Monday, 27 October 2014

Nova Scotia, Fracking and Transfer Payments

By: Frank Atkins, Business in Calgary Magazine

Before he became a senator, Mike Duffy was the host of a news television show on the CTV network. I was a guest on that show, and Mr. Duffy asked me a question about equalization. I responded that the system of transfers that we generally refer to as equalization is not consistent with the efficient running of the economy. When Mr. Duffy, asked me why, I responded that equalization was like having your 25-year-old son living in your basement rent-free. There was no incentive to get a job and no incentive to move out and become a productive member of society. Mr. Duffy's reaction was somewhat akin to wondering how someone with so much education could have such weird ideas.

I was reminded of this recently, when the government of Nova Scotia officially banned hydraulic fracturing, commonly known as fracking. A lot of people think of fracking in the same manner that they think of the oilsands, as dangerous, dirty and generally destroying the environment. Fracking has the added problem that it is alleged to contaminate drinking water. The problem is that there is no proof of these claims. Fracking has been around for many, many years and I am not aware of any credible claim that it has harmed drinking water. Given the number of years that fracking has been used, I find it curious that it is only recently that the environment movement has decided fracking is bad.

This sort of rhetoric is typical of the manner in which organizations such as Greenpeace and the World Wildlife Fund view the oil and gas industry. Generally speaking, the environmental movement never lets the facts get in the way of a good argument. Just so that we understand who the players are here, it is worth noting that the Nova Scotia government that banned fracking is a Liberal administration. Next door to Nova Scotia in New Brunswick, there is an election where the Conservatives are running against the Liberals on a pro-fracking platform. Finally, Liberal leader Justin Trudeau's principal adviser is Gerald Butts. Before joining Mr. Trudeau, Mr. Butts wasthe president and CEO of the World Wildlife Fund Canada. We should pay attention to this in the next federal election.

The fact that there is no scientific basis for the claims against fracking is just one of the problems with the Nova Scotia decision. The major issue here is the hypocrisy that is involved in this decision. Nova Scotia is a recipient of a large amount of transfer payments. Nova Scotia has the opportunity to develop industries, and to create jobs and wealth through using fracking and selling natural gas. This would lead to Nova Scotia ending its dependence on transfer payments. Instead, it has chosen to continue to survive by receiving transfer payments. Here is the hypocrisy. These transfer payments generally come from the western provinces, who make money from using fracking techniques. Apparently, it is all right to receive money from other provinces that use fracking, as long as Nova Scotia does not use fracking itself.

It seems to me that Nova Scotia is the 25-year-old son living in the basement. Because of transfer payments, there is no incentive to get out of the basement and become productive members of the Canadian economy.

Frank Atkins is an Associate Professor of Economics at the University of Calgary, a senior fellow at the Frontier Centre for Public Policy, and a member of the Advisory Board of the Institute for Public Sector Accountability. 

Thursday, 23 October 2014

Rest In Peace

By banning high-volume fracking, Nova Scotia has bowed to ENGO pressure and hobbled the province's economic future

By: Jim Bentein, from Oilweek Magazine

Nova Scotia's Liberal government allowed "well-funded anit-fossil fuel groups" to dominate its decision making in choosing to ban high-volume fracking, says the head of an organization that represents conventional and renewable energy producers in the province.

The ban, says Barbara Pike, chief executive officer of the Halifax-based Maritimes Energy Association, has cost the province in an anti-business light, a perception that will be almost impossible to overcome.

The government has "created the impression that the province isn't open for business," says Pike, whose organization represents some 320 energy producers, from tidal to wind to oil and gas. "If you're developing wind for generating hydro or other forms of energy, you're looking at investing in a place that is business friendly, and Nova Scotia  may not be where they will put their money."

She was commenting on Energy Minister Andrew Younger's announcement in early September that Nova Scotia would ban high-volume hydraulic fracturing as part of onshore oil and gas development in the province.

His decision came days after and independent panel, headed by Cape Breton University president David Wheeler, released a 387-page report calling for more research into hydraulic fracturing but not recommending an outright ban.

