WESTERN OIL FLOWS EASTWARD
AN ADDRESS BY
DR. OLIVER B. HOPKINS, B.A., Ph.D. VICE-PRESIDENT, IMPERIAL OIL LIMITED
Chairman: The President, Mr. H. G. Colebrook
Thursday, December 8th, 1949
Honoured Guests and Gentlemen: No more fascinating story has been unfolded in the development of Canada's resources than the geological surveys of the Western Provinces and North West Territories, leading to the great oil discoveries in the past twenty years.
Our honoured guest's contribution to that remarkable development has been outstanding.
Having received his degree from the John Hopkins University he was immediately appointed Assistant State Geologist of Georgia and from 1914-1919 was a member of the United States Geological Survey. In 1919 he came to Canada, joining the Imperial Oil Limited, commencing exploratory operations in the West and was in charge of a geological party operating from the Athabaska to the Peace River.
In 1920 he went to Colombia, South America, to evaluate the property of the Tropical Oil, Company, which was subsequently absorbed by the International Petroleum Company.
On his return to Canada in 1921 he was appointed Chief Geologist of both International Petroleum Company and Imperial Oil Limited. In 1933 he became a Director of the International. In 1944 he was appointed a VicePresident and in 1945 was elected to the Board of Directors of Imperial Oil Limited.
To Dr. Hopkins and his Department goes the credit for the discovery and development of Canada's first major oil field in over a decade-the new Leduc Field near Edmonton, Alberta.
He has made many contributions to geological literature with several books and articles to his credit.
I have very much pleasure on calling upon Dr. Hopkins now who will address you on his chosen subject--"WESTERN OIL FLOWS EASTWARD".
Not long ago a friend of ours from Texas made his first visit to Toronto. One of the things which impressed him most was the hotel in which we are meeting--and in particular the Imperial Room. He explained "We think we do things in a pretty big way in our state, but we've never managed to persuade our largest hotel to name its main dining room after our company." I am sure he would be even more impressed if he were here today and realized that such a representative group of business and professional men had been formed to foster and extend Imperial relationships.
Although those relationships are not the subject of what I am to talk about today, I deeply appreciate your invitation to speak to you. It is, in itself, an indication of the far-reaching importance of the oil development in western Canada.
Exactly three years ago today a drilling rig at a wildcat well not far from Leduc, a prosperous little town in the midst of a fertile agricultural area of central Alberta, had reached a depth of 2,400 feet. Perhaps the drillers on that rig could be excused if their attitude was one of hopeful resignation. This was just another test well that appeared to hold no more promise than some of its unsuccessful predecessors.
For Imperial Oil, Leduc was the 134th wildcat drilled in western Canada over a period of almost 30 years--and there was as yet little to show as a result.
Other companies were no more fortunate.
This gloomy picture of only three years ago was superimposed on a background no less discouraging. On the prairies, production from existing fields was declining and there seemed little hope of relief from the heavy transportation cost of bringing crude from distant United States fields. Nationally, Canada was importing over 90 per cent of her oil requirements--and paying for it in U.S. dollars which, even then, were hard to find.
That was three years ago. Today, by developing known fields, Canada could produce about one-half of all the oil she uses and we talk in terms of possible self-sufficiency within a few years.
The turning point came on February 13, 1947, when the Leduc well I mentioned a moment ago blew in as a successful producer. In the light of subsequent developments, little wonder it was acclaimed the most important oil discovery in North America that year, and has been referred to as a landmark in Canada's economic history.
The importance of Leduc was not only that it was the discovery well in a field which contains some 240 million barrels of oil, but even more in the fact that it opened up new hunting grounds for the oil prospector and made western Canada one of the most active oil exploration areas in the world.
In earlier years, exploration in Alberta had been concentrated largely in the foothills and in the southern plains. Logically so, because Turner Valley, the one major field, was found in the foothills. And in the south there had been just enough small showings of oil to encourage further exploration. Some oil had been discovered in the eastern part of the province, at the Saskatchewan border, but it was heavy crude and not suitable for the manufacture of the light fuels required.
Leduc, as you know, is in the central section of Alberta near Edmonton, and oil occurs there in a limestone formation that is older geologically than that which produces in Turner Valley. So the Leduc discovery not only gave new promise to a large and relatively unexplored area, it also indicated an additional formation in which oil may be expected.
As a natural result, exploration since then has been concentrated largely in the area within a hundred mile radius of Edmonton, and a spectacular number of new finds has been made.
