Resource World Magazine

Energy Outlook 2014 Energy expert Thomas Drolet takes a look at this crucial sector and offers some perceptive observations by Ellsworth Dickson I t was energy in the form of coal that jump-started the world's economies to achieve sustained growth and wealth during the Industrial Revolution starting in the 1760s. Then it was oil that mobilized the world – and it still does. And while fossil fuels and nuclear energy sometimes get a bad rap in the media and by certain sectors of society, we can't do without them. In an interview, Thomas Drolet, President, Drolet and Associates Energy Services, Inc., discusses current events regarding the various forms of energy. Horizontal drilling and hydraulic fracturing (fracking) continue to generate controversy. "The advent of horizontal drilling and fracking is a true example of a technical revolution in the production of oil and natural gas," said Drolet. "It has arisen into gradual prominence over the last two decades. However, it's only been last five to six years when it has been applied in many areas throughout Canada and the US. It is now catching on internationally as well." He pointed out that fracking resulted in some problems for the oil and gas industry due to public opposition that comes when any new energy technology is implemented, as it is in this instance, in the backyards of many urban areas. "History has demonstrated that fact in spades," he said. "One example was when oil was first discovered in south and southeast Texas in the early 1900s, much of it in people's backyards. Some of this current fracking opposition is based on early drilling by the industry that did not abide by good industry standards in providing adequate casing 36 www.resourceworld.com RW December 2013.indd 36 integrity in the upper reaches of the well bore. Most of these problems have been fixed by establishing better regulations by state and federal agencies." Drolet noted that a significant component of the public's opposition comes from a concerted effort by many in the anti 'any fossil' energy camp that do not want to see any increase in the use of any form of fossil fuels. "Their objective, simply put, is to kill any and all use of fossil fuels," he said. "I believe that there are so many prolific new shale and tight oil associated gas fields dotted throughout Canada and the US that the use of fracking will win out with time." He is of the view that the widespread use of horizontal drilling and fracking will become a mainstay of natural gas supply for the next 20 to 40 years. "Our economy and lifestyle depend on adequate use of fossil fuels to power our homes and industries," Drolet told Resource World. "With the problems related to acceptance of coal-fired power, I believe natural gas, found in this new unconventional way, will become an ever increasing supplier of electricity in North America and the rest of the world. Natural gas has so many other uses such as car and fleet fuels." Much oil still comes from the Middle East. "The so-called Arab Spring has led to too much instability in the Middle East," said Drolet. "To me, the root cause of the instability is the fact that there are still many dictatorships threatened by its rise and, as a result, any move towards a lessening of central control is something that needs to be crushed." Drolet said that the current instability in the Middle East will continue to lead to some concerns about the stability of oil supply and put somewhat of a geopolitical price premium on the international price of oil. He noted that most major agencies (OECD etc.) predict that oil production in the near to middle term will level out at approximately a 1-1½% increase per year. "My prediction, therefore, for the price of oil, as a 2014 average, is approximately US $90 a barrel for WTI and $101 for Brent crude," said Drolet. He said that one of the common mis- conceptions is that the shale gas revolution alone has resulted in a major excess supply onto the North American market. "In fact, most of the excess gas causing the price to linger in the US $3 to $3.70 range is really due to so-called 'associated gas' which is coming from the production of tight oil, as from tight formations, like the Bakken and many others fields in the US and Canada," said Drolet. "Despite low prices, most of the major oil and natural gas producing companies are drilling prolifically in order to keep their 2 P reserves (proven + probable) on the balance sheet up to a level that demonstrates a long-term supply capability. Many of these new shale gas wells are, in fact, being shut-in to await higher prices while the associated gas component continues to flow from tight oil drilling operations and serve markets." " investors, our due diligence should As take a close look at the average drilling costs as a measure of the company's profitability and therefore potential future share value increase," said Drolet. "Self-sufficiency or true independence for oil and gas for the US and Canada is a topic being widely debated," said Drolet. "In the case of oil and, given that it is a worldwide commodity, I do not see the US becoming totally independent of offshore oil supplies. Greater independence and greater self-sufficiency should be the objective." With the advent of further LNG export terminals, Drolet thinks natural gas pricing will gradually (over decades) work somewhat towards a worldwide price. "In the case of oil, and with the discovery of some new reservoirs (i.e. in Texas and other areas of the US and Canada), I see onshore supply increasing and prices moderating," said Drolet. " investors, we As should keep a close eye on those new discovery fields and the companies that will be able to access them quickly." "The issue of coal and its future use is a complex topic," said Drolet. "The fact is that here, in North America, 38% of our electricity comes from coal-fired power plants. That percentage is decreasing either through government and societal pressures or through regular regulatory changes. DECEMBER/JANUARY 2014 12/11/2013 6:12 PM

• Cover