"Nova Scotians have overwhelmingly expressed concern about allowing high-volume hydraulic fracturing to be part of onshore shale development in this province at this time," Younger said in a written statement. "Our petroleum resources belong to Nova Scotians and we must honour the trust people have put in us to understand their concerns. We will, therefore, introduce legislation to prohibit using this technique to stimulate onshore shale projects."

Pike says the ban is a grave mistake and will halt virtually all onshore oil and gas development in a province that will, according to all estimates, need to import substantial volumes of gas in the future, as offshore resources dwindle and rising costs impact future offshore exploration initiatives.

The government, which relies on federal transfer payments for more than 40 per cent of its revenue, has also lost an opportunity to create economic activity and jobs, Pike notes.

She points out that 1,000 people showed up at a recent job fair put on by Alberta oilsands producers in neighbouring New Brunswick, where onshore fracking has been allowed. There was a suggestion, however, that it might be banned if the pro-fracking Conservative government was defeated in a late September election.

"[Job fair attendees] said they were going out west because there are no jobs," Pike says, adding that the employment prospects in Nova Scotia and Prince Edward Island are as bleak as they are in New Brunswick.

Pike says that recent opinion polls in the province show about half of Nova Scotias favour fracking, but that didn't stop the government from "listening to the same groups that are fighting pipelines in British Columbia" by announcing the ban.

"This is perceived by some of those groups as a real victory," she says, arguing that anti-fracking groups stacked the attendance at public meetings that were held as part of the Wheeler panel's process.

Karen White, a spokeswoman in Younger's department, says that Pike and other critics of the government are wrong when they portray it as viewing the fossil fuel sector negatively.

She says the government continues to support offshore oil and gas development as well as waterless fracs using propane, CO2, or nitrogen. It also continues to support coalbed methane (CBM) development, White says, noting the recent approval of a project being developed by Toronto-based East Coast Energy Inc.

"The concern was around the use of high amounts of fresh water," White says, adding that the legislation will outline whether the use of recycled water would be allowed.

Julie Cohen, president and chief executive officer of privately owned East Coast Energy, which proposes to develop a CBM project in the Pictou County area of the province, says her experience with the Department of Energy in Nova Scotia "has been very positive," with permits being granted without extensive delays.

"In fact, I had the minister of energy come to the site," she says.

The company was granted permits to drill two test wells last November and December along the Foord coal seam, located near Stellarton, at a depth of 540 metres.

CBM development is not new in Nova Scotia, where it dates back to the 1800's and where more than 30 wells have been drilled since 1979.

The Foord coal seam is known for its high levels of methane gas.

Cohen says her company has since drilled the first successful horizontal well in a CBM seam and will be carrying out further analysis this fall. She hints that development will proceed.

"It's very exciting," she says. "For me, it couldn't be any better."

East Coast Energy has the rights to develop 22,000 acres, with 20 coal seams.

She says a Sproule Associates Limited resource estimate showed there is 426 billion cubic feet of gas in place there.

Gas utility Heritage Gas Limited is extending a pipeline to the Stellarton area, which means the project would have ready access to local and out-of-province markets.

Cohen says she "sort of feels bad" for the energy minister, since he is being portrayed as anti-industry.

But she also says the fracking decision came in a province "where people don't understand what fracking is about."

The energy department also doesn't appear to understand what it is, according to Paul Barnes, manager, Atlantic Canada, for the Canadian Association of Petroleum Producers.

"What do they mean by high-volume fracking?" he says. "Is it fresh water they're talking about? Can you use salt water or waste water?"

He points out that the province should have no worries about freshwater shortages or access to salt water, given its ample rainfall and coastal location.

"The concern for us is the way [Younger's announcement] came out," he says. "We were hoping to have more discussions with the government [before any decision was made]."

He says he wouldn't go as far as Pike in portraying the government as anti-business, pointing out that it does have an active offshore oil and gas industry.

"But if you don't want to see onshore oil and gas development, why promote offshore development?" he asks.

