Alberta’s Oil Riddle
Paradox: Turner Valley must produce more oil to become a major pool; Turner Valley is producing too much oil, therefore output is being restricted
CHARLES LUGRIN SHAW
OUT IN the rolling foothill country of western Alberta, within sight of the Rockies, a great new industry has sprung into being.
It’s the oil industry. And today the Alberta oil industry, representing a capital investment of some $75,000,000. is drawing petroleum from ground once valued only as cattle range, at a rate justifying the expectation that before long Canada will rank at the top of the list of British Empire oil-producing countries.
It’s still in its infancy, this latest child of Alberta, but it’s growing amazingly fast; so fast, in fact, that it has already found itself beset by a confusing array of problems.
The first problem is production, and that involves a strange paradox. Unless Alberta and for the time being, that means Turner Valley produces more oil than at present, it cannot hope to break into the great markets of Eastern Canada and the Pacific Coast. If it does produce more oil. there is only the immediate prospect of an embarrassing surplus in the prairies, which at present constitute the only deixmdable sales territory. And then there is the problem of conservation— trying to curb waste and at the same time maintain the field on a satisfactory economic basis.
Most of the problems are traceable to the field’s extreme youth. As a crude field. Turner Valley is actually only about two and a half years old. although development has been carried on intermittently since before the War. What they had in Turner Valley and the surrounding country during the initial stages was not a crude oil field but a naphtha gas field. With a few minor exceptions, every well was a producer of gas which, after being subjected to certain processes, could be converted into a thin, whitish oil resembling gasoline.
But that sort of product, valuable though it might be,
would never make a great commercial oil field. Proud as Albertans were of those naphtha wells, they were only gas wells; and what Albertans really hoped for during long years of toil and heartbreak was a strike of crude oil—the stuff that has made every major petroleum region the world over.
Time and again the patient drillers thought they had it. The indications were promising enough; they had the assurance of eminent geologists for that. But every attempt had brought only disappointment, and the sceptical were beginning to wonder if these optimistic “oil” people, who talked glowingly of petroleum profits, were merely moneygrabbing promoters or crackpots.
The search has ranged far and wide; has lasted more than fifty years. Away back in ’78. Dr. George M. Dawson, Canada’s great geological authority, found oil occurrences in the Athabaska region. Ten years later the first well was spudded in at Langevin. near Medicine Hat, and gas was struck. During the next twenty years many other gas wells came in, but no crude oil producers. The gas wells were not to be sneered at, mind you—Royalite’s No. 4 gas well during its first six years produced naphtha worth $3,000.000. But crude oil was still the objective.
And in June, 1936, they got it. Ik)b Brown, who retired from the street-car business in Caigan' because he thought there was more romanceand he hoped more money—in oil, made the discovery. I Ie was down more than 6.8CX) feet at his Turner Valley Royalties well and beginning to wonder whether he would ever hit anything but limestone when, with a rumble and roar that could be heard for miles, crude oil .gushed to the top of the derrick and continued to flow at the rate of more than 800 barrels a day. Alberta’s crude oil field had arrived !
Brown’s strike of crude oil. strictly speaking, wasn’t the first in Alberta, but it was the first to show really worthwhile volume, and it opened a new and dramatic chapter in the province’s oil history. Encouraged by Brown's success, drilling was pushed at several other locations, and within a few months a sufficient number of producers had been added to prove indisputably that crude oil was there in considerable quantity. Today more than sixty crude wells are producing, and twenty are being drilled. In addition, more than 100 gas wells are in existence.
Production has gone up rapidly. In 1936 Turner Valley produced exactly 1.284,238 barrels of crude oil and naphtha. Output for 1937 was 2.767,000 barrels; during the first ten months of 1938 it was 5.799,000 barrels.
According to Dr George S. Hume, a geologist who probably knows more about Alberta oil prospects from the standpoint of his profession than anyone else, the possibilities of Turner Valley and the adjacent area are likely to be extended still further. “A really major field has been assured,” said Dr Hume, addressing a congress of mining men recently. “And Turner Valley isn’t the only one. The indications of finding oil over a very' wide area in the foothill section are extremely promising.”
The operators are optimistic too. I talked to Bob Brown the day he brought in his Vulcan Brown well last summer —a spectacular gusher if there ever was one. hurling a shaft of burning oil 300 feet into the air in a vast billowing cloud of flame and smoke.
