Quo vadis, offshore Canada? – The importance of offshore supply for the region

February 5, 2016

Author: Sona Mlada, Senior Analyst

Publisher: Offshore Magazine, February Edition

The production from offshore Canada may not represent a significant part of the global offshore production (Canadian production represented only about 1% of the global offshore production in 2015), but it does play an important role for the country in future. By 2020, we expect the supply from Canada offshore to grow to ~350 kboe/d (from the current production at 270 kboe/d), nearly 75% represented by liquids. The production has a potential to grow as high as 500 kboe/d in the following decade, assuming all of the discoveries come on line and operators unlock some of the new discovery potentials. The question remains: how much of the not-yet-sanctioned projects will come online given the current oil price environment? Are we going to witness a production rebound or a steady decline?

Global Offshore Regions
To set the scene for the global offshore regions, we can start by looking at the expected spending levels from 2015 – 2020 (Figure 1). Over 300 billion USD will be invested into Western Europe, where Norway is the largest country with offshore investments amounting to ~180 billion USD (or ~10% of global investments). The second largest region is North America, including the US (~140 billion USD), Mexico (~90 billion USD), and Canada (~24 billion USD). South America represents the third largest region, where Brazil takes the lead, as the second largest country globally, with expected investments of ~165 billion USD. Brazil, the US, Angola, and Mozambique are the countries with the largest investments in ultra-deep-water (over 1,500 meters), whereas countries like Norway, Mexico and the UK dominate the shelf developments (less than 125 meters of water depth). Canada ranks as the 19th country in terms of total spending in offshore exploration and developments with expected investments amounting to ~24 billion USD in the time period between 2015-2020. About 70% of this spending will be dedicated to the development of infrastructure, drilling and completion of the offshore wells, primarily in the shelf water areas. The exploration capex will represent nearly 30% of the total spending in the country. The exploration activities will focus mostly on the deep and ultra-deep-water developments; above 75% of all exploration capex will be dedicated to these deeper-water developments.

Who dominates the market in Canada?
Unlike other offshore markets, where several operators are competing for their share (e.g. the US, UK or Norway), in Canada there are only a handful of operators of the offshore fields, as depicted in Figure 2. Throughout 2015-2020, the largest operator, ExxonMobil, is expected to invest over 11 billion USD offshore Canada. Almost 80% of these investments are directed to projects under development – primarily Hebron. Husky is the second largest operator in term of offshore spending in Canada. For Husky Energy, over 80% of the total expected spending (4 billion USD) will be directed to developing the discovery White Rose. Suncor is estimated to direct all of its short-term capital into development of the producing Terra Nova field; at the same time, Statoil is expected to invest in the development of its Bay du Nord discovery from 2013, which established the Flemish Pass as a new play offshore Canada. Currently, the investments in the field are related to appraisal campaign. While waiting with the final investment decision, Statoil is working with the government of Newfoundland to establish the terms for Bay du Nord development. Bay du Nord was the first significant deep water (above 1000 meters of water depth) discovery in Canada offshore, with resources estimated at 400 MMboe. The second largest deep-water discovery was Mizzen from 2009 (130 MMboe) and Harpoon from 2013 (70 MMboe). Looking at shelf and deep-water discoveries combined, Bay du Nord still stands out as the largest single asset discovery since 1984, when Terra Nova was discovered, with total estimated resources of 550 MMBoe. The largest discovery ever made in Canada offshore was Hibernia in 1979. The total original resources were estimated at about 1.5 billion boe, and the field continues to be the largest producing field in Canada offshore, with an average daily production of 120 thousand barrels per day in 2015. However, the production from Hibernia is on a steady decline (on average the production declines by 10% over the next five years). Canada will need the contributions from the projects currently under development (Hebron) to change the downwards declining trend and grow again to above 400 thousand barrel per day, a level, at which Canada offshore was producing from 2002 to 2008. In 2015, the upstream companies invested over 500 million USD in subsea equipment and installation, of which over 65% was related to SURF. Nearly 300 million USD was invested in the pipeline systems, including the laying of the flow and gathering lines from the individual wells in a field back to the central facility. Three main operators account for almost 99% of all subsea investments during the year 2015 – Exxon Mobil (with ~350 million USD), Suncor Energy and Husky Energy (both operators invested ~80 million USD).