And while CBM development doesn't involve high-volume fracking, he points out that it does require the use of water. "It's a mixed and confused message."

Offshore gas development is slowing as the Sable Offshore Energy Project winds down, despite the recent addition of the much less prolific Deep Panuke project, which was finally commissioned by Encana Corporation last fall. In April, Nova Scotia Finance and Treasury Board Minister Diana Whalen said that the province faces significant economic and fiscal challenges as royalties from offshore development decline.

Offshore royalties are estimated to climb to $31.78 million in 2014-2015 from just $22.36 million in 2013-2014, as the Deep Panuke offshore gas project goes into production. However, those revenues pale in comparison to the past. It took in $172.68 million in offshore royalties in 2010-2011, for instance, when gas prices were much higher and the Sable project was producing significant gas volumes.

Edwin Macdonald, vice-president and chief geologist with St. Brendan's Explorations Ltd., which has licenses to explore three blocks in the Cumberland Basin in the province totalling 833,000 acres, says he will await the final regulations before reaching a decision on his company's plans or commenting on the government's decision. However, he says his company plans to drill primarily for conventional natural gas on its properties.

Nevertheless, even those plans are on hold until the final regulations are announced, he says.

Macdonald won't criticize the fracking ban, but he wonders how development will proceed without the industry being able to explore for shale gas.

"There is a long history of oil and gas exploration in Nova Scotia, stretching back to the 1860's,' he says. "In all of that time there have been 130 conventional wells drilled and there have been no commercial discoveries."

Macdonald, who was born and educated in the province and has worked worldwide, including in western Canada, in the South China Sea for Husky Energy Inc. and offshore Atlantic Canada, says it is unlikely there will be onshore gas development any time soon, given the massive capital investment involved.

Another veteran local geologist, Bob MacDonald, who owns consulting firm Jammin Rock Resources Inc. and has 40 years of experience in the oil and gas industry, says the decision is more about politics than geology.

"There is a silent majority [in Nova Scotia and New Brunswick] that wants shale gas development," he says.

He recently conducted a survey for a client in New Brunswick who wanted to gauge the public mood  about development. "We knocked on 4,500 doors and 75 per cent of the people were in favour of development."

And he's convinced the same percentage of Nova Scotians would support fracking. "We're kind of tired of being on welfare."

He says there is more seismic available, and there has been more active drilling in New Brunswick, where Halifax based Corridor Resources Inc. has been producing small volumes of conventional gas from its McCully Field since 2007. Corridor has launched a shale gas exploration program and has so far drilled three wells and fracked them with waterless frac technology developed by Calgary based GASFRAC Energy Services Inc.

Future plans, however, were thrown into doubt with the late September election of a majority Liberal government under Brian Gallant.

During the campaign, Gallant set out the conditions his government would require before allowing fracking for shale gas to move forward in New Brunswick. The conditions include extensive public consultation to determine if a social consensus to allow fracking exists; the existence of methods to avoid unacceptable risks to the environment, water and health; the government's ability to maximize benefits to the province through a royalty regime; and the development of a country-leading regulatory regime. Lastly, the economic and long-term employment benefits would have to outweigh and residual risk, the Liberal's platform says.

Estimates suggest New Brunswick's onshore has the potential to deliver 80 trillion cubic feet of reserves through fracking, and while not much is known about Nova Scotia and Prince Edward Island, there's bound to be significant potential in both provinces - potential that might go unrealized if the fracking fear that has paralyzed Nova Scotia spreads to other jurisdictions.

"We're missing a golden opportunity here," Bob MacDonald says.

Brad Hayes, president of Calgary based Petrel Robertson Consulting Ltd., was one of the 11 members of the Wheeler panel, and he shares Bob MacDonald's view that the decision was about politics rather than geology or economics.

"Some of the people working with me on the panel said there was a lot of political interference around the decision," he says, even though the panel, appointed after a moratorium on fracking was declared by a previous New Democrat government in 2012, was supposed to provide and independent review.

He wonders if the energy minister even read the Wheeler report.