“There’s no telling how far north this field may go, nor how far west,” said Brown. “Take this Vulcan well as an example of what I’m telling you. We’re a long way off the regular line here, and the well’s success shows that a big new territory is a potential oil field. The oil’s here all right. It’s just a matter of drilling-—and drilling. Why, a doodlebug man -one of these fellows who uses divining instruments to indicate the location of a prospective well—told me we’d find only a dry hole here; that it was useless to drill. Well, we fooled him, didn’t we? We’ll fool a lot of odicrs before we get through.”
Since Brown brought in Vulcan “off the line”—he was west of the then proven crude area—the field has been extended to the north by the blowing in of Home No. 2 with an initial flow that indicated it might become the field’s largest producer of crude. To date the bulk of crude production has come from a narrow strip about five miles long at the extreme southern end of the field. Home No. 2 is located some twelve miles north of this area. Wells have produced at intervening points along this twelve miles, so that the indicated length of the field is now about seventeen miles.
No one is surprised any more when a new well “blows in” in Turner Valley; it’s become a matter of routine, after the drilling proceeds to a certain depth, to hit the crude. As a matter of fact, the percentage of dry holes drilled in Turner Valley during the past two and a half years is far less than the average for, say, the United States. During the first six months of 1938 only one out of twenty wells drilled in Turner Valley was non-commercial; in the United States the ratio is one in five. And another factor in favor of the
Turner Valley field is its ‘productive closure,” which is the distance between the shallowest point where gas is encountered and the deepest point where crude is found. In the famous Kettleman Hills field in California, one of the world’s richest, the closure is 2.200 feet. In Turner Valley it’s 4.400 feet, just twice as great. To practical oil men this is one of the best possible indications of an oil field’s potential productive capacity.
TN TURNER VALLEY the business of producing oil is
still pretty much of a family affair. Nearly all the oil men and their families know each other, and they’re all pulling for each other to make good.
“Down there south of Little Chicago. Jack’s been trying to make a well for the last three months,” said one highly successful driller. “And do you suppose that most of us wouldn’t give our shirt to see him come through with a gusher? We’re all out to make a reputation for this field, and if Jack hits oil, as he’s pretty sure to do if he keeps on drilling, why, it’s going to mean just as much to us as to Jack, even though Jack may be the one to cash in first. You see, we’ve all got a stake in this valley, and Jack’s success is ours, just as we’d have to share his failure.”
The driller mentioned Little Chicago. That’s one of the fantastically named little settlements of rough board and tarpaper shacks down in the southern section of the valley. Another settlement a mile or so away is called Little New York. They are the crudest sort of towns, the stores and office buildings being of the single-story, false-front variety that is the trademark of the Western frontier, and as soon as you leave the main highway you’re in thick dust or mud. according to the seasons, just as in the days of the prairie schooner.
Little Chicago and the other mushroom oil towns of Alberta, however, have little in common with the brawling hell-holes that served the frontier in another age. The architecture may be the same, but the atmosphere is different. For one thing, women and children are as much in evidence as men. Everyone talks oil from dawn till night, when the gas flares dot the hills like Indian camp fires, but the Turner Valley folk haven’t allowed oil or anything else to interfere with their domestic life. And the drillers, who form the nucleus of the population, earn gocxl steady wages and can afford the better things of life, even though they have to tolerate “frontier” inconveniences temporarily. The radio keeps the oil towns in touch with the outside world, and Calgary is only an hour or so away by fast motor road. The frontier, maybe—but with reservations.
rTTIE valley itself is an inspiring spectacle.
The drilling derricks are scattered over the rolling hills for a distance of nearly twenty miles, with the big wells at present clustered
around the twin towns with the funny names. Nowhere will you see a thick forest of derricks such as in the longerestablished fields of California or Oklahoma. And probably you never will. There may never lx> the ugliness in the Alberta oil fields that has characterized those of the South, with derricks and tank farms and pipe lines obliterating all the original loveliness of what was once one of the prettiest cattle ranges in all the West. The Conservation Board is going to see to that.
