moves being made," Mr. Fagerheim said.
He sketched a map and arrows on a piece of paper to show the current, unusual dynamics of the global oil industry.
Alberta is selling its oil to the United States at a huge discount. At the same time, Eastern Canada is buying 350,000 barrels a day of U.S. oil at full price, with additional expensive oil coming from places such as Algeria and Saudi Arabia.
It's a situation that could have been helped by the proposed Energy East pipeline to the East Coast, but that plan was scrapped amid widespread opposition.
Mr. Fagerheim has little faith in Canada's political leaders. He's not impressed that Ottawa spent billions this year to buy the Trans Mountain pipeline and a proposed expansion project in a bid to get the project completed.
"Do they really want to drive pipelines," he said, "or did they buy this to have it go away?
'THE MARKET IS BROKEN' In the summer, Cenovus Energy Inc. produced 377,000 barrels a day from the oil sands. But as with many Alberta oil producers, Cenovus is hitting the brakes. At current prices, it is losing US$5 a barrel.
In the meantime, Cenovus made a deal in September to lease new rail cars, similar to a plan the province is working on for the
industry as a whole. Cenovus's deal would move 100,000 barrels a day to the Gulf Coast in Texas, where the oil would get a much higher price. The first rail cars roll off the assembly line in April.
In this crunch, Cenovus is pushing the science of the oil sands. It has curtailed production in a delicate balance it calls "dynamic storage," in which it continues to pump steam into its reservoirs to warm the bitumen, but does not pull the oil out of the ground. The bitumen is stored in the reservoir. The technique involves slowing what are called electrical submersible pumps. The company conducted this experiment in the spring for about six weeks, when the price differential last exploded.
It figures it can keep up this art-and-science juggling act to hold back some 50,000 or so barrels a day for several months.
"We're doing everything we can," said Keith Chiasson, a Cenovus senior vicepresident, early on a late November morning, the sky pitch black, ahead of meetings to decide the company's 2019 budget. "Our bitumen is in high demand - if we can actually access the global market."
While the industry has collectively cut back as much as 200,000 barrels a day of production, Cenovus made the big call last month. It wants the provincial government to mandate all producers to cut back.
It argues that oil sands rivals such as Exxon Mobil Corp.-controlled Imperial Oil - which benefit from low prices with their refining operations - are making windfall profits on the backs of Albertans and other Canadians.
"The market is broken," Mr. Chiasson said.
In the longer term, he has hope for the future. In addition to more oil by rail, new pipeline capacity such as Enbridge Inc.'s proposed Line 3 is supposed to open by this time next year, which will ease the current squeeze.
"We're confident the pipelines will eventually get built."
'WE'RE REALLY A DUMB NATION' At a breakfast at the Petroleum Club in late November, Mark Scholz, head of the Canadian Association of Oilwell Drilling Contractors, gave a fiery speech. He talked of an industry under siege, "an existential crisis." He lashed out at "radical environmentalists" and said they were not fighting fair.
"Our opponents are not entitled to their own facts," he declared to rousing applause.
Ms. Notley spoke next. She made fun of coffee shop hipsters in other Canadian cities. She spoke strongly in support of Alberta and the oil business. She received polite, muted applause. Prime Minister Justin Trudeau spoke to an audience at the city's chamber of commerce later the same day.
A large pro-oil and pro-pipeline protest shut down a city block outside the hotel where Mr. Trudeau was for the chamber luncheon. Inside, he received a cold reception.
George Fink, who founded the small oil company Bonterra Energy Corp. in 1998, speaks in a measured tone, but his message is declarative: The Prime Minister is failing Alberta. It starts with the Trans Mountain pipeline, which is going through more consultations after a loss in court over its approval. Mr. Fink and others believe Mr. Trudeau would act unilaterally if he cared about Alberta.
"Shouldn't you be strong enough to say, 'Look, we're just going to proceed with Trans Mountain?' " Mr. Fink said in a boardroom on a Friday afternoon as snow began to fall after a warm, dry week.
Mr. Fink, who is in his late 70s and grew up on a Saskatchewan farm, is slowing production at Bonterra. He's been through crashes before, but his company, a light oil producer, has paid out more than $1-billion in dividends during its two-decade run.