"He got the report on August 27-28 and the ban was issued the week after," he says, questioning how a thorough analysis could have been made of such a detailed report.

In June, Hayes and Ray Ritcey, the former president of Heritage Gas and also a member of the Wheeler panel, produced a report that suggested there was likely commerical potential for onshore gas development but that the industry first needed the assurance that it could use suitable technologies, including fracking.

"Exploration companies are attracted but are hesitant to move quickly in light of the high levels of risk and uncertainty," Hayes and Ritcey suggest in their report.

"As knowledge of the subsurface, including sedimentary rocks and hydrocarbons, is extremely limited, it is very difficult to quantify the potential or even rank the various basins in terms of overall prospectivity," say the authors. "More exploration, and particularly more deep wells targeted to investigate unconventional reservoirs, would be required to add to our knowledge."

They conclude that the province is unlikely to see increased exploration activity until the moratorium on fracturing is lifted, additional seismic well data is acquired and the complexities of developing frontier basins are addressed.

Nevertheless, they did suggest, using information acquired to date, that gas volumes in the prospective Windsor-Kennetcook Basin are between 17 trillion and 69 trillion cubic feet, while CBM resources stand between 280 billion and 1.8 trillion cubic feet.

Hayes says he is as mystified as others about the government's reference to high-volume fracking.

He says Younger "is trying to create the impression there is a definition and that high-volume fracking would be dangerous, but that is not correct."

In fact, there is no one-size-fits-all approach producers can use. Some formations, such as the Cardium in Alberta, need as little as 2,000 cubic metres of water for each frac, while others, such as the Horn River in British Columbia, routinely see fracs that use 50,000 - 75,000 cubic metres of water.

"The companies will put in as little fluid as they can because it makes sense" - the less water they use, the less a frac costs.

But he says they won't know that until they can test approaches on different reservoirs, which the ban will prevent them from doing.

As for waterless propane-only fracs, he says "not many plays use propane," and he doesn't see that changing.

And CO2 and nitrogen are mostly used in addition to water "to energize a frac" but are rarely used on their own.

Hayes fails to see why water use should be such an issue in the province, pointing to its use in the Marcellus shale in Pennsylvania, where water access is similar to what it is in Nova Scotia.

"You're not talking about high-volumes when you compare water use in fracking to agriculture," he says, which uses far more than the energy industry ever would.

In any case, he says the provincial government hasn't reached out to other Canadian jurisdictions like Alberta and British Columbia, which have strict regulations regarding water use by the energy industry.

"Those provinces have dealt with this issue, and there are very good regulations in place," he says.

Kevin Heffernan, president of the Calgary-based Canadian Society for Unconventional Resources (CSUR), which represents most companies involved in fracking, says the Nova Scotia government never contacted his organization, even though it is recognized as one of the most knowledgeable groups regarding the technology.

"We're certainly prepared to meet with the Nova Scotia government about a path forward," he says.

In contrast, the former left-leaning Parti Quebecois government in Quebec talked to CSUR and to companies involved in fracking to gain a good understanding of the technology, he says. After implementing a moratorium on fracking a few years ago, the Parti Quebecois subsequently agreed to allow some fracking in the province and even invested in a company involved in areas where it will be deployed.

"Maybe the [Nova Scotia government needs] to understand how it is regulated safely in other jurisdictions," he says.


Monday, 20 October 2014

Oil, LNG, Elections, and Keystone

CAGC Recorder Article by: Mike Doyle

Mike Doyle is the President of the CAGC – the Canadian Association of Geophysical
Contractors - representing the business interests of the seismic industry within Canada.

The CAGC website may be found at www.cagc.ca.

Another soft year for crew numbers. Perhaps the recent and upcoming mergers (of seismic companies) signal the bottom of the market for our industry - as in the floor. Canada’s oil exports to the USA continue to grow whereas natural gas needs to find a new market given the saturation of shale gas in the USA. Petronas is pushing the BC Government to announce LNG taxes prior to the end of October 2014 or potentially face ten years of further delay. It is hard to say who will blink first but a positive investment decision would help our market tremendously.

