Brian Zinchuk is editor and owner of Pipeline Online
The Lloydminster Upgrader will soon be seeing oilsands bitumen, while at least some Lloydminster Blend will be sold on the open market. Photo by Brian Zinchuk
When Cenovus put out its earnings statement on April 27, there wasn’t a lot of mention of northwest Saskatchewan. Last year, Cenovus acquired Husky Energy, Saskatchewan’s largest oil producer, whose principal operations were in the Lloydminster region. But what was mentioned marked a substantial shift in strategy for the Lloydminster Upgrader, which has been the foundation of the region’s production for decades.
For the last decade, Husky had been building a series of steam assisted gravity drainage (SAGD) projects which they refer “Lloydminster thermal projects.” But the pace of construction on those projects had slowed considerably, from two a year to an all-but stop during the earlier days of the COVID-19 pandemic. The company currently has completed 11, with one more being finished this year. The initial plan was for 15.
And even during the depths of the oil downturn, prior to COVID, Husky typically employed six drilling rigs on those Lloydminster thermal projects during the winter drilling season. This last winter, with oil prices into the $80s and $90s, RiggerTalk.com, publisher of the Canadian Association of Energy Contractors rig data, typically showed only one Cenovus rig working in the area. As of May 9, no rigs were shown working for Cenovus in the region, although Serafina Energy Ltd. had one rig drilling north of Cochin.
Upgrader to process oilsands crude
In that earnings call, Keith Chiasson, Cenovus executive vice president downstream, spoke about using the Lloydminster Upgrader to process oil from oilsands projects at Christina Lake and Foster Creek in northeastern Alberta oilsands projects, as opposed to Lloydminster area heavy crude. Lloydminster Blend crude (LLB) will be sold on the market.
The entire purpose of the upgrader, when it was built by the Grant Devine Progressive Conservative government in the late-1980s and early 1990s, was to process Lloydminster area product. This strategy would mark a pronounced shift for the upgrader.
Pipeline Online contacted Cenovus after the earnings call and posed a number of questions regarding their activity level and intentions in northwest Saskatchewan. On May 5, Cenovus responded by email.
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With regards to ongoing Lloydminster thermal project development, the company responded said, “The Lloydminster region remains an important area for Cenovus, with the Spruce Lake North project on track for first oil, which will contribute 10,000 barrels per day capacity by the end of this year. We continue to apply Cenovus operating strategies to our Lloydminster thermals, including using longer wells in optimal positions to target the best areas. Along with our focus on ensuring safe, reliable operations across our portfolio, our strategy continues to include disciplined capital allocation and investing selectively in the highest-return opportunities.”
Asked about using the Lloydminster Upgrader for oilsands production, and simply selling Lloydminster blend on the market, Cenovus replied, “The Lloydminster Upgrader and Refinery are a great industrial complex and we are looking at ways to extract more value out of these facilities, including introducing oil sands crudes from Foster Creek and Christina Lake to both facilities. This allows us to expand our margin because we’re using lower cost crudes in the upgrader and the refinery versus LLB, which we’ll then just sell to the market. We will continue to process our upstream feedstock at our Lloydminster assets while looking at ways to debottleneck the facility for increased capacity and efficiency.”
Lloydminster thermals are expected to produce between 95,000 and 105,000 barrels of oil per day (bpd) by the end of 2022, according the company’s April 2022 corporate presentation. The operating expense (opex) is listed at $16 to $18/bbl.
Their 2021 annual report noted, “Bitumen production from Lloydminster thermal in 2021 averaged 97.7 thousand barrels per day.”
This is a typical CHOPS setup – a progressing cavity pump which produces into a storage tank. The product is then shipped by truck, since the oil is too thick to pipeline without diluent. Photo by Brian Zinchuk
Cold production to thermal over the last decade
A decade in, the switch from cold heavy oil production in the Lloydminster region to thermal production has largely been accomplished, with the ratio of cold/thermal production having basically inverted over the last 10 years. Most of that cold production was done through a process known as CHOPS, cold heavy oil production with sand.
