The source of the crude: scenes from the wellhead in oil country

Dina O`Meara
July 9, 2007 - 3:25 p.m.

HARDISTY, Alta. (CP) - On a breezy summer day in eastern Alberta, Jim Kovacich, with Windale Oilfield Services, oversees a crew on its sixth day of reworking an old pump jack that's seen better days.

The sour smell of oil permeates the muddy site, and signs warning of hydrogen sulphide are plastered on several fences. "Keep downwind," Kovacich says, half joking.

Pump jacks riddle the countryside in this hilly region of Alberta where the sandy terrain is more useful for grazing cattle than growing crops.

Bobbing slowly up and down like squeaking metal birds, they pull up heavy black gold that will be trucked and piped to the nearby Hardisty terminal. The terminal is at the centre of a spiders' web of gathering pipelines that carry millions of barrels of oil a day, almost 80 per cent of Western Canadian crude, to refineries in eastern Canada and the midwestern United States.

Rising global costs for crude continue to ramp up price pressures throughout the gasoline supply network - at the wellhead, the refinery gate, and gasoline station. But for oil companies, the higher costs of exploring for oil and rising labour, electricity, transportation and rig costs are also eating into their profits.

"It whittles down pretty quickly," Tim Vokenfohr, marketing director with Pearl Exploration and Production Inc. (TSXV:PXX), says of producers' returns. "The amazing thing is that when oil was $40 a barrel, you didn't see that much difference in netbacks from today at $68 a barrel."

On Monday, world oil prices surpassed US$76 a barrel on the London market to reach their highest level in nearly a year after a global energy watchdog warned of a looming oil and natural gas supply shortage. The Paris-based International Energy Agency, an adviser to 26 industrialized countries, reported that higher-than-expected demand would persist to 2012 amid tightening supplies.

Global oil companies have enjoyed booming profits in recent years as the oil in their terminals fetches higher prices and the gasoline, diesel and jet fuel the integrated producers also refine rises to record levels. However, the industry argues that high profits are necessary to reinvest into the ground to find less accessible new sources of crude and upgrade an aging refinery network in many parts of the world.

With crude prices at such lofty heights, Kovacich has noticed increased activity in eastern Alberta, since high prices have made producing the lower-grade oil more lucrative.

Setting up a well involves renting and transporting the rig plus crew, drilling materials and pipes to the site, as well as renting the assorted trailers needed for the lab, the office and the "dog house," or crew shack, among others.

Exact costs are confidential to keep competitors guessing, but a job like this one, servicing an older well, could total around $25,000 a day all included, Kovacich suggests, waving a hand over the fenced-in site.

An oil battery like this Halkirk one includes a treatment tower where water and sand are separated from the oil, a manifold trailer and four storage tanks that can feed into trucks or pipes.

But transport is far down the process road.
Unless it's seeping out of the ground like in Alberta's oilsands, discovering oil takes some sleuthing before you can tap into the right layer and go commercial.
Deep in the earth lie the remains of plants and animals buried at the bottom of the great inland seas that covered the prairies about 100 million years ago. High pressure and heat, plus a few chemical reactions, transformed the sludge into the oil and gas now found in different rock layers, or strata, of the earth.

To find it, geologists study maps, then seismic crews go blast sonic underground pictures of the strata and a drilling crew is dispatched in the hope of hitting that sweet spot.
In the meantime, producers are holding their breath and having nightmares about not being able to pay the rent if yet another well turns up dry.

Imperial Oil (TSX:IMO) had a history of 133 dry wells near the Edmonton area back in 1947.
The company was about to call it quits when on Feb. 13 it struck pay dirt with Leduc No. 1, forever changing the history of the province, and indeed, of Canada.
Today Canada pumps out more than 2.5 million barrels of oil per day from conventional, oilsands and East Coast offshore operations, with Western Canada the epicentre of production, with nearly two thirds of the country's output.
Ironically, much of Western Canadian oil is exported to the United States, while Eastern Canada imports most of its crude needs from the North Sea or Middle East to feed refineries in the Atlantic provinces, Quebec and Ontario.

With large costs to find unconventional reserves, and huge cost pressures on future oilsands growth, it's a risky, expensive business, each step of the way.

Prices at the wellhead are based on the oil's quality, and the cost to transport it to market.
In eastern Alberta, this means the wellhead price is about $20 below the benchmark West Texas Intermediate price at Cushing, Tex. because of the added expense of condensate that gets pumped in to make the heavy oil flow along a pipeline.

Add finding and development costs that have doubled in the last few years, the price of running the well, royalties and taxes, and sundry transportation fees, and sometimes netbacks dip into negative territory.

Alberta's major hub of transportation squats just outside of the town of Hardisty, (population 760), a large industrial zone populated by Gibson Energy Ltd., Flint Hills Resources, CCS Energy, Husky Oil Operations (TSX:HSE), Enbridge Pipelines Inc. (TSX:ENB), and Encana Resources (TSX:ECA).

Trucks roll in and out of the site where huge rust-and-white storage tanks interconnect on the site with a mesh of pipes and pipelines that ship 10,000 metric cube batches at a time with atomic clockwork precision.

Pipelines bring in light, heavy and synthetic oil from northeast, east and central Alberta.

Then it flows out to eastern and southern markets on Enbridge, Inter Pipeline Fund (TSX:IPL.UN) and Kinder Morgan's Express pipelines at a strolling pace of just under five kilometres an hour.

"It's all about hydraulics," Lyle Welder, with Enbridge says of Hardisty.

Just over two million barrels per day from over 70 shippers run through the company's lines; metered, tested for consistency, adjusted for pressure and flow by booster and main line pumps.

Some of the oil is stored underground in refurbished salt caverns, while some is stored in tanks where volumes are measured by radar and steel gauge to millilitre accuracy, waiting to be blended and shipped.

"Measurement is crucial in the oil industry, especially in the transportation system," Welder says. "That's our bread and butter because we're taking custody of somebody else's product before sending it to market."

Much of the oil at Hardisty is mixed into different blends with varying densities and viscosities (each cocktail mix jealously guarded) like the Western Canada Select blend, or Husky Energy's Lloydminster blend.

Refiners like a full-spectrum blend of heavier oil that their plants can handle, said Gerald Johnson, Husky's assistant pipeline superintendent.

Husky ships 500,000 barrels per day of crude, synthetic crude and blended crude to and from Hardisty. The company has 10 storage tanks on site, with a five-year expansion plan to build up to five more.

Johnson has been at Hardisty since 1963 and says automation has brought the biggest changes such as the mass metre, vibrating technology, electronic metering and sensors in the pipe manifolds.

"Being able to monitor the larger volumes the way we do today compared to the way we used to things weren't anywhere near as accurate," he says.

From Hardisty, Alberta oil begins another leg in its journey to markets and refineries across North America.