As well the USA midterm elections are coming in early November. As usual it is too close to call however a Republican majority in the Senate could force Obama into a more difficult corner as it relates to delaying a decision on Keystone. Some excerpts from a couple of interesting columns for Energy Now follows on these matters:

A brave view in an uncertain world: Why Canada’s energy boom remains on course despite sliding prices by Claudia Cattaneo   FP  | October 16, 2014 | Energy Now – www.energynow.ca

With oil prices skidding near four-year lows and Canadian energy shares feeling the pain, it’s hard to stay optimistic. But a new report by HSBC Global Research argues Canada’s oil and gas boom remains on course.

The 20-page report, authored by HSBC Bank Canada chief economist David Watt, says the unprecedented boom in capital spending in Canada’s natural resources sector is here to stay, with major projects currently under way or planned in the next decade worth $675-billion.

“Natural resources investment has been quite firm in the post-financial crisis, a trend we expect to continue, despite recent commodity price volatility,” Mr. Watt writes in the Oct. 15 report.

It’s a brave view in an uncertain oil world.

Global oil price and market gyrations lately added to many Canadian worries — whether proposed pipelines are moving ahead; whether First Nations could stand in the way; whether fiscal terms, environmental legislation, political agendas could weaken the economic case. Oil bounced back sharply from a four-year low Thursday, closing at US$82.70, reversing the steep selling of the past two weeks.

We expect U.S. imports of oil from Canada to continue to rise.

Still, the volatility doesn’t alter Canada’s unique attributes as a major energy producer: giant oil and gas deposits, the expertise to extract them, sound regulation, a legal system that protects property rights, and a social conscience and supportive governments. Investors who believe that a growing, more affluent world population needs more energy are better off investing in Canada than in the few remaining energy producing jurisdictions that still accept their money.

To be sure, the oil price downturn could curtail spending in the short term as producers adapt. The silver lining is that they will also temper rising costs.

Mr. Watt argues that natural resource investment in Canada will remain a key driver of overall business investment. With the vast majority — more than 75% — of the major projects planned or under way in the energy sector, most of it will flow to Alberta and British Columbia.

“Alberta (current population: 4.1 million), thanks largely to the oil sands, has surged past Ontario (current population: 13.6 million) to become the leading investment destination in Canada. The 10-year outlook for natural resources investment … will even more firmly entrench the westward shift.”

The report argues that oil will continue to be exported to the United States in the next few years — a prediction that conflicts with efforts by Canada to diversify its oil markets in Asia and Europe.

“With Canadian oil production expected to continue to increase and the U.S. still the destination for over 98% of Canadian oil exports, we expect U.S. imports of oil from Canada to continue to rise,” the report says. “In coming years, as oil exports double from 2.2 million barrels a day to 4.5 million barrels a day in 2025, and exports increase from 67.1% to almost 76% of oil production, we look for Canada to eventually account for over 40% of U.S. oil imports.”

But natural gas will find its way elsewhere because the U.S. market is saturated. While in competition with other suppliers of liquefied natural gas, the report argues Western Canadian gas still has a major advantage — proximity. “Proposed Western Canadian LNG export facilities would be between 3,500 and 4,000 nautical miles from Asian ports, while U.S. Gulf Coast projects are between 9,000 and 9,500 nautical miles from Asian markets."

U.S. midterms: Stage may finally be set for Keystone XL vote by Canadian Free Press | October 13, 2014 | Energy Now – www.energynow.ca