One move is to reduce the number of times the horse's head of a pump jack bobs up and down - to five a minute from 10.
This would cut production and reduce royalty costs, but Bonterra still has to pay its field operators.
Mr. Fink doesn't want to turn off the switch completely. He doesn't want to put his field operators out of work. He knows them and their families. Christmas is less than a month away. "I don't really have the heart to turn it off for a month or two," he said.
He feels Mr. Trudeau has written off the Prairies for the Liberals in next year's federal election. He says the general corporate tax cut the Liberals introduced on Nov. 21 doesn't really help Alberta oil all that much: He calculates that on a $2.3-million well, Bonterra could save $18,000.
He believes Canadians are making a mistake if they vote Liberal in 2019; if they do, he predicts the loonie will plunge.
"If that regime gets re-elected, we're in trouble as a country," he said.
Over at Total Energy Services Inc., a drilling rig and oil field services company, Dan Halyk stews. His roots are also in Saskatchewan - tiny Foam Lake. His dad owned the one gas station in town. Mr. Halyk founded Total Energy in 1997 when he was in his late 20s and has been CEO since 2002.
Businesses in Canada, he argues, are being killed by too-high taxes and too many regulations. And because of the Trans Mountain delays, he has shuttered five of Total Energy's 25 field offices in small towns, the first time he has done so.
"These towns are getting crushed," he said.
Total Energy is shifting investment dollars to the United States. He said more and more drilling rigs are moving south to Texas, where there are profits. In Western Canada, in the winter of 2012, during the thick of the last boom, more than 700 rigs were working. Last winter, it was less than half that number. Total Energy has a fleet of 116 rigs - a fifth of them in the United States.
Every rig employs about 30 people, and drilling a well pays dozens in related services. In the summer, Total Energy's rigs effectively sat idle three out of every four days.
"I can't have a $30-million piece of equipment sitting around," Mr. Halyk said.
"As a Canadian, I'm sick to watch what's going on right now."
The conversation shifted to skepticism of climate science - not uncommon in downtown Calgary. The United Nations Intergovernmental Panel on Climate Change in October again warned of dire consequences if human beings do not take aggressive action to cut back on carbon emissions.
Some Albertans are wary.
"I've been doing a lot of reading," Mr.
Halyk said. "We're not having an open scientific debate." At Surge Energy Inc., a small oil producer, veteran oil patch CEO Paul Colborne embodies the Albertan oilman: Upset - yet still confident. He wants the Prime Minister to plough ahead on Trans Mountain and said Canada is crazy to sell cheap oil to the United States and then import expensive oil.
"We're just dumb people," Mr. Colborne said over a morning coffee.
"We're really a dumb nation right now."
Still, he urged some calm. He had a chart that showed the oil differential has surged before for similar reasons - pipeline problems and refinery closures - but it always returned to normal. "Everyone's hair is on fire," he said.
His confidence in oil's long-term future is rock solid. He thrust up one arm to indicate demand. He thrust the other down to indicate the challenge of producing more oil.
And then, again, a conversation about oil drifts into climate science. Canadians need to embrace oil, Mr. Colborne said.
Don't be ashamed.
"All I'm saying to you is the data is still unsettled," he said. "I'm proud of our vast reserves of oil. I don't want higher taxes. I don't want massive deficits. Oil is not going anywhere. It's the most important commodity in the world. We all need it."
GLOBAL OIL DEMAND There is global oil demand. The world guzzles a record 100 million barrels a day. Each year, production from oil reservoirs around the world declines roughly 5 per cent. That means to keep production steady, the world needs to find five million barrels a day of new oil every year. The volume is the equivalent of one new Canada of oil each year.
This seemingly solid supply-demand dynamic gives Arun Chandrasekaran confidence. He's the head of energy investment banking at National Bank Financial Inc. in Calgary. He was born and raised in the refining hub of Fort Saskatchewan, near Edmonton. His banking career started in 2004, as oil was shooting through US$40 a barrel on its way, four years later, past US$100.