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Cenovus’ 2021 Annual Report said, “Acquired as part of the arrangement, Lloydminster conventional heavy oil utilizes a combination of production technologies including CHOPS and horizontal wells and EOR projects in the Lloydminster region of Alberta and Saskatchewan. Production for 2021 averaged 20,200 barrels per day of heavy crude oil and 10.6 MMcf per day of conventional natural gas.”
Cenovus did not directly respond to a question if it was planning any activity in its vast CHOPS production area around Lloydminster previously operated by Husky, given the substantial increase in oil prices. In 2013, Husky reported it had drilled 228 CHOPS wells. In recent years, hardly any CHOPS wells have been drilled. And as very few new CHOPS wells have been drilled in the region in recent years, the natural declines will have had a significant impact by now.
The Rush Lake thermal plant is indicative of the Lloydminster thermal projects – cookie-cutter designs that have been repeated 12 times now. Photo by Brian Zinchuk
The decline of heavy oil production that is not produced with thermal methods is significant. Husky’s 2013 annual report noted, “Thermals are now producing more than 37,000 bbls/day of Husky’s total heavy oil production of approximately 112,000 bbls/day. The technology has emerged as a central driver of the company’s expected steady growth in crude oil volumes in 2014 and beyond.”
That statement also reveals that cold production at the time was approximately 75,000 bpd. The April 2022 Cenovus corporate presentation noted Lloydminster conventional heavy oil is listed at 19,000 to 22,000 bpd by the end of 2022.
The opex for these operations is $36 to $39/bbl. The report notes the company is “managing natural declines” and “piloting CO2-EOR technology.” This operating expense, is significant, and was one of the primary drivers for the growth of thermal production. A decade ago, Husky executives pointed out that the cost of production for thermal was half that of CHOPS, and this year’s numbers have bore that out. In fact, in 2021, the thermal opex is less than half that of CHOPS.
Decarbonization
A major thrust for Cenovus is the Oil Sands Pathways to Net Zero Alliance. The company, and its predecessors, literally wrote the book on geological storage of carbon dioxide and enhanced oil recovery during its long experience in being the operator of the Weyburn Unit. While Cenovus has since sold that to Whitecap, it picked up Husky’s CO2 enhanced oil recovery efforts in northwest Saskatchewan. To that end, Cenovus said, “We currently operate two carbon capture projects, including at the Lloydminster Ethanol Plant and our Pikes Peak South thermal project, where we have partnered with Svante to test new carbon capture technology. Our five-year business plan includes three additional carbon capture projects, including at the Lloydminster Upgrader. We will be releasing more information on potential future developments in our 2021 environmental, social and governance (ESG) report, expected this summer.”
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The company’s April 2022 corporate presentation notes that their near-term (2021-26) decarbonization projects include the Lloydminster Upgrader. Phase 2, from 2027-35, includes “expanded CO2 capture across larger assets.” Among those listed are Lloydminster thermal projects.
The company also mentions “small modular reactor pilot,” but does not say where that would be. During a small modular reactor announcement in Regina in late March, Alberta Energy Minister Sonya Savage noted that such reactors are being considered in the oilsands.
The company said in their email, “Cenovus is a founding member of the Oil Sands Pathways to Net Zero Alliance, an unprecedented alliance that brings together Canada’s six largest oil sands producers. We are working collectively with the federal and Alberta governments to achieve net zero greenhouse gas emissions from the companies’ oil sands operations by 2050 to help meet Canada’s climate goals and 2050 net zero aspirations. The investment tax credit for carbon capture projects announced in the federal government’s budget in April 2022 is a positive step forward in those collaborative efforts. Governments and industry will need to continue to work together to enable the fiscal and policy framework needed to ensure Canada meets its climate commitments and remains globally competitive.”
Watch for Pipeline Online’s upcoming series on how the Devine-era Lloydminster and Regina upgraders were not the boondoggle some thought they where, but rather key building blocks in this province’s economy.
If you’re basing your business decisions on what’s really going on in the Saskatchewan energy sector, you need in-depth stories like this that you won’t find anywhere else. No other media digs as deep into the oilpatch in Saskatchewan as Pipeline Online. Follow Pipeline Online on LinkedIn, Twitter or Facebook.
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