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The progressively steeper summer drop in Alberta oil production

It's not often that two big energy trends can be captured on a single line chart.

Like a Hollywood scandal, the first mega-trend is well recognized: Spectacular growth in North American oil production. But the second trend lurks underground. When seen, it makes a profound statement about the character of all that new North American oil that is coming to market.

Canadian and U.S. oil production has grown remarkably over the past five years. Since 2009, both countries have collectively boosted their output by a staggering 2.8 million barrels a day (b/d). A good portion of that growth has come from the Canadian oil sands, which has contributed to 23 per cent of the increment. But the real renaissance has been the flood of light- and medium-grade oils extracted using horizontal drilling and hydraulic fracturing processes. It's not well recognized, but this da Vinci-esque innovation is also changing the mechanics of how the oil industry will respond to society's future call for the vital commodity they produce with the new techniques.

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Our two-in-one chart this week shows just Alberta's light and medium oil production from 2002 to December, 2013, but serves as a proxy for the broader trends in play.

Immediately noticeable is the reversal of the production decline starting in late 2009. The 50 per cent rise off the bottom (from 300,000 b/d to 450,000 b/d) is a result of the oil field renaissance. Exposing more rock to the well bore (horizontal drilling) and then shattering the surrounding rocks (fracking) accelerates the drainage of the target oil reservoirs. That's why top-line production is growing so quickly; not only from prolific geology in Alberta, but also from Saskatchewan and many established U.S. plays.

But our modest Alberta chart demonstrates something that can't readily be seen in charts from other regions: repetitive and increasingly pronounced production dips every summer.

Alberta's oil and gas industry shuts down its field operations every April for a couple of months in a ritual called "spring breakup." Melting snow makes rural roads impassable to heavy equipment, so most drilling operations halt. It's like pulling the plug on a DJ at a party. The dancing stops and the energy in the room declines. In today's oil business, when the new drilling stops, production falls off quickly.

Production declines are nothing new. However, the combined character of horizontal drilling and hydraulic fracturing is such that the output of each well is heavily front-end loaded. It's common for a new oil well to lose 60 to 80 per cent of its initial productivity after the first year of production.

From the chart, production dips can be seen in Alberta every summer as sure as the solstice. The dips can also be measured. In 2012 and 2013, the three-month declines in response to the spring breakup represent a drop of about 5 per cent. Annualized, it's 20 per cent, which means if drilling were to stop for an entire year, Alberta's light and medium oil production would fall by an average 90,000 b/d.

But the real observation is that the dips are getting more and more pronounced; back in 2004, the effect can be seen in the chart, but you have to squint. By 2011, you can easily see it without reading glasses. The rapidity and magnitude of the declines should become pronounced in the coming years, as an increasing fraction of Alberta's growing oil production (excluding oil sands) is brought to surface using the new drilling and completion techniques.

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An increasing sensitivity to declines is only visible in Alberta production data, because of spring breakup. Yet the touchy personality of steeper declines is now embedded in the character of all new oil production in North America, including in places like the Bakken in North Dakota and the Permian Basin in Texas.

Migration to progressively steeper oil declines is somewhat analogous to a just-in-time (JIT) delivery system in a manufacturing operation. The back end of the assembly line is very sensitive to what happens at the front end. For the oil business, this operating model comes with consequences; some positive, some negative.

NEXT WEEK: What does a just-in-time oil supply system mean to things like commodity prices? Energy independence? Corporate strategy? And why is shale oil different from shale gas?

Peter Tertzakian is chief energy economist at ARC Financial Corp. in Calgary and the author of two best-selling books, A Thousand Barrels a Second and The End of Energy Obesity.

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About the Author

Peter Tertzakian is chief energy economist and managing director with Arc Financial Corp. in Calgary and provides analysis on technology and energy-related businesses to fund managers and portfolio companies. More


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