Now in his late 30s, Mr. Chandrasekaran has already been through two busts. National Bank took hard hits during the most recent one. But the bank is a long-term backer of the oil patch. It lends to 110 energy companies, the most of any of the big banks, Mr. Chandrasekaran said. Its energy portfolio is now worth about $8-billion, up almost $2-billion in the past two years.
"We helped a lot of companies survive through '16. Our support through this downturn? Unwavering," he said. "We're not going to react to these short-term blips.
And short-term could be three months, six months, nine months. It doesn't matter."
He pointed to a chart of the estimated global energy picture over the next several decades. Renewables surge, as does natural gas. Oil rises in the decade ahead and plateaus in the 2030s. In 2040, however, according to this estimate, oil remains the world's No. 1 source of energy.
"The world needs energy," he said. "And it's not 10 or 20 years. It's 50, 60, 70 years."
'I'VE GOT OIL IN MY VEINS' Chris Graham has driven heavy-haul trucks in the oil patch for a quarter-century. He moves drilling rigs from one hole to the next. There have been good times. In the last boom, he was making $350 an hour and piled up as much as $90,000 in a month. His best year, he grossed $750,000.
In fall 2013, he bought a new rig. Then came the crash. Mr. Graham had money in the bank and figured he had a good enough hand to ride out the bust. By late 2015, he folded his cards. He told the bank, "Well, I've got no more money to give you."
The bank repossessed the rig.
"The only real winners were the bankers in that one," he said.
Through the bust, Mr. Graham drove for others and did some work hauling construction equipment. He checked out the wild west drilling boom in West Texas last year. The situation back home started to get better this year. He lives in Saskatoon, and there is profitable light oil drilling around Kindersley, near the Alberta border.
In October, his luck changed. Mr. Graham is a regular Lotto Max player. On Oct.
26, after buying a quick pick Maxmillions ticket at Midtown Foods in Kindersley, his numbers - 19, 21, 22, 31, 37, 45 and 48 - came in. He won $1-million.
"I was shaking," he said of his reaction.
His girlfriend, at first, didn't believe him.
Once she realized he was crying, she knew it was real. "We had to check it a few times," he said.
The first thing he did was book a trip to Hawaii. On the flight home, he readied his next play. He had work lined up in Saskatchewan.
He was going to spend $320,000 to buy a new winch truck outright.
No more banks breathing down his neck when things get bad. He eyed a Kenworth C-350.
"We were going to be givin' 'er and going to work," he said.
He knew all about the details of the West Texas Intermediate-Western Canadian Select differential but had not realized how fast things were changing, how tough things had become, until a half-hour after he landed in Saskatoon from holiday. He got a call and was told the work he had lined up was gone. Drilling plans had been cancelled.
There were no rigs to move.
So Mr. Graham is making own moves.
He's turned his eye south. He's still going to buy the new rig but is also setting up a U.S. limited liability company and getting other paperwork in order. He will put his winch truck to work moving rigs in the Permian Basin of West Texas, around the boom towns of Odessa and Midland.
At 43, Mr. Graham is all-in on oil, even though he knows it beats him up. Moving his work a long way from home, some 1,600 miles south, is his pragmatic bet.
"I have no confidence in the oil patch," he said.
"Every time I go through a bust, I think, 'Man, I've got to find something better to do.' You know what I mean? Then it picks back up. I've got oil in my veins. After 25 years of doing this, it's all I know."
Ingram Gillmore, chief executive of Gear Energy, sits at his office in downtown Calgary on Thursday. Currently, business for Gear is the worst it has ever been, and Mr. Gillmore has taken several emergency measures, including shutting down two rigs drilling new wells in October.
GUILLAUME NOLET/THE GLOBE AND MAIL
Top: George Fink, founder of Bonterra Energy, stands in his office in downtown Calgary on Thursday. Mr. Fink says the Prime Minister is failing Alberta. Above: Chris Graham, who has worked in the oil patch driving heavy-haul trucks, is seen at his home in Warren, Sask.
TOP: GUILLAUME NOLET/THE GLOBE AND MAIL; ABOVE: DAVID STOBBE/THE GLOBE AND MAIL
THE GLOBE AND MAIL, SOURCE: NATIONAL ENERGY BOARD