For Turner Valley is now in the Conservation Board era. Clothed with the sweeping authority of legislation passed at a special session of the Alberta Legislature last November. this Board, working on the policy that it is better to get started late than never, is setting out to mend some of the earlier mistakes made in developing the oil field and to pattern a new design for the future. In this design, incidentally, there will lxi no place for the spectacular but tragically costly burning flares that represent wasted gas. It’s gas pressure which brings the oil to the surface, and gas pressure must lx.* conserved if the wells are to have long life. One proposal is that the gas after reaching the surface be pumped under pressure into the ground again in the effort to maintain pressure and thus maintain the flow of oil. There is some question as to whether this plan will work in the Turner Valley, but the Board is actively pushing investigation of its efficacy. Another important part of the program is continuance of pro-rating, of which more later. Another is the spacing of wells; they’ll be spread out, one for every forty acres.
With 350.000,000 cubic feet of gas being wasted daily when the Conservation Board took hold, the need for some kind of control was obvious enough. Some oil wells were using 35,000 feet of gas to raise a barrel of oil—more than $10 worth of gas at prairie prices—to raise $1.20 worth of crude oil. True the gas couldn’t have been sold for $10; but that’s a theoretical value. The prairie market consumes only about 20,000,000 cubic feet of natural gas daily.
Chairman of the Board is W. F. Knode, a hardheaded Texas oil man. One of the first things Knode did was crack down on the gas wasters.
"This is a crazy setup," remarked Knode when he took charge. ”11 you let all this gas get away, how are you going to raise your oil? And if you can’t raise your oil. where will you be?”
So the Board adopted a plan of ascertaining the ratio of the various producing wells in respect to their consumption of gas per barrel of oil. Those wells which used only a moderate amount of gas per barrel wore given a free rein, more or less. The wasters were forced to curtail their flow, which meant reducing their production of oil. Of course there were protests, but the commission has plans for compensating ojx'rators of some of the wells which will suffer most.
The basic idea is to make Turner Valley an example of what an intelligently managed oil field should be. It won’t be the perfect example by any means, because gas wastage had a ten-year head start on the conservationists, and that is one of the criticisms you’ll hear today from the independent spirits in the oil business out West—that the conservationists are bolting the barn door after the horse got away. And you’ll also hear that conservation is just a trick—one of the manoeuvres of the big interests to get control of the field. Some of the little fellows feel that they should be allowed to get as much oil out of the ground as fast as possible, and that the world should be very glad to buy it at their price.
AT FIRST that’s just about what happened—wells ran wide open, and the operators smiled broad smiles as they listened to the dollars singing through the outlet pfix'S. Then, with mounting production came marketing trouble. In the initial stages Turner Valley crude had to compete with crude imported from south of the border by the big companies. Naturally there were squawks from the independents; but that phase soon passed. As quickly as the big companies were able to rid themselves of their import obligations, they turned to the new source of supply.
Production kept on. climbing until it outran local distributive facilities. Later, as facilities were extended, it approached and at times exceeded the consumption capacity of the three prairie provinces which constitute Turner Valley’s natural marketing area.
And that brought pro-rating—which introduced the paradox of restriction of output in a field that has to show it can
produce more and more oil if it is to be considered as an economic source of supply for major markets outside the Prairie Provinces.
Pro-rating is simply the regulation and curtailment of the production of all wells in a given field to a fixed percentage of their rated productive capacity. In any given case it may be justified on either technical or economic grounds, or both. If an oil well is allowed to run wild, that is, produce without restriction of any kind, it is apt to dry up much sooner than would otherwise be the case. In the Turner Valley particularly, the oil has a paraffin base. If the wells run freely the paraffin has a tendency to “freeze” or harden, and the flow of oil is soon reduced to a trickle. The economic reason is the obvious one that if a market absorbs ten thousand barrels a day less than is produced, the surplus is going to become very embarrassing to everyone concerned.
Pro-rating has now been operative in Alberta for well over a year. At first it was administered by the refining companies; now the task is in the hands of the Conservation Board. The percentage allowed has ranged from fifty-five per cent to approximately twenty-five per cent, the same rate applying to all wells as soon as they come into production, except in the case of wells using an excessive proportion of gas or draining a small acreage.
