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Shale gas spreads wings beyond BC Alberta anticipates land sales bonanza, possibly topping C$1B; Quebec test results could unlock new play, fuel junior share surge Gary Park For Petroleum News
Canadian shale gas development is set to breaks out of its British Columbia confines, propelled by expectations of blockbuster March land sales in Alberta and initial success from a test well in Quebec.
The quiet stirrings of interest in the Devonian Duvernay play in northern Alberta could turn into a full-scale upheaval at the government’s March 10 and March 24 land sales.
Chris Theal, managing director of energy with Macquarie Capital Markets Canada, estimates the first sale could generate successful bids of C$800 million-C$900 million and the second offering could push the total over C$1 billion — a welcome turnaround after two years of rapidly shrinking returns from the auctions.
The government has posted 416 parcels covering almost 818,000 acres on March 10 and 379 parcels totaling 706,000 acres on March 24, with the bulk of the acreage located east of Grande Prairie in the shale formation.
The first signs of action occurred at a December sale when the government collected C$384 million from 480,000 acres, more than doubling its 2009 sales revenues.
No completed wells Theal is not yet prepared to put the Duvernay shale in the same league as British Columbia’s Horn River basin, noting the play has many deeper wells, while there is no record yet of a completed well.
But he told a Canadian Energy Research Institute natural gas conference Feb. 22 that “anytime you see a big block go up like (the December sale) in an otherwise dead year of activity, red flags go up.”
Theal suggested that the fast-evolving shale gas technology “could open up another resource play” in the Western Canada Sedimentary basin.
For Alberta to enter the shale age, the provincial government must take the time to understand how it can compete in the resource, where it “falls short,” then simplify its royalty regime.
Theal said that means providing the industry with a royalty framework “that allows risk takers to recover capital costs up front, make a rate-of-return over the medium-term and ensure the government gets a good return on its resources.”
He pointed to British Columbia as an example of how to succeed, noting the Montney play is expanding because of changes in deep-well incentives, while Horn River scales of economy continue to improve
‘Emerging potential’ Mike Dawson, president of the