A certain Canadian pipeline appears poised to spring back to the top of the American political agenda, with the upcoming congressional elections setting the stage for a vote on the long-delayed Keystone XL project. Republicans have all but declared that they would try to use their new dominance in Congress to push through a Keystone bill, should they win the Senate in three weeks as many predict. The pipeline issue had been a little more dormant in Washington since the spring, as foreign crises came to dominate the political agenda while the Keystone process was mired in a regulatory delay. That period of relative calm appears poised to end. "It's very, very likely that there will be a Keystone bill fairly early on in 2015," Ben Lieberman, a counsel on the Republican-controlled House energy committee, told a gathering last week at the Wilson Center think-tank. Of course, lawmakers have attempted to ram Keystone legislation onto the president's desk before. Such efforts stalled in the Senate, where the Democratic leadership prevented a vote. What would be different now, Lieberman said, is that the Senate calendar would no longer be controlled by Democrat leader Harry Reid — who was determined not to allow a Keystone vote onto the floor lest it cause divisions in his caucus, alienate his party base and donors, and create a painful dilemma for the president. Even if Keystone backers fall short of a filibuster-proof 60 per cent of Senate votes, Lieberman said, the legislative game will have changed. He said there would be all sorts of new strategic possibilities. One would be to stick a Keystone provision into a must-pass spending bill, something President Barack Obama be loath to veto, and force him and his congressional allies into one of two options: Approve Keystone, or scrap the whole thing. "That raises the question," Lieberman said, "What would President Obama do if a Keystone bill reaches him?" That very quandary lies at the heart of a piece published by Karl Rove, the prominent Republican strategist and fundraiser. As he described a possible agenda for a Republican-controlled Senate in an Oct. 9 op-ed in the Wall Street Journal, Keystone was one of the very first things he mentioned. "Will (Obama) spend two more years polarizing Washington, attacking Republicans' motives, complaining about GOP obstructionism, and circumventing Congress in lawless, even unconstitutional, ways?" Rove wrote. "Or will Mr. Obama try to salvage his presidency by doing what other presidents — Ronald Reagan, Bill Clinton and the two Bushes — did after electoral setbacks, which was working with the opposition party?... "Right out of the box, Republicans should move quickly on proposals where they and the administration agree, such as giving the president (fast-track) authority to negotiate trade deals that receive an up-or-down congressional vote, or on issues that have significant support from Democrats, like the Keystone XL pipeline." Virtually every published election-prediction model predicts the Republicans winning the Senate. The likelihood of a GOP takeover ranges from 58 per cent according to statistician Nate Silver, to 94 per cent according to the political scientists at the Washington Post's Monkey Cage blog. A Keystone bill could be just an early example of the new dynamic that would bedevil the president in his final two years in office, with bills getting to his desk that he might rather veto than pass. Canada's ambassador to the U.S. doesn't want to pick sides. In an interview, Gary Doer went out of his way to avoid describing the pipeline dynamic as Republican-versus-Democrat. He points to West Virginia as one example where the Senate candidates for both parties have expressed support for Keystone. One of them will replace the soon-to-retire Jay Rockefeller, who sided against the pipeline. "West Virginia's interesting," Doer said, "because it goes from a No vote to a Yes vote no matter who wins." In a similarly non-partisan vein, Doer points out that a task force of people with varying political affiliations, led by former CIA boss David Petraeus and ex-World Bank boss Robert Zoellick, strongly endorsed the pipeline in a just-released report for the Council on Foreign Relations. But pipeline opponents say all these names, and all these bills, are just hot air. "When it comes right down to it, the only person who matters (here) is Barack Obama," said Jason Kowalski, the U.S. policy director at the group 350.org. "President Obama will decide whether this thing is built or not.... Surely the election will change the political dynamic in the U.S., and it's definitely a big factor, but at the end of the day it's still the president's decision." The president pushed back, aggressively, when congressional Republicans tried to force a decision on Keystone before the 2012 election. Arguing that it couldn't comply in time, the White House essentially rebooted the regulatory process. Since then it has repeatedly pointed out that, legally speaking, this issue belongs to the executive branch, which must conduct a review of public and inter-agency comments through the U.S. State Department. Another delay this year came when the State Department said it couldn't pass judgment, as the route was under dispute in the Nebraska court system. None of that has changed. A verdict from a Nebraska court appeal might still be months away.

From Brainy Quotes on the Internet:

Never give up, for that is just the place and time that the tide will turn.

-          Harriet Beecher Stowe