EnCana grapples with gas glut

By Shaun Polczer
Calgary Herald
November 28, 2009

Company split takes effect Monday; Eric Marsh: Managing a natural gas 'renaissance'

EnCana executive VP Eric Marsh is pressing government to develop policies that encourage consumption of natural gas, which is both clean and abundant. (Photograph by: Ted Rhodes, Calgary Herald)

Starting Monday when the company's split into two comes into effect, he'll be charged with finding ways to use them up when he takes over the position of "Executive Vice-President Natural Gas Economy"--a fancy way of describing a natural gas evangelist whose job is to extol the virtues of North America's cleanest and possibly most abundant fossil fuel.

It's probably the first time a major energy producer has created a senior executive position focused solely on demand instead of supply.

"This industry has gone through a period of time over the last three to five years that we've

never known before," he says. "We would say it's a renaissance in natural gas development. The big change is that it's brought on by technology."

The new EnCana is coming to market at an odd and some say troubling time for natural gas producers, as one of the purest play natural gas producers in North America. Virtually all of its production is gas of the "unconventional" variety, an abundant but relatively difficult type of gas to produce from hard to reach rocks like shale and tight sandstone.

The original EnCana was a pioneer in this regard, practically inventing the concept of "resource plays." Today, every major multinational oil company from Exxon to Shell is scrambling to take up positions in every shale basin they can find.

Some estimates by the U.S. Geological Survey and others suggest North America has 100 years of gas in the ground, thanks to the discovery of big new shale plays in places like Horn River and Louisiana.

In fact, shale--which was once considered impossible to extract gas from--has proven to be so prolific that it currently accounts for 13 per cent of North America's total production and full-blown development has barely begun. Huge reserves lie untapped in places such as Quebec and Pennsylvania that could dramatically alter the production landscape for decades to come. Marsh says scarcity is no longer an issue in a market that has been characterized by volatile spikes in supply and demand.

That in turn has driven prices down to multi-year lows, as storage levels reach all-time highs. The more successful companies like EnCana are at finding and developing new reserves, the lower the price goes.

Speaking at the meeting to approve the split on Wednesday, EnCana CEO Randy Eresman warned of a looming shakedown among gas producers due to lower long-term prices. Conventional exploration and development that can only be profitable at $7 to $8 will probably fall by the wayside.

"We've got exposure to all of the plays that are actually causing the value of natural gas production we're seeing today," he said. "Over time we think that clear itself up and the best producers at the lowest cost will survive."

Finding the solution to the glut is Marsh's job. Already, he's pressing governments to develop policies that encourage consumption of natural gas as a substitute for coal and nuclear to generate power and as a transportation fuel in cars and heavy trucks.

Marsh estimates that a third of North America's greenhouse emissions could be eliminated by switching vehicles to burn natural gas. To set the example, EnCana is switching its 1,800-strong vehicle fleet to natural gas and configuring rigs to use it instead of diesel.

Marsh says many government leaders often aren't aware of the magnitude of the opportunity to reduce oil consumption and cut emissions. It's this "green" mantra the new EnCana will try to make as the cornerstone of its emerging corporate culture.

"We think you can make good inroads on commercial transport infrastructure in three years. We have this abundance of natural gas, it's affordable and we can count on the supply being there."

In a recent meeting with the Herald's editorial board, Texas oilman T. Boone Pickens complained that North Americans are unable to buy natural gas vehicles. Only one manufacturer actually produces a natural gas passenger car --the Honda Civic GX--and it's only available in limited quantities. About 150,000 cars are configured to run on natural gas out of a total North American fleet of 250 million automobiles. By contrast, natural gas-powered cars are common in places like Europe with almost 40 to 45 models to choose from. Europe currently imports most of its natural gas from Russia.

Pickens has described North America as the Saudi Arabia of natural gas. "We have more of it than anyone," he said.

Pickens is promoting his own plan to encourage natural gas in eighteen-wheelers and federal vehicles with a pair of bills working through the U.S. House of Representatives and Senate that he hopes will be passed by the end of the year. He said he has met personally with President Barack Obama to discuss the issue and described natural gas as "the only fuel we have in North America that can take out foreign oil."

But others have raised doubts about the extent of gas supplies in shale, questioning what they see as overly optimistic resource assessments.

