Waterflood program incentive announced for province, industry reacts

Government says it should support 500 fulltime jobs

Regina – The government of Saskatchewan announced a program on Dec. 5 designed to improve the petroleum industry’s long-term operating environment, sustain jobs, and increase investment activity in our province.

Minister of Energy and Resources Bronwyn Eyre spoke of the realities of the high Western Canadian Select (WCS) to West Texas Intermediate (WTI) differential.

“Whether it’s a $300 million impact to our royalties over the course of a year, and a $5 billion impact to the sector, or a fluctuation that would create a $500 million impact to royalties, and a $7 billion impact to the sector, they’re all big numbers. Numbers that affect our ability as a government to fund hospitals and highways, social services and schools. Numbers that affect the ability of our energy sector to get product to tidewater.”

In “leaving no stone unturned,” she said. “This is just the beginning.”

The Waterflood Development Program will replace a previous program with a more aggressive competitiveness initiative to provide long term, stable production, she noted. It also complements an existing horizontal drilling incentive.

“This initiative is about planning the future,” Eyre said.

It will incentivize the conversion of producing wells into waterflood injection wells or the drilling of new dedicated waterflood injection wells. At maximum uptake, the program will support $375 million in new investment over the next five years and 500 new permanent jobs. Over 10 years, the program will lead to an estimated $245 million in new provincial royalties, and $1.9 billion in direct gross domestic product (GDP) impacts, and 14.5 million barrels of new oil production. The program will also enhance the competitiveness of Saskatchewan’s energy industry by facilitating an economically sustainable increase of production capacity by an estimated 72 million barrels over the course of the next 35 years, Eyre said.

“Waterflooding is a proven enhanced oil recovery strategy that is good for sustainability and good for the environment,” Energy and Resources Minister Bronwyn Eyre said. “In the face of a rapidly changing global market, Saskatchewan is addressing competitiveness by supporting our province’s largest economic sector with a cost-effective policy that encourages long-term capital investment.”

Waterflooding is a secondary recovery oil production technique that re-pressurizes an oil reservoir to boost total oil recovery from the reservoir. The Waterflood Development Program promotes good production practices and better reservoir management, the government said in a release.

“It’s important to note, this program will not undermine the actions of Alberta in its attempt to solve the differential crisis, because this isn’t heavy oil. This is about enhancing the competitiveness of our energy industry in other plays, into the future, ensuring we’re ready to address not only today’s challenges, but those which lie ahead.”

“We have to do something to address capital flight, and the risk of capital flight,” She said. Capital spending in the oil and gas sector in Canada has dropped 39 per cent since 2014, and the majority of that money has gone to the United States. Oil production in Saskatchewan has dropped six per cent since 2014. “The value of oil has dropped 42 per cent, oilwell drilling, 30 per cent, employment, 10 per cent, and investment, 37 per cent. Provincial total oil revenues between 2014 and 2017 declined 50 per cent. Across Canada, as many as 100,000 workers have been laid off in this downturn, and Saskatchewan hasn’t been immune to that. So the time to act is now, to do all we can, as a government, to send the signal, that despite all the challenges we face, we stand with our oil and gas sector, with the 35,000 people who go to work every day in Saskatchewan in our oil and gas industry.”

“And with this waterflood initiative, and initiatives to come, we want to thank energy companies for helping to change the face of this province, from have not, to have. And for everything they do, big and small, in the communities where their people live and work,” Eyre said.

Scott MacFarlane, president and CEO of Cathedral Energy Services, a directional drilling company, said, “With today’s announcement, we’re very excited about it. It will bring further investment in the Saskatchewan economy. It’s a further boost to strengthen the overall sector to Saskatchewan. It will help Cathedral as well as other oilfield services companies, by way of increased operating activity levels, which we are desperately needing at this point in time.”

He noted the government involved industry in this plan.

MacFarlane added, “We need to be getting the message through to the federal government that we need to be building pipelines so that we can get our product to market, and get the price for it that we deserve.”

Jenson Tan, vice president of business development with Vermilion Energy, said, “We see this waterflood incentive initiative as another example of continuing to make the province an attractive place to invest.

“In our current capital spending plan, Vermillion plans to invest $225 million in Saskatchewan in 2019 in our light oil assets in southeast Saskatchewan. We will be drilling 150 wells, with many of these having some of the best economic recurrence in North America. What we are really excited about is the waterflood potential on our asset base. We plan on investing at least $30 million on waterflood and enhanced oil recover assets in the coming year which will be used to pilot and implement several waterflood projects.”

Several will be directly impacted by this new initiative. “The incentives announced today support this waterflood investment, which we believe could unlock significant resource potential, which would further increase our investment levels in the near-term, mid-term and long-term.”

Eyre explained the incentive is revenue neutral. “It’s a royalty deferral, not a royalty break or royalty reduction. It’s a three-year royalty referral which allows companies to make the $500,000-ish in capital investment and flow that capital through as quickly as possible in order to make the conversion.”

Eyre told reporters the initiatives has been in development for a long time.

“On behalf of the members of Energy Producers Association of Canada, it is a pleasure to support the good work of the Government of Saskatchewan,” Energy Producers Association of Canada president Tristan Goodman said. “Waterflooding is an important long-term reservoir management strategy that improves oil recovery. Given the current challenges facing the Western Canadian oil industry, initiatives such as this will assist the sector over the next few years.”

Brent Gedak is owner of Brent Gedak Welding of Estevan, a firm which specializes in building the surface pump packages used in waterflood applications. He said, “That would drive my business up, and I would be able to bring on more people and execute more projects. It’s very slow.”

Waterflood Production Services of Estevan was founded in 1970. General manager Dave Heir said, “I think it’s absolutely brilliant. Everybody gets to participate, from drilling down to packagers like myself. It’s a gift that just keeps on giving. This gives for 30, 40 years, at least. The waterfloods dad put in Steelman field in the late 1950s, early 1960s are still operating today.”

NDP critic questions if waterflood technology is proven

Buckley Belanger, NDP energy and resources critic, said, “Obviously, if you look at the technology that has already been in use, we haven’t got any information to show that the technology is proven, and that’s always something we want to see as part of the whole process. So access to that information and results of that are very important to us.

“We obviously are very supportive of getting the industry moving as quickly as we can. The ultimate solution is the pipeline, but some of these initiatives offhand may or may not help the industry overall if we don’t have the pipeline answer.”

Asked by reporters about how revenue neutral the program might be, Belanger said, “That’s exactly it. The technology is here. You would assume the incentives are in place to prove that technology works. Now what if it doesn’t work? And then do we lose those royalties? That’s the real question here. But if it does work, and then we would have the royalties, plus interest. That’s how I understand it.

“So I think that’s the big question around the revenue-neutral argument the minister alludes to. If it works, then obviously it’s going to stimulate the sector. It’s going to provide revenues to the provincial coffers. But if it doesn’t work, that’s a risk that we’re going to be taking as a province, and this is why it’s important that we look thoroughly at what is being proposed, and see exactly where the risks are for the taxpayer, and, of course, at the same time we’re trying to stimulate that part of our economy,” Belanger said.

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