Pro-rating has been accepted by the majority of those in the industry as a necessary and logical development in a growing field. There have been a few rebels, of course, just as there are in every industry which attempts to reduce the wastage of a diminishing natural asset. But the die-hards appear to be in the minority now, and there will probably be fewer of them when the Conservation Board enforces its policy of compensating those companies which will suffer most from the gas-oil ratio restrictions.
What About the Big Fellows?
ACTUAL production fluctuates from
day to day. During the height of the harvest season in September last, the field was turning out close to 30,000 barrels a day. Some technicians felt that at that output the held was being pushed beyond its efficient rate of production. There seems to be but little doubt, however, that the field has developed to the stage where it can supply most of the prairie demand, provided it can compete on a price basis with alternative sources of supply. Figures for the first ten months of 1938 show that the three provinces consumed 20,499 barrels daily, of which amount 19,217
barrels came from Alberta. Only 1,282 barrels were imported daily, and a good deal of this was used in the making of products which cannot be manufactured from Turner Valley crude.
Most of the criticism of the various types of curtailment has been based on the suspicion that it is all a part of a sinister stratagem on the part of the big oil companies, who run the refineries and distributing facilities, to control the field.
“They’re trying to freeze us out; that’s what they’re trying to do,’’ one indignant producer, who boasts of his independence, declared not long ago. “And what will they do when we’re out of the oil business, and they’re in the saddle all through the valley? Why, they’ll just bottle things up; that’s what they’ll do. They’ll cap the wells and hold them for the future; maybe for fifty years until some of their present sources of supply are dried up. It's all a plot.”
Even when Alberta’s oil production was much less than it is today, the little fellows couldn’t see the justice in restriction while Imi>erial was buying oil in Colombia and Peru; British American was buying in Oklahoma; McColl-Frontenac in the MidContinent field and Trinidad. And they saw red every time a tank car came in with oil from Montana just across the border.
Such criticism overlooks the fact that the big oil companies are just as anxious to make money out of Alberta oil as out of any other oil, but before they invest their millions in pipe lines or new refineries they want to be sure they’re going to make money—and not lose it. And to be sure of that they must know that Alberta has a really big pool of oil. They must feel sure that the pool will provide enough oil for a long enough time to pay off the cost of pipe lines and refineries before it peters out.
As yet, Turner Valley, despite its phenomenal percentage increase in the production of crude during the past three years, is still a pretty small puddle in the world’s ocean of oil. The American Petroleum Institute estimates that world production for 1938 will total 1,980,000,000 barrels. Final figures will probably show that Turner Valley output in 1938 was somewhat more than 6,000,000
barrels. Compare this with the world aggregate, or even with the 170.000,000 barrels annual production of the East Texas field or the 115,000,000 barrels of the Texas Gulf Coast area, and you’ll see that Turner Valley still has a long way to go before it becomes a major oil field.
One of the main troubles of the oil industryin Alberta today is the problem of men in a hurry, according to some of the more conservative technicians trained men long associated with the oil industry, men like J. H. McLeod, president of Royalite, who probably has a wider practical knowledge of the situation than anyone else in the province. McLeod is a quiet-spoken man who believes that nothing can be gained just now by “popping off.” But, like other big companymen, he thinks that too much haste will make it impossible to develop the field with maximum benefit to all parties concerned, including the consumer.
McLeod and the other lifetime oil men have the advantage of being able to regard the Turner Valley from the broad perspective of the world market. Being Canadians and, more specifically, Albertans, they naturally want to see Alberta’s oil industryget ahead, but they can’t help weighing Turner Valley’s problems in the light of the oil picture as a whole. If it isn’t economic to sell Alberta oil in Eastern Canada and on the Pacific Coast in competition with foreign oil, why should the industryand the country go into debt to subsidize Alberta’s product? they ask. And why should Turner Valley’s wells be forced to produce at a rate that isn’t consistent with good oil-field practice?
They also point out that the big companies have made an enormous capital outlay in refineries, distribution and transput facilities, all based on the assumption of a few years ago that Canada would have to import practically all its oil. This existing investment, they continue, must be paid for. Furthermore, any proposal to scrap the existing system or even drastically to reorganize it, would be sheer economic lunacy until such time as it can be definitely proved that Alberta can supply the domestic market at a cost that would be economically profitable to the country as a whole. And when it is realized that the Dominion still imports 35,7(X),000 barrels of crude petroleum
annually, it will be seen just how far Alberta, with a current production of something more than 6,000,(XX) barrels, has to go.