First there was the northern extension of Leduc--at Woodbend--early the following year. And in September of 1948 the Redwater field, 30 miles northeast of Edmonton was discovered. Even in its early history Redwater was recognized as the continent's most important new field of 1948. Since then extensions, especially in the case of the Simmons well, have made it one of the large fields of North America, with reserves now estimated at some 500 million barrels-about twice as large as Leduc.
This year an even more dramatic discovery was made at Golden Spike. The estimated average thickness of the oil-producing section at Redwater is 65 feet, and at Leduc 33 feet. At Golden Spike only two producing wells have been drilled but in both the oil-bearing zone is in excess of 500 feet. Although the extent of the field is not yet known, we believe reserves eventually will be measured in hundreds of millions of barrels.
South of Leduc at Stettler, another promising new find has been made. It is too early to evaluate its size but indications point strongly to another important field.
Still other discoveries in 1949 include Bon Accord, Joseph Lake, Whitemud, Normandville, and Excelsior. These may or may not lead to the development of sizeable oil fields but they point up the fact that the general area offers great promise.
Normandville is of special significance because of its distance from the other discoveries. It is 240 miles northwest of Edmonton near the Peace River and it has greatly stimulated exploratory activity in this northern area.
Altogether, oil reserves discovered in Alberta in the two years following--and including--Leduc are estimated at one billion barrels. Since that time, that is since last March, the newer discoveries have given a good start on the second billion.
Furthermore, the exploration effort is still on the increase and, as a result, the rate of discovery should be further accelerated. In the prairie area more than 100 million acres of oil and gas rights have been taken up for exploration. More than 100 Canadian and U.S. companies and syndicates are active, and the number continues to grow. Dozens of surface geological crews and 109 seismograph and gravity meter survey outfits are now in the field.
In Alberta, the total spending for exploration and the related programs of development this year will exceed $100 millions. That is about 10 times the amount spent only three years ago.
Obviously no one knows what measure of success this intensive effort will have. But we do know that only a small fraction of Canada's 475,000 square miles of prospective oil territory has been tested. As a basis of comparison, Canada has about one-third as much prospective oil territory as the United States which is expected to produce 60 billion barrels from known fields. If we assume that the prospective areas of Canada are equally rich, then Canada should ultimately produce 20 billion barrels.
Of course this is entirely speculation because productivity varies widely between different areas. For example, Texas comprises about 1/12 of the area of the United States but has about one-half of its oil reserves.
However, even the more conservative estimates place Canada's undiscovered reserves at "several" billion barrels and some geologists predict that we will have proved five billion barrels within five years. Certainly it can be said that we are well on our way to self-sufficiency in oil, and we may have more than enough for our own requirements.
It should be emphasized that self-sufficiency will be attained only through venturing a staggering amount of risk capital. The discoveries of the past three years may tend to make us forget the barren decades which went before, But the search for oil is still a costly and uncertain business. Although the odds have been shortened somewhat, the long term record shows that only one of every 20 wildcat wells is a producer. And the cost of a single wildcat may range from less than $100,000 to more than a million.
A leading authority on the economics of oil estimates that before we can hope to bring production up to the level of Canada's current demand there must be an investment of almost a billion dollars. Or, to bring it closer home, the equivalent of about $300 from every family in Canada.
That, of course, is only one side of the story: we should also consider the contribution such an investment will make to the economy of the west and of Canada as a whole. Already the western fields, although producing under restrictions, have brought important benefits. Understandably, those benefits have been most apparent in the province of Alberta. The invigorating influence of oil industry spending amounting on average to $2 millions a week has been reflected throughout the business structure of the province. Population and employment have increased. New industries have been established and others are contemplated.
Almost as important to the citizens of Alberta are the increased revenues their government is receiving as a by-product of the oil development. The province, as you may know, receives a royalty of one barrel of oil out of every eight produced on Crown lands, which comprise about 90 per cent of the total area of the province. This royalty at present yields about $20,000 a day and will increase as production increases. Since Leduc the Alberta government has also collected $22 millions from the sale of leases to Crown reserves, practically all of it within the past year, and more than $6 millions in fees and rentals. When you consider that the population of Alberta is less than that of the city of Toronto you have some idea of the effect of this income on the provincial economy. It has been estimated that at present some 30 per cent of the Alberta government's total revenue is derived from the oil industry--and that is exclusive of the nine cent tax on every gallon of gasoline sold.
But perhaps the most tangible benefit to Albertans and to the people of the prairie provinces generally has been the reduction in the prices of petroleum products.
