The big drill
By Scott Simpson
Vancouver Sun
August 21, 2009
B.C.’s natural gas sector is poised for an unprecedented boom
 B.C.’s shale gas resources, including those in the Horn River Basin and the Montney Shale Zone, are estimated to be between 250 trillion cubic feet and1,000 trillion cubic feet, according to the Ministry of Energy, Mines and Petroleum Resources. (Photograph by: Graphics, Vancouver Sun) |
What energy crisis? Despite what you may be hearing about a global peak in oil production, waning reserves, and $100-plus oil prices, North America is suddenly awash in fossil fuel.
Sophisticated new drilling methods and a shared epiphany among exploration companies about the vast potential for new natural gas production from deep underground shale deposits have overturned decades of gloom about waning gas supplies.
“Natural gas will displace coal. It will displace oil,” said Mike Graham, Canadian foothills division president for Calgary-based gas giant EnCana. “There is no reason North America shouldn’t be energy self-sufficient if we can displace a lot of the oil with natural gas.”
British Columbia is emerging as a major player in this new enterprise.
Gas exploration and development companies, all the way from obscure juniors to global giants like ExxonMobil, have scrambled into northeast B.C. in the past three years, desperate to reserve a piece of the Horn River and Montney shale plays (or underground geologic formations) that are perceived as two of the most lucrative on the continent.
Since 2006, at least 19 companies have paid B.C. $3.65 billion to lock up large land positions in one or both of those areas, and the price per hectare has climbed three- to five-fold.
The total estimated volume of shale gas in B.C. is as much as 1,000 trillion cubic feet — enough to supply all of North America for 40 years, although the volume of gas that can be economically extracted is likely to be substantially lower.
“These plays rank up there with the best in North America. The more holes that are punched, and the more information we have, the better people are feeling about these plays,” Energy Minister Blair Lekstrom said in an interview.
“This definitely allows us the opportunity to become an energy powerhouse in British Columbia. Most importantly, it generates revenue to invest into health care and education, programs that are pretty tight as we look at the economic situation.”
Most of the focus has been upon Horn River, but Lekstrom noted that Montney, which is located near Dawson Creek and encompasses both shale gas and tight sandstone gas formations, could be even bigger.
Indeed for B.C., the only energy crisis is that there is suddenly too much of the stuff on the market. There is several months’ worth of gas already in storage. “I’ve seen it a few times in my career where storage gets very full, and you can get some brutal pricing in late summer and fall. This is going to be one of those years,” EnCana’s Graham said.
Across North America, companies are slashing production as prices tumble below the level at which it is economic to produce the gas — thanks to booming production from about 20 shale and “tight” gas fields scattered across the U.S.
Gas generates royalty income for B.C. and an ongoing decline in gas prices is cutting hundreds of millions of dollars out of revenue projections — $500 million this year alone.
This week, the trading price for natural gas reached its lowest point in seven years on the New York Mercantile Exchange, and analysts think it will creep even lower before making a modest recovery this winter.
On Friday, gas was trading as low as $2.80 US per unit for September delivery, and the February 2010 price was $5.35 — both numbers are well below the estimated price the B.C. government assumed when it released its deficit-destined budget last February.
Gas was $13.30 in July 2008.
“Industrial demand for natural gas has declined, Scotiabank Economics commodity analyst Patricia Mohr said in an interview. “It certainly declined in the first half of this year because of the recession and also because of the development of new, quite low-cost natural gas shales and what are called tight sands basins, in the U.S.
“Supplies have become much more ample in the United States and the cost curve has also dropped. Some of these shales are fairly low cost to produce.”
You can’t get this gas out of the ground with a conventional drilling rig. The gas is locked tight into the surrounding rock, which must be fractured, or ‘fraced’ in the industry vernacular, with high pressure injections of a sand-water compound.
Wet sand forcing its way into the rock causes fractures that open up a route for trapped gas to escape to the surface, often at high pressure.
The other key technique is to drill a conventional hole down into the deposit and then veer the well off at a series of right angles, like spokes on a wheel. These horizontal spokes allow for a wider distribution of mud, and the capture of gas from a bigger underground area than a single vertical well could reach.
Calgary-based EnCana, the biggest gas producer in B.C., has been lethally effective with these techniques in the Montney over the past five years, developing productive wells with the precision of an industrial assembly line. The company expects to apply the same techniques in Horn River as well.
It’s worth noting that EnCana got in early at both Montney and Horn River, and occupies central positions on both of those resources.
“We can drill thousands of wells in the Montney, and it’s similar in the Horn River. So we have decades of drilling out in front of us,” EnCana’s Graham said.
EnCana’s production cost at Montney is $3.50 US per unit of gas (a Terasen residential customer is currently paying $5.96 Cdn for approximately the same volume) and expects Horn River will be the same when fully developed over the next four or five years.
The break-even cost for a conventional, shallow, vertical well in Alberta, by contrast, is $7.50 according to a recent analysis by BMO Capital Markets.
Graham noted that the B.C. government has made the province “more competitive” with royalty schemes that exact lower payments upon companies willing to invest in unconventional resources. EnCana, he added, is exclusively focused on unconventional plays.
“To be successful in the natural gas industry you’ve definitely got to think long term.”
EnCana’s success in the Montney sandstone region has fuelled optimism about the shale portion of the basin, whereas expectations for Horn River come from spectacular gas flows from just 81 wells spread over 11,500 square kilometres.
The nearest town is Fort Nelson, which is preparing for a surge in activity by opening up new industrial land.
“We anticipate increased growth and we are experiencing moderate impact right now,” said Tyler Mattheis, Fort Nelson community development officer. Mattheis said “nothing explosive” is happening right now, but he noted that there’s more activity than might reasonably be expected to accompany depressed gas prices. “We haven’t seen really seen the dip that we expected.”
Nexen Inc., one of the Canadian participants at Horn River, said companies jumped into the area as they sensed a boom was coming, in order to lock up contiguous land blocks that would help keep exploration costs down.
“We’re at a stage where we’ve proved the resource is there. We’ve proved we can produce it out of the ground. Now the focus is, can we do it in a cost-effective manner,” said Tim Chatten, a Nexen’s investor relations analyst.
© Copyright (c) The Vancouver Sun