“The oil business was never notoriously sentimental,” one big company executive told me, “but even if it did feel pretty soft-hearted and patriotic about giving Alberta first rail, it would find it impossible under existing conditions to compete in price with foreign oil in markets outside the Prairie Provinces. Oil can be brought into Canada by pipe line from the Mid-Continent or Illinois at a verylow price, because Sarnia and other Canadian points represent the final drip from the American pipe-line system. With tank ships, another cheap form of transportation, supplying the Coast markets and the pipe line feeding the central sections of Canada, the competition lor Alberta is going to be pretty tough.
“And that’s only one factor. Another is that Turner Valley oil hasn’t yet proved its ability to displace foreign oil in the degree of its diversification. You can crack down these foreign oils to a dozen or so divisions - gasoline, motor and lubricating, fuel, Diesel, paraffin, road base, vaseline and greases. So far as we know, the uses for Alberta oil arc* more limited.
“And then there’s the question of production. Alberta has made a fine start, but we’re still sceptical of its ultimate ability to compare with the world’s biggest fields. The geologists may be right when they predict that oil will flow as freely from wells in Alberta as in Oklahoma and Texas; but we can't operate on predictions. We've got to have the realities. We aren’t sure yet whether anyone knows the true potential yield of the Alberta fields. We may be excessively pessimistic about all this; wre hope we are, even if it’s going to make a lot of costly changes in our distribution setup necessary. But we maintain that there is still too big a doubt to warrant a reversal of policy. The profit margin in the world’s oil business is too thin for that.”
Empire Oil Needs
DUT the oil companies, big or little, are ^ not the only element to be considered, and the producers are very conscious of that. They realize that Turner Valley may still be insignificant in the world oil situation, but they also realize that in less than three years Alberta’s potential oil production, based on Government standards, has grown from virtually nothing to a
l**ak flow last autumn of 30,000 barrels a day. They realize also that whatever its ultimate productive capacity may prove to 1R\ Alberta is now one of the few sources of oil within the British Empire that can lx.* counted on in an emergency.
Wide as are the ramifications of British oil companies and extensive as may be the popular conception of the Empire’s ixtroleum resources, the fact is that 95 per cent of Britain’s oil comes from nonEmpire countries. Mexico’s recent expropriation of British and American oil concessions illustrates the relative insecurity of an oil supply controlled by the whims of a foreign government. The only wholly British countries producing oil today are Trinidad, Burma, Bahrein, Brunei, British India and Canada. The fact that Canada is closest of all these countries to the Motherland is of first-rank importance.
And that is where the industry’s claim for Government support comes in on the basis of Empire security and defense. “If the private companies can’t afford to get behind Alberta, then it's a job for the Government.” declared one leading operator; and even Knode, chairman of the Conservation Board, has been quoted as saying that the Government should take over the whole field if plans for putting 'Turner Valley on an economic basis fail.
The Imperial Government is not passing up any bets in Alberta oil. Sir Edward Ellington, marshal of the Royal Air Force, and other British officials, visited the field last summer and arranged for tests of Alberta oil to ascertain its value for airplane gasoline.
Just how far the Dominion Government
should go in fostering the oil industry is still a matter of divided opinion. There are those who think Government should stay out of the oil business; that a subsidized oil industry, unable to stand on its own feet, would be merely another white elephant. And then there are those oil operators who think Government should subsidize the railroads to the extent of providing a competing rate with imported oil in the markets east and west. Sir Edward Beatty, president of C. P. R., has shown a sympathetic interest in the problem of Alberta oil there have already been two reductions in oil rail freight rates on the prairies—and further concessions may be granted, but the oil men feel that in view of the national importance of getting their industry on its feet there should be practical aid from the Government, too. They argue that if wheat and other commodities are subsidized, oil has an even greater right for protection, at least during its struggling youth.
