MEG Energy CEO says oilsands new chapter is exciting, but Canada has to want it, …

Canada’s oilsands appeared to be skidding toward big trouble in the dying days of 2014. Shale producers in the United States had found ways to produce oil faster and cheaper, and the Organization of the Petroleum Exporting Countries was pushing down prices to try to drive everyone else out of business.

By Christmas that year, a month after the Saudi Arabia-led OPEC cartel started its market share offensive, a showdown that most other oilsands companies were hoping would be short lived, Calgary-based MEG Energy Corp. was slashing its budget by 75 per cent and bracing for the worst.

“We were all over it, focusing on how to reinvent our business and doing it in cheaper ways that would be sustainable,” Bill McCaffrey, MEG’s chief executive, recalled in a rare interview at the company’s downtown headquarters. “We knew that we had to be better than the alternative.”

To match costs in a lower oil price environment, MEG reduced staff by 40 per cent to 600 employees and accelerated the use of some homegrown technology to improve the energy efficiency of its operations.

We are becoming a greener barrel than a lot of other choices around the world

Bill McCaffrey, MEG Energy CEO

Two and a half years later, MEG is the only next-generation pure-play oilsands developer growing in an industry abandoned by international players and now dominated by four Canadian giants: Suncor Energy Inc., Canadian Natural Resources Ltd., Imperial Oil Ltd. and Cenovus Energy Inc.

MEG produces about 80,000 barrels a day from the Christina Lake area of the Athabasca oilsands, the richest non-mineable area located south of Fort McMurray.

In its first quarter, MEG reported revenue of $560 million, up from $290 million a year ago, and pared its operating loss to $79 million from $197 million. Its operating cost for producing a barrel of oil was $8.43, down from $8.53 in the same time frame.

McCaffrey, 60, a nose-to-the-grindstone civil engineer who in his 35 years in the business has survived a handful of oil shocks, said the oilsands’ new chapter — based on a return to Canadian control, low-cost operations and lower emissions — is exciting.

The change is so significant, he argues, it warrants a rebranding and a re-discovery of the industry.

“We are becoming more efficient, we are becoming a greener barrel than a lot of other choices around the world, and there are a lot of studies that suggest that the world really wants Canadian oil and Canadian energy,” McCaffrey said.

One of those studies, conducted by Ipsos for the Canadian Association of Petroleum Producers, recently found that 31 per cent out of 22,000 respondents in 32 countries ranked Canada as their top choice among 11 countries for oil and gas imports. The top six countries with the greatest interest are Israel, the U.S., Algeria, India, South Africa and the U.K.

McCaffrey believes Canadian control of the oilsands will only accelerate the innovation drive, not stall it.

MEG Energy’s Christina Lake facility near Fort McMurray. MEG Energy is an oilsands-only company that does not rely on mining.

Handout MEG Energy Corp.

“The Canadian companies that have the majority of development in the oilsands have … created the expertise and realize the importance of technology, of absolute focus on cost reduction, and of cost control,” he said.

In contrast, “international companies … have opportunities in other places and they haven’t necessarily spent the same amount of time developing the skill that the Canadian companies have. It’s not a negative. It’s just a statement of where you spend your time and where your focus is.”

An industry rebranding couldn’t come fast enough for Cody Battershill, founder of the Canada Action Coalition, a non-profit group that advocates for a more informed conversation about natural resources.

He said the industry lost control of its brand during the past decade by allowing the anti-fossil-fuel lobby to misrepresent what it does.

The result is that the Canadian sector is in survival model and does not get any recognition for its technological advances when “we should be thriving as the world’s greenest oil and the world’s most socially responsible oil,” Battershill said. “Fair-trade energy is what I like to call it. The entire supply chain is fair trade.”

If the oilsands’ game-changers of the past were about building an economic business — such as replacing conveyor belts with trucks and shovels, or using in-situ technology to get at deposits that were too deep to mine — today’s innovations are focused on reducing costs and environmental impacts to meet new market and government expectations.

A prime example is MEG’s internally developed eMSAGP (enhanced Modified Steam And Gas Push) technology, which enhances reservoir performance by injecting a non-condensable gas and by drilling infill wells.

The end result reduces steam requirements, increases production and lowers the steam-to-oil ratio, which, in turn, frees up steam to be redirected to new well pairs, further growing production.

“While many new potential technologies are talked about by oilsands producers, eMSAGP is very real in that it is currently being used on approximately 40 per cent of MEG’s production, so it is an important change underway and is a key reason why the company has been able to exceed nameplate production capacity,” Peters & Co. analysts said in a June 27 report.

McCaffrey said employees across the company own the improvements, and they’re continuing to build on them.

“This technology is so good that it gets smiles on their faces,” he said.