Because lower cost Alberta crude has displaced the uneconomic sources on which prairie refineries were formerly dependent, product prices are substantially lower than they could have been otherwise. Price reductions made last year cut the prairie consumers' annual bill for gasoline, tractor distillate and other fuels by about $9 millions.
The new oil production should lead to a more balanced economy for the prairies. As I have mentioned, development along these lines is already taking place in Alberta. It will be reflected too in increased prairie refining capacity. A new 16,000 barrel a day refinery went into operation at Edmonton last year. Two others are projected for that area and expansions are under way or contemplated at Saskatoon, Moose Jaw, Regina, Brandon and Winnipeg. At least $30 millions will be spent in the next two years to increase prairie refinery capacity to more than 80,000 barrels a day. That is as much oil as was refined in the entire Dominion only 20 years ago.
When we turn to the effects of the new oil on Canada as a whole we must keep in mind that a more prosperous, better balanced prairie area will inevitably have favorable repercussions throughout the Dominion. On one hand, it means a more receptive market for products made in the east and on the west coast. And on the other, lower cost operation for western agriculture and industry must ultimately benefit the whole of Canada.
Capable of more exact measurement is the contribution domestic oil production is making to the solution of our most serious economic problem. Petroleum is the largest single factor determining our exchange situation. In terms of U.S. dollars we have been importing more crude oil and refined products than we have of any other commodity; and by some coincidence Canada's dollar shortage last year happened to be almost precisely the same as the dollar value of our petroleum imports. Oil from Alberta wells means that this year we will save 90 million of those scarce American dollars.
Finally, Canada's development has been predicated to a considerable degree on petroleum; so much so that Canadians use, per capita, more oil than any nation in the world except our neighbour to the south. In the past we have been dependent largely on foreign sources of supply. The added security of large oil reserves within our borders is of fundamental importance not only to Canada but to this hemisphere.
I think you will agree that these benefits--to Alberta, to the prairies and to Canada--have been substantial. And they will become even greater as more reserves are found and developed, and as markets for western oil are found beyond the prairie provinces which are its present economic limit.
It would be too much to expect that developments of such importance could be crowded into less than three years without the industry suffering some growing pains.
The most serious have been caused by wells coming into production faster than it has been possible to find economic outlets for their output. Since last summer when production began to outstrip prairie refining capacity, each new well has meant that all the wells must be restricted in output. While Alberta now is able to produce about 125,000 barrels of oil a day from existing wells, actual production has been limited by the economically accessible market to 60 to 65 thousand barrels. Even on this restricted basis, however, Alberta's oil production in 1949 is estimated to be worth about $56 millions at the well head, almost half the value of Canada's entire gold production last year.
New markets will not be found until lower cost transportation is available. As you probably know, crude oil is a world commodity and it has a world price. It is sold in any given market at a price determined by world competition, and the amount received by the producer is that price less the cost of transportation to such market.
In this respect Alberta is at a considerable disadvantage. Generally speaking the large oil-producing areas of the world are close to water and to inexpensive water transport. Others are close to pipe lines built at lower cost than is possible today. For instance, Arabian oil is moved from the Persian Gulf through the Suez Canal to the Atlantic seaboard, more than 7,500 miles, for $1.40 a barrel.
Alberta oil, on the other hand, lies in an area bounded by the broad stretches of the Rocky Mountains on one side and by more than a thousand miles of land to the lakehead on the other. It cannot find new markets without overcoming these great transportation handicaps.
As an example, competitive oil from Illinois and Oklahoma can be laid down in Sarnia for $3.53 a barrel, a price which gives producers in those states a reasonable return after meeting production and transportation costs. The rail freight alone from Edmonton to Sarnia would run about $3.25 a barrel. So that to back out present supplies at Sarnia by rail the western producer would have to accept only 28 cents a barrel for his oil. Obviously, at that return there is no incentive either to continue producing oil or to search for new fields.
The eventual need for a pipe line to provide low-cost transport was recognized as a probability soon after the Leduc discovery and planning was started, on paper, more than two years ago. As you know, Inter-provincial Pipe Line Co. has already started work on a pipe line from Edmonton to the Great Lakes. It will be 1,150 miles in length-among the longest in the world-and will be built in three sections: from Edmonton to Regina; Regina to Gretna, Manitoba, on the International boundary; and from Gretna to Superior, Wisconsin, at the western tip of Lake Superior. On its way, it will pass through, or near, present refining centres on the prairies and on arrival at Superior the oil will be trans-shipped by lake tanker to Canada's largest refinery at Sarnia and to other refineries in Ontario.
