The ABCs of Saskatchewan's petroleum.

News swirling out of the petroleum sector appears on the surface to point the industry in two different directions at the same time. Headlines proclaiming cuts in production and reduced outputs run nearly side by side against articles detailing massive profits, expansion plans and worker shortages. Dig a little deeper and making sense of Saskatchewan's position in the oil and gas sector is as simple as ABC.

Consider level A as the large, easy-to-find and accessible oil and gas fields usually found in regions where exploration has been limited. Level B fields are smaller and are often the leftover, hard to-access portions of what was once a large field. Level C is every other revenue source stemming out of petroleum production including waste oil recovery and pipeline tolls.

The companies targeting each level and their differing takes on what they deem to be profitable ventures account for most of those contradictory headlines.

The A Perspective

"The large companies, the ones I'd call A-level companies, have a different focus than smaller producers," explains APF Energy president Steve Cloutier. Those big companies want as big an impact as possible, he says, and are often seen divesting themselves of holdings that have shrunk to a size where they no longer fit into their portfolio.

"Different companies will have different business plans," agrees Roger Shaneman, manager of resources and Saskatchewan for the Canadian Association of Petroleum Producers (CAPP). That explains why a company such as Petro-Canada, which expects gas production in Western Canada to drop by up to four per cent every year, looks to places such as Africa and offshore Nova Scotia lot the next big gas play.

Without question, says Nexen Inc. vice-president of corporate communications Kevin Finn, one of the biggest factors affecting his company's activity in Western Canada is a falling discovery size.

"Saskatchewan and all of Western Canada is getting more and more competitive," Finn asserts, noting average reserves per well brought on stream are getting smaller.

"In this business your reserves are your inventory and we're seeing quite a change in the economics of the industry. Reserves are not going to disappear tomorrow but the basin is maturing and we all have to come to grips with that."

That said, Nexen remains heavily invested in Saskatchewan's petroleum industry and on some fronts is looking to increase its stake.

"We've been in business in Saskatchewan for a long time and we've had a long and fruitful relationship with the people of Saskatchewan," Finn says of the company formerly known as Canadian Occidental Petroleum. Approximately 70 per cent of their Canadian crude oil production originates in Saskatchewan including 8,000 equivalent barrels per day out of the southeast part of the province.

"Our activity is driven by looking at the land position we have and by the alternate uses there may be far our capital," Finn says. The company sees some opportunity for growth in Saskatchewan particularly from their heavy oil reserves in the west central area and is determined to maintain the high level of efficiency needed to operate in Western Canada.

The B Side

Saskatchewan is the nation's second-largest petroleum-producing province and is part of what is considered to be a mature basin. It's been called a mature basin for decades and its demise has been widely anticipated, yet Saskatchewan keeps churning out oil and gas.

"The province has been quite remarkably able to continue its life on and on, even 50 years longer than some had predicted," Shaneman says. In fact, CAPP notes record-breaking years for oil and gas development. While the discovery rate for natural gas has dropped somewhat, there have been a consider able number of natural gas wells drilled (in Saskatchewan the number has tripled) and production has increased dramatically over the last three years.

Shaneman believes 'a whole basket of different influences combined' led to the current robust state of the industry. Tax changes provincially and federally, reduced regulatory complexity and leveling out of power rate imbalances previously levied against industry are among those forces.

"A good portion of (industry health) is due to the good commodity prices we've had since 2000," Shaneman says. The higher Canadian dollar exchange rate has been accepted into the formula and the heavy oil differential price--the market difference between heavy and light oil which affects Saskatchewan substantially--has been favorable.

"As well, some new technologies have been opening up reserves that are being made recoverable," Shaneman points out. Combined with increased exploration these advances have given companies access to step-outs from existing fields,

This B-level of recovery is perfectly suited to a company such as APF Energy. They spend a great deal of time drilling up their properties and have been growing their business cost-effectively by relying on the drill bit to replenish their inventory.

"Some companies don't have the human resources or capital to exploit older pools. We do and it's a pretty powerful combination," Cloutier declares.

