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Throwing fact at fiction Analysts, industry take issue with claims Canadian gas can’t compete with US shales; no clear-cut winner found in comparison of 3 years of FD&A costs Gary Park For Petroleum News
There are early signs of a groundswell among analysts and industry leaders to counter the prevailing wisdom that Canadian gas producers have no hope of competing with U.S. shale gas plays.
Canada’s notorious high-cost structure, with the Western Canada Sedimentary basin rated as the world’s most expensive operating region, and the lack of infrastructure to get gas from British Columbia’s remote shale plays to major North American markets are frequently cited as stumbling blocks.
But new research by FirstEnergy Capital covering the outlook for finding, development and acquisition costs, along with the emergence of new technologies and new knowledge, are seen as grounds for hope.
FirstEnergy analyst Darren Engels put to the test claims that U.S. shale players have a huge edge over WCSB producers, noting the U.S. plays have received a “lot of attention for massive land positions, enormous initial production rates and low costs.”
To determine the “true results” he stacked up some Canadian companies with a significant weighting to gas resource plays, or that have significant amounts of gas in place, against a few U.S. producers with shale plays.
No clear-cut winner Engels found there was no clear-cut winner based on three-year average FD&A costs and cash flow recycle ratios.
Based on 2008 results, he said there was little to separate U.S. players such as Chesapeake Energy and EOG Resources from Canadian producers such as Trilogy Energy Trust, Strom Exploration, Peyto Energy Trust, ARC Energy Trust, Birchcliff Energy and Celtic Exploration.
Applying the three-year average he drew a similar conclusion when stacking EOG, Chesapeake and XTO Energy against Peyto, Storm, Celtic, Birchcliff, Trilogy and Progress Energy Resources.
While some U.S. players were nearer the top end of the spectrum, there was not much to differentiate them from Canadian companies.
Engels concluded it is “far too early to say that the U.S. shale players have better costs and better recycle ratios than Canadian players.”
He said U.S. producers are “at the better end of the spectrum, but they’re not a heck of a lot ahead of the lower-cost producers in Canada.”
However, he conceded there is still a lot to learn about gas resource plays, including future development capital needs, operating costs, decline rates and what government incentives will be available to keep different regions competitive.
In summary, he said it is “just too early in the game to say there are a true winner and a true loser, whether it’s north or south of the (Canada-U.S.) border.”
Drop in costs forecast A FirstEnergy presentation by Engels and Steven Paget on FD&A costs forecast a possible drop of 25-35 percent this year from the all-time peak in 2008.
Their report pointed to an average US$16 per barrel of oil equivalent of proved plus probable reserves from last year’s US$22.72.
But Engels cautioned that the slump in exploration drilling could reduce reserve additions this year, affecting FD&A costs and recycle ratios.
Confident that the emergence of resource plays, new technologies and new understanding will yield better costs and recycle ratios, he said that could also lead to a positive impact on costs and reserve additions in more mature conventional plays.
Engels said reduced exploration also puts downward pressure on service and capital costs that should last until commodity prices improve and stabilize.
He said gas prices will take longer to recover than oil as production declines eat into the supply bubble that has pushed prices under US$4 per million British thermal units from US$13 last summer.
Unconventional competitive Peter Lindner, president of DeltaOne Capital Partners, said gas from Canada’s unconventional sources is competitive with the U.S., but conventional gas is uneconomic and will clearly decline for a number of years.
Greg Stringham, vice president of the Canadian Association of Petroleum Producers, said that as Canada improves its technology and builds gathering and transportation infrastructure to its unconventional resources “it will be back to a much more competitive shale-gas-on-shale-gas competition.”
Mike Dawson, president of the Canadian Society of Unconventional Gas, said WCSB gas is being “challenged to be competitive relative to other supplies in North America, predominantly the shale supply basins of the U.S. Midwest and Southern U.S.”
Over the long term “we are seeing the decline of natural gas production in Western Canada being driven primarily because of lower gas prices and a lack of competitiveness in the North American market.”
Dawson said the higher transportation costs and shorter exploration season in Canada has been further eroded by Alberta’s new royalties.
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