To assist in the movement from Superior, two lake tankers--almost twice the size of the largest now plying the Lakes will be constructed at a total cost of about $8 millions. Each will be able to carry more than four million gallons of oil on each voyage and more than five million barrels during a seven months season of navigation.
Initial capacity of the pipe line will be 95,000 barrels a day to Regina and 70,000 barrels a day to the lakehead, with the delivery at Superior in the summer of 1951 expected to be between 50,000 and 60,000 barrels a day. However, by installing additional pumping stations capacity can be increased to a total intake at Edmonton of about 150,000 barrels a day and to an output of some 103,000 barrels at the lakehead.
It is expected that the pipe line will be completed next year and that oil will be flowing through it as far as Regina in the fall and to the lakehead by the opening of navigation in 1951. Cost of transporting a barrel of crude through the line will be less than a third of the cost by rail.
Completion of the line will add substantially to the benefits accompanying the western development. In Alberta, of course, there will be still greater business activity as oil production increases, still higher revenues for the government; across the prairies further reductions in product prices can be expected as the crude moves out to wider markets; and nationally there should be an additional saving of $40 millions a year in U.S. exchange.
It may be of interest that in sponsoring the Interprovincial Pipe Line Co., Imperial Oil's primary concern was in getting oil to market, not in getting into the pipe line business. Consequently, Imperial is retaining only one-third of the equity in the pipe line company. Twenty-five percent will be held by other oil companies, who, like Imperial, are guaranteeing traffic for the line and so making it financially possible. The remainder, just short of 42 per cent, is in the hands of the general public. Ordinary common sense tells us that the lower the cost of building and operating the pipe line the more competitive Alberta's oil will be. Conversely, anything which adds to its cost or impairs its efficiency will limit the area it can serve and will mean that the benefits of the western oil development will not be realized to the fullest possible extent.
These were the determining considerations in arriving at the route of the line. Engineering studies indicated that an all-Canadian route would be 121 miles longer to lakehead; it would require at least an additional $10 million to build; the increased operating cost would be about one million dollars annually; and it would delay the completion of the line by one year. It was obvious that the less costly route to Superior was in the best interests of the Canadian economy and that there was no logical alternative.
The question of an all-Canadian route is perhaps of academic interest at the moment, since all the major steps of authorization and financing have been completed on the most efficient basis that we have been able to devise. Yet it does reveal that the rapid growth of a new industry brings problems in understanding as well as problems in engineering. And unless understanding keeps pace with engineering, the national interest can easily be obscured by proposals that are superficially attractive but which will not stand analysis.
Western oil has already started to flow eastward. Refineries of Alberta, Saskatchewan and Manitoba are now being supplied with Alberta oil. And the pipe line is being built to help supply Ontario where a substantial market is available on a competitive basis. This market, if fully developed, would absorb the entire initial throughput of the pipe line.
However, by the time the pipe line begins operation, the pressure of Alberta oil will demand an even greater outlet. When definite plans for the line to the lakehead were formulated last spring, Alberta reserves were estimated at one billion barrels--an amount sufficient to supply the line at its initial rate for about 25 years. Since that time other discoveries have been made, as previously mentioned, and by the spring of 1951--when the line is in operation-reserves will probably have increased to two billion barrels.
If these reserves are found, the problem of an adequate outlet for Alberta crude will not be solved permanently by this pipe line. It is likely to be a continuing problem of serious proportions because of the ever-increasing volume of oil seeking an outlet and the great distances to adequate markets.
This problem would be partially solved if the United States considers it desirable to import oil and Canada considers it in the national interest to export some of her crude to the U.S. Such exports could be regarded as a means of payment, with Canadian oil in lieu of U.S. dollars, for oil we import at refining centres remote from producing fields in the west.
It is safe to conclude that Canada is witnessing only the beginning of a new era in oil development and in the transportation problems which accompany it. Other pipe lines will probably have to be built to provide markets for the ever-increasing flow of Alberta's wells.
Considering that so much has been said and written recently about the development of oil in Alberta and its significance, what I have said may not be new to many of you. However, I hope I have been able to convey to you something of the extent and importance of the oil development in western Canada. And perhaps, also, to impress upon you that great developments, such as the one we are now witnessing, are inevitably associated with great problems--problems which we believe are being solved in the best interest of all Canada.