Offshore resources in Canada
Crude oil represents nearly 75% of the total remaining resources of offshore Canada. This is light oil, with the average API gravity between 30 and 35. Nearly 50% of the total remaining crude resources (~2.1 billion boe) are represented by the three largest fields: Hibernia (producing), Hebron (under development) and Bay du Nord (not yet sanctioned discovery). Hebron, together with Hibernia, belong to the five largest crude oil offshore fields globally (in terms of remaining resources) that have a fixed concrete gravity based (CGB) structure, with Hebron at the top of the list. The associated gas is being injected at the large oil fields offshore Canada. Encana operated Panuke Deep is the largest gas field offshore Canada (remaining resources of over 700 billion cubic feet). Encana operates the field with a medium steel platform facility type. According to the Nova Scotia Offshore Petroleum Board, Panuke Deep was facing serious water woes since the beginning of 2015. Based on governmental information, the field produced on average ~130 thousand liters (~820 barrels) of water per month during the months January – April 2015. Facing these difficulties, the operator was forced to shut down production from Panuke Deep from June through September 2015. The production recommenced in October 2015, and reached ~50 million cubic meters in November 2015 – less than 1/5 of the peak production from the field from early 2014. Speculations occurred with regards to Encana’s’ next steps concerning the offshore field in Nova Scotia. The fact remains that Panuke Deep does not fit into the new strategy of the largest Canadian upstream company – it sold most of its gassy assets during the last two years and has invested heavily in the liquid-rich shale acreages in North America. All of the key assets (Eagle Ford, Permian Midland, Montney and Duvernay) are situated onshore.


Production
As Figure 3 illustrates, production from offshore projects in Canada has been steadily declining since the end of the first decade of the 21st century. It will be the ExxonMobil-operated Hebron project (depicted in yellow in the chart), that will change the direction of this curve past 2017. The project was sanctioned at the end of 2012, and the first oil is expected during 2017. Bay du Nord is depicted in the green color on the chart. Statoil has not yet sanctioned the project, however, the supply from Bay du Nord will be crucial to maintain the growing tendency of the Canada offshore production going forward.

Breakeven prices
As discussed above, the growth potential in the Canada offshore production is abundant. The question remains – will these fields be profitable at current oil prices? The scenery is not exactly optimistic. Looking at the breakeven prices for the Canadian offshore projects, we can observe that only the Southern extension of Hibernia and Terra Nova fields have their breakeven prices below the current low oil price (34 USD/bbl as of January 8, 2016). Rystad Energy believes in a significantly higher oil price towards 2020, making many projects economical in future. The large volumetric contributions from Hebron will require the oil price to be above 60 USD/bbl. Figure 4 is the answer to the opening question ‘Qou vadis, offshore Canada?’. There is a potential for the production to grow as much as 500 thousand barrels per day by 2030 (~75% crude oil) given the oil prices increase back up to the 100 USD/bbl level by 2020. With the oil prices at around 80 USD/bbl going forward, offshore production in Canada would never experience a rejuvenation, large projects discoveries (like Bay du Nord) would never come on stream and production would face a steady decline past mid-2030.

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Article Contacts

Sona Mlada, Senior Analyst

Phone: +47 24 00 42 00

sona.mlada@rystadenergy.com


Julia Weiss, VP Marketing

Phone: +47 48 29 87 61

julia.weiss@rystadenergy.com

About Rystad Energy

Rystad Energy is an independent oil and gas consulting services and business intelligence data firm offering global databases, strategy consulting and research products.

Rystad Energy’s headquarters are located in Oslo, Norway, with additional research teams in India. Further presence has been established in Norway (Stavanger), the UK (London), USA (New York & Houston), Russia (Moscow), Brazil (Rio de Janeiro), Africa as well as South East Asia.