Companies like APF Energy make the most of the resource. New technologies help them accomplish their goal but to Cloutier there's nothing magical about finding new resources with three dimensional seismic technology and horizontal boring.

"Our stuff is pretty plain-Jane," he believes. "It's pretty steady and it makes our investors very happy."

Cloutier credits the expertise of APF Energy employees for the company's impressive bottom line. For starters, seven geologists on staff for a company of APF's size is quite a good number. Then it's a matter of having people in the field, Cloutier says, who understand production and know the lay of the land to efficiently extract the resource.

"By and large we have a group of guys in their mid 20s to mid-40s who've got a lot of continuity in those fields" he says. "The quality of worker I've seen has been top-notch. They're highly skilled, longtime Saskatchewan workers and their experience is definitely one of the strengths of our company."

APF Energy's most recent acquisition in Saskatchewan was a heavy oil company, in keeping with actions common to the expanding royalty trust sector. Yet Cloutier believes oil and heavy oil plays must be part of a larger portfolio including such resources as coal-bed methane.

"The days of royalty trusts going out and simply buying assets is coming to an end," he asserts. "We need to be creative and open in building our portfolios."

At C Level

Newalta bills itself as 'the cost-effective recycling and recovery option' and is a prime example of the innovation and creativity found at this level of the petroleum industry.

The $3-million acquisition of Sand Hill Contracting in southwest Saskatchewan earlier this year raised to three the number of recycling and recovery facilities Newalta has in the province. Operations at Halbrite revolve around conventional oil recovery while Newalta's Regina facility deals in industrial waste management such as used oil, solvents and oily water.

Newalta is forecasted to recover more than one million barrels of oil through its various recovery methods across Western Canada. Newalta vice-president of oilfield operations Peter Dugandzic says that translates into about 60 per cent of the industry's total waste management.

"We have a very dominant position in Saskatchewan and we're able to offer our customers a wide variety of options when it comes to recovery and re-use of the resource," Dugandzic says. This most recent purchase expands Newalta's service offering and firms up their market position in the province.

"We see Saskatchewan as a growth area for our business and in many ways we see ourselves as a Saskatchewan-based company," he says. "We like working in Saskatchewan and our investments in the province have proven to be very good."

The company's commitment to the province extends to what Dugandzic calls a 'stellar relationship' with regulatory bodies and provincial agencies in Saskatchewan. Governments, industry and the general public appreciate Newalta's environment-friendly role in petroleum production.

The company constantly examines new technology and finds ways to adapt proven technologies to their specific needs. One such breakthrough came in the recycling of frac sand.

"We've developed a technology to wash and dry frac sand so that it can be sold back to producers," Dugandzic explains. "Two years ago frac sand was disposed of in dumps. We demonstrated our process is commercially viable and now customers prefer our product."

Newalta's success depends largely on the efficient and economic recovery of a marketable product. The fact their oil is regarded as a virgin product when it flows back into the pipeline toward the refinery, Dugandzic says, is proof the company is meeting its goals.

Among the advantages Saskatchewan's petroleum industry has are pipeline tolls paid on natural gas delivery. Shaneman with CAPP notes Saskatchewan's position on some of the main trunk lines in North America gives it a leg up on other areas.

"As well," he says, "with Regina half-way between Chicago and the big natural gas fields in the Northwest Territories, there are efficiencies to be gained dealing with Saskatchewan."

Good news from the oil patch is especially important considering the significant troubles Saskatchewan's economy has laced in the agriculture industry and on other fronts, Shaneman says.

"Right now there are more people excited about the oil and gas industry than not. The feeling I get from talking to oil people--and if the past is any indication of future production--there is every reason to be excited about the industry for years to come."

CONTACT

Roger Shaneman

Manager of Resources and Saskatchewan Canadian Association of Petroleum Producers

[phone]

Kevin Finn

Vice-President, Corporate Communications Nexen Inc.

[phone]

Steve Cloutier

President

APF Energy

[phone]

Peter Dugandzic

Vice-President, Oilfield Operations

Newalta

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