Canada Enjoys Short Boost in Production

THE spike in world oil prices prior to the Persian Gulf war has encouraged Canadian oil and gas producers to start drilling again. "Capital spending by oil and gas companies is increasing in response to higher commodity prices and new export market opportunities for natural gas," reports Peters & Co. of Calgary, Alberta, in a research report on the Canadian oil industry. The firm reports that oil drilling in 1990 was half what it was in 1988 and at a low for the last five years. The reason: low oil prices and too much natural gas.

"The Persian Gulf crisis has given the exploration companies a significant boost to their cash flows. It has also improved the economics for oil-related investment," states the report.

Here are some immediate spending plans:

Nova Corporation, TransCanada PipeLines Limited, and Westcoast Energy Inc. are spending more than US$1.72 billion on pipelines and plants in 1991.

The Hibernia drilling program off Newfoundland - the only significant oil project outside of western Canada - starts this year. Developing offshore wells in the oil-rich waters off Newfoundland will eventually cost US$4.3 billion and will be heavily subsidized by the federal government.

Shell Canada will spend US$774 million developing the Caroline oil and gas field in Alberta.

"It's going to be busy. Alberta's economy is booming as a result," says Hans Maciej, vice president of the Canadian Petroleum Association in Calgary. "We see conventional exploration increasing by 12 to 15 percent, and overall spending rises by 30 percent when you add the mega-projects."

The interest in conventional drilling for oil and gas is not confined to Alberta, Canada's leading producer. Peters & Co. reports increased interest in land sales in British Columbia's oil and gas regions. But although Canada's oil exploration business may be making a comeback, the long-term outlook for oil and gas production appears gloomy. Figures released by the National Energy Board in Ottawa show falling reserves.

Canada's conventional oil reserves are disappearing quickly and the country may have to rely on new technology to produce light crude oil from the heavy, sticky bitumen of the oil sands in Alberta. So perhaps the most significant investment this year is the heavy-oil upgrading plant being built at Lloydminster on the Alberta-Saskatchewan border. By late next year that plant will be producing 46,000 barrels of light crude a day.

"There are 2.5 trillion barrels of reserves in place. On a world scale that's greater than anything I know about," says Mr. Maciej of the Petroleum Association.

The problem is extracting light crude from the heavy oil. Maciej says the best way to strip mine the oil sands and convert the bitumen to light crude is with an upgrader such as the one being built at Lloydminster by Husky Oil Ltd. And although all oil sands can be converted, some of the thick tar is fine just as it is. "Keep in mind that you have a super heavy crude that can be used as feedstock for asphalt products," says Maciej.

Other conversion methods include bringing tar sands to the surface using steam to reach material that is too deep to strip mine. Plants using this technology are operating at Cold Lake and Peace River, both in Alberta. The difference in the processes is the extraction cost. Strip mining and using an upgrader can reduce the cost per barrel of oil from the tar sands to US$13 per barrel; other methods can cost US$20 per barrel, or more.

One thing Canada - and especially Alberta - has lots of is natural gas. The Caroline Field, just north of Calgary, is the most significant natural-gas discovery in the last quarter century. Producers and industry groups report that increased supply - and a warm winter in North America - have meant prices about 20 percent below what they normally are at this time of year.

And with oil, it all comes back to price. "US$18 a barrel is not good enough," says Maciej. "US$25 a barrel would do a lot for the Canadian industry."