Writing in World Oil magazine, consulting geologist Art Berman said that not enough is known about the long-term production characteristics of shale gas wells to accurately estimate reserves. In the August issue of the industry publication he suggested shale gas reserves could be less than a third of preliminary estimates.

Likewise, Allen Brooks, managing director of energy investment bank Parks Paton Hoepfl& Brown based in Houston, expressed his own doubts about how economic the shales will prove to be in self-proclaimed "musings," that have been widely circulated on the Internet. "The gas-shale play is beginning to smell like a bubble and as we have learned during the past few years, bubbles have a way of ending in a bad way."

But EnCana's Marsh is unfazed and envisions a day when gas producers vertically integrate, selling natural gas in filling stations and operating power generation facilities.

spolczer@theherald.canwest.com

© Copyright (c) The Calgary Herald

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'Size of the prize' huge for shareholders:Cenovus CEO

Ferguson has 25 years of oilpatch savvy

Brian Ferguson isn't your typical oilman. With his accounting background and a commerce degree from the University of Alberta, he often stood out from EnCana's other senior executives, as a bean counter among engineers and geologists. But his oilpatch credentials are impeccable.

After joining Alberta Energy Company in 1984, Ferguson has spent most of his career in Calgary's energy hub. In February 2006 he was appointed EnCana's chief financial officer, a position he has held through this week's breakup of the company into two parts. On Monday, he'll officially become the chief executive of Canada's newest heavy oil and oilsands player, Cenovus Energy, which begins operations Dec. 1.

Q: How would you describe Cenovus's corporate culture?

A: Cenovus is going to be a company that all our employees and stakeholders are going to be proud of. If I was to think of a couple or three words that I think would be important to describe the character of the culture, it would be words like rigorous, respectful, ready.

Q: Are you happy with the performance of the "when issued" Cenovus shares? I'm assuming the idea was to try to establish a value for the shares before the split took effect.

A: The when issued market, as we've discovered, is not something that is well known or often used. So as a result there seems to be a lot of learning on a variety of people's parts, whether that's investors or investment dealers. An anecdote: My own broker called me today and said, 'Brian, I've got an order for 50,000 CVE (Cenovus' ticker symbol) how do I do that?' I said, 'Don't ask me, call your trader.' It's something that's encouraged by the Toronto Stock Exchange, the idea is to provide a more orderly transition to the common shares in trading.

Q: How would you distinguish Cenovus from other heavy oil producers?

A: We have a 40-billion barrel opportunity. We have 40 billion barrels of natural bitumen in place, this massive opportunity that we have inherited under the EnCana umbrella. The size of the prize is huge for our shareholders. The other key way we distinguish ourselves is that I believe we can be self-funding.

There are two fundamental strategic questions I ask myself: How do I grow my business? And the other is how am I going to fund that growth? We've got a great balance sheet and a low cost structure that allows us to be self-funding at mid-cycle prices. That, I think, is definitely unique.

Q: Part of the rationale for the split was to increase each respective company's ability to grow--did I hear you correctly in saying you can grow 15 to 20 per cent per year?

A: That is specifically what we forecast for 2010 from Foster Creek and Christina Lake. I think we can sustain that 15 per cent range for the next decade just on our bitumen production just from Foster Creek and Christina Lake without looking at any of the other projects we have.

What we're going to do over the first two quarters of our life is to assess, evaluate and prioritize how we will place those other projects in the Cenovus portfolio and how we will move forward.

Q: EnCana's strategy to split seems the opposite of Suncor, which merged with Petro-Canada to avoid being purely an oilsands player. Is there any advantage to breaking into two pure plays as opposed to having one single diversified company?

A: What you always need to to do is establish the right strategy for your company based on the assets and opportunity in the portfolio that you have as a corporation.

Our strategy is one that has been in the making since 2003. After the merger of Pan-Canadian and AEC in 2002, we spent the first 18 months really trying to understand the assets. What we concluded is where we could really be industry leaders in unconventional gas and in situ oil right in our own backyard. We were active in 22 countries around the world at that point in time. Between 2003 and 2006 we sold $13 billion worth of assets--sold all our assets outside North America so we could focus on what we could do best and be very, very good at. That's evolved into the EnCana of tomorrow and Cenovus. I view the split here as the next natural step in EnCana's increasing focus.

spolczer@theherald.canwest.com

© Copyright (c) The Calgary Herald

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