It also enables MEG to cut capital costs on expansion projects by 25 to 50 per cent, or down to $20,000 per flowing barrel from $40,000; cut development time to 12 to 18 months, from three to four years; cut non-energy costs by 46 per cent and heading lower; and cut energy requirements by half, to a steam oil ratio of 1 to 1.25, which means a lower carbon footprint.

The result is that MEG can produce oil profitably even at a US$45 price.

“We are hitting all the right cylinders for the environment that we live in: low prices, focus on the environment, and to be a sustainable growing business,” McCaffrey said. “We don’t know what the oil price is going to be, but our job is the same either way. We have to be committed to driving the cost down through efficiency improvements.”

On May 12, when MEG released its results for the first quarter, it anticipated 40-per-cent production growth, to 113,000 barrels a day, by 2020, and to eventually reach volumes of 210,000 b/d from its Christina Lake property alone.

Wildlife crossings are strategically placed approximately every 400 metres over MEG Energy’s Christina Lake above-group pipelines.

Handout MEG Energy

The company also owns the Surmont properties, for which it is seeking regulatory approval to produce 120,000 b/d.

McCaffrey said his company’s technology could be applied throughout the industry and is an example of the innovation underway throughout the sector.

Others are working on extraction using solvents, electromagnetic energy or streamlining and automating parts of their businesses.

Despite MEG’s technological focus, it is not a member of Canada’s Oil Sands Innovation Alliance, a consortium of producers that try to accelerate environmental improvements.

McCaffrey said he supports the group, but has not joined because it has been focused on oilsands mining, which his company doesn’t do.

It’s also not the first time MEG has gone big on innovation. In 1999/2000, when oil was at US$12 a barrel, McCaffrey, his brother-in-law and a friend bought their first property in the Christina Lake area for $120,000 and pioneered in-situ extraction at a time when big oilsands companies were doubling down on mining.

McCaffrey had worked in heavy oil at Amoco Corp., which was eventually acquired by BP PLC and which sold its heavy oil business to Canadian Natural, so he knew the basics.

As global interest in the deposits grew, MEG went public in 2010 at $35 a share. Soaring oil prices drove its stock price above $50 a share in 2011.

One of the early investors was CNOOC Ltd., the Chinese state-owned giant, which remains a shareholder with about nine per cent of MEG’s stock.

But the oil downturn that burst the oilsands bubble came with a heavy price. Burdened by $5 billion in debt, MEG’s stock tanked. The company refinanced and issued new equity last January so it could return to growth.

Even so, its stock has remained depressed, recently falling below $4, its lowest level since going public.

As hard as it’s been, MEG is one of the lucky ones.

Names such as Laricina Energy Ltd., Connacher Oil and Gas Ltd., BlackPearl Resources Inc., Osum Oil Sands Corp. and Sunshine Oilsands Ltd. either went bankrupt or are in asset preservation mode. Athabasca Oil Corp. expanded by acquiring Statoil SA’s Leismer project, but it has diversified into conventional production.

Glen Schmidt, who recently retired as Laricina’s chief executive, said smaller oilsands companies that championed new technologies were hardest hit by the flight of capital due to the combination of low oil prices, lagging competitiveness versus U.S. shale and a series of federal and provincial government measures that stalled pipeline construction, increased regulation and introduced uncertainty on how carbon is going to be managed and priced.

Governments say innovation over and over again, but they clearly have no real understanding of what it takes to support it

Glen Schmidt, retired CEO of Laricina Energy

“Governments say innovation over and over again, but they clearly have no real understanding of what it takes to support it,” Schmidt said. “They should make the regulatory processes easier for projects to advance, not harder. They are the single largest impediment to creating a healthy dynamic in the industry.”

Nevertheless, McCaffrey believes the improved oilsands are now competitive with U.S. shale.

“By reducing our costs, both on the capital end of it and on the operating end, and by having smaller projects, we can move to faster implementation,” he said. “And technology is super important in this, because it provides tremendous efficiency improvements that will be game-changing for our industry in a very positive way.”

Indeed, some early movers in the investment community are beginning to question the shale oil model, due to rising costs and the requirement for continued drilling to maintain production, McCaffrey said.

“The strength that the oilsands has is its very low decline rates, so a lot of the dollars can go to growth, as opposed to just replacing declining production,” he said. “We typically don’t have a lot of cost pressures right now, because it’s an industry that is going to be moving in a more calculated manner going forward.”

But the rest of Canada needs to want the oilsands, too, McCaffrey adds, starting with allowing pipelines to be built. MEG is one of the companies backing Kinder Morgan’s Trans Mountain pipeline expansion. It also uses Enbridge Inc. pipelines and rail to sell its production in the U.S. Gulf.

“It is a tremendous prize, the oilsands,” he said. “We have a duty to get it right among Canadians.”

Financial Post