“If we had freight rates on oil from Calgary to British Columbia on the same level as they are on wheat, I could bring Turner Valley oil by rail to Vancouver at a cost competitive with oil now being brought here regularly by tank ship from Southern California,’’ said a Vancouver financier who has been close to the Alberta situation ever since it became interesting to men with capital. “I can buy Turner Valley oil at $1.20 a barrel, and at the wheat rate I could ship it here in tank cars at 70 cents, making a total cost of $1.90. I’d have to pay $1.70 for the same grade of oil in California, and the tank ship cost would be 20 cents, or a total of $1.90. But, of course, we can’t get oil transported at
the wheat rate. Instead of the hypothetical 70 cents, the ‘laid-down cost’ in Vancouver would be $3.50 a barrel.”
There are, of course, good reasons for the difference, or for part of it anyway, and one of them is that wheat cars can roll eastward with the products of British Columbia; the tank cars would rattle home empty.
Pipe Line Facts
XTOT A few oil men look beyond railroad transportation and envision pipe lines eastward and westward from the Alberta oil country*. They say the pipe line is Ixiund to come some day : that the railroads at best can provide only a temporary expedient until such time as the volume of oil production justifies the cost of what in the long run would be the most economical transport metluxl. They point to the
110.000 miles of pipe line in the United States which constitute an amazingly complex system of distribution in competition with the railroads, and remark that quite obviously the piix-line companies didn’t establish their facilities just for fun.
The pipe line is unquestionably a cheap method of transporting oil once the line is laid. But pipe lines come high, even though their cost is only a fraction of the cost of building a railroad. Recently the Vancouver Board of Trade Mining Bureau estimated that an eight-inch pipe line traversing the 650 miles between Calgary and Vancouver, capable of delivering
30.000 barrels a day. would cost $20,000,(XX). On the basis of carrying charges established by United States experience, such a line, the Bureau‘s engineer estimates, could pump oil from Calgary to Vancouver at a charge of 45 cents a barrel. Collecting charges from the field to Caigancurrently run 20 cents a barrel. On this basis, Turner Valley crude, quoted at $1.20 a barrel in the field, theoretically could be laid down in Vancouver at SI.85 cents a barrel.
On a similar basis, construction of a 1,200-mile pipe line from Calgary to Port Arthur would bring the cost of Turner Valley crude laid down at Sarnia to approximately $2.15 a barrel. But American crude is now quoted at Sarnia at around $1.60 a barrel. Which indicates the height of the economic hurdle Alberta crude will have to jump before it can be distributed in the Eastern Canadian market.
Moreover, before anyone lays a pipe line from the oil field to the Coast or to the Great Lakes or anywhere else, he is going to be mighty sure that he has the guarantee of sufficient oil to warrant the investment. And, frankly, that guarantee cannot yet be made. Most experts seem agreed that Alberta’s potential oil production must be at least 100,000 barrels a day backed by an adequate reserve before pipe-line construction would be justified, and that is considerably more than double the most hopeful estimate of today. And the builder v’ould have to be sure of 100,000 barrels a day, not only this year but for at least fifteen years. In the United States, most pipe lines are amortized on a seventeento twenty-year basis.
Even the most optimistic oil operator is convinced that, for the present, the pipe line is only a pipe dream, even though it may be very much a reality before long.
“Shucks, with our present production
it would take us two months just to fill the ! pipe line from Calgary to the Coast,” I confessed a Calgary executive the other | day. “But give us time. We’ll find the oil. j Just remember, please, that less than three years ago we didn't even have a crude oil showing u'orth talking about, and that in a couple of years we’ve multiplied our production by ten. We’ve come a long way and we’re going a long way farther.”
They all admit that production is still the paramount goal ; more orderly production than they’ve had in the past, but production and in steadily mounting volume. Volume is the thing.
“Why, if we could count on 100,000 barrels a day, our worries would be over.” one operator recently declared. “We’d have more oil than the prairies could use, and a surplus big enough to make the transport companies as eager to take the stuff to other markets as we are to send it.”
But Alberta is still a very small child in the world’s petroleum family. For a while it was shamefully neglected, and only now is it showing signs of lusty growth. But it’s got to realize sooner or later that Turner Valley is only the nursery; that there’s room for expansion outside in other prospective Alberta oil fields, and that healthy expansion is the thing that counts.
And meanwhile the operators continue drilling their wells, confident that the geologists are right; that a really great oil field lies under the rolling grasslands. Some of the dreams of sudden wealth may have vanished, but the oil men’s hopes are high. They’re determined to find their destiny, even if it means finding it the hard way.