When Finance Minister Tom Marshall delivers the provincial budget this afternoon, it’ll be built on three big guesses.
They’re educated, expert guesses, but fundamentally 40 per cent of the provincial budget depends on how much oil will be produced in the next year, how much oil will sell for and what the Canadian dollar exchange rate will be.
“The one we focus on, of course, is price, and that’s the one everyone talks about, and we ignore production,” Marshall said. “What happened in the last two years is the production numbers changed big time from budget time to mid-year.”
Last year, the forecast for oil production was off by 19 million barrels.
When Marshall got the updated numbers, he arranged a meeting with the experts at the Canada-Newfoundland and Labrador Offshore Petroleum Board (CNLOPB) to get some answers on how the forecasts could go wrong by such a large amount.
“A forecast is obsolete the day you give it,” said Jeff O’Keefe, manager for resource management at the CNLOPB.
Last week, The Telegram visited the CNLOPB to get the same basic presentation.
The bottom line, O’Keefe explained in a presentation that lasted more than an hour, is that oil production is very complicated, and very unpredictable.
On top of that, you never really know how much oil you’ve got until it’s been pumped out of the ground.
Before an oil development is approved, the oil company has to develop a “reservoir simulation” which basically maps the structure of the field — where the oil is, where the natural gas is and where the rock is. Then it simulates how all of that will change as it starts pumping the oil out of the ground.
Considering the fact that it is operating thousands of metres under the ground — under the ocean — it’s got a fairly sophisticated sense of what’s going on down there, but none of it is certain.
In the most simple sense, they stick two pipes into an oil reservoir — one pumps water or natural gas in to force the oil out the other pipe.
The oil companies spend a lot of time and engineering brainpower to figure out how much water to pump in, and at what rate the oil should be coming out. Eventually, they start getting a mix of oil and water coming out, and the longer they keep pumping, the more water they get, and the less oil they get.
O’Keefe said they won’t really look at shutting down a well until they’re either getting less than 200 cubic metres of oil per day, or over 95 per cent water.
When they shut down one well, they can transfer the equipment — that “slot” — to a new well, but there’s no real way of knowing for sure when a well will be ready to shut down.
“One of the things on Hibernia is they’re lasting a lot of longer than expected,” O’Keefe said. “So you can’t take that slot for somewhere else. And so that’s part of forecasting.”
Hibernia has a total of 64 slots, 61 of which are active right now.
Similarly, the Terra Nova and White Rose fields are managing several dozen wells.
Another factor that complicates things is that the drilling going on is always in flux, O’Keefe said. At Hibernia, they’re drilling new wells all the time, and they constantly have to revise their drilling schedule.
If the company thinks it will take seven months to drill a new well, and they do it in four months, that speeds up the rest of the schedule.
Moreover, if that new well starts producing between 10,000 and 15,000 barrels a day, and comes online a few months early, that can pump a lot of unexpected oil into the system.
“It makes a huge impact in terms of production for that year, but also it changes your drilling schedule,” O’Keefe said. “Things that you predicted would be years out already come up on the schedule a lot sooner.”
Other factors come into play, too. The White Rose and Terra Nova production vessels can store only a certain amount of oil. Periodically, oil tankers need to hook up and offload it. If the weather is bad and the tanker can’t hook up, the production vessel may fill up and have to stop pumping oil out of the ground.
O’Keefe said the CNLOPB is very much aware oil production accounts for 40 per cent of the provincial budget, but unpredictability is the nature of the beast.
Marshall, for his part, is sanguine about the fact that all of his budgeting is based on three educated guesses.
In particular, he said, every year he has a “knot in his stomach” when they forecast the price of oil, mostly because it’s hard to believe oil will stay that high.
“We don’t control any of the three factors,” Marshall said. “You want to build in some prudence, you want to build in some conservatism, but we don’t deliberately try to lowball. We try to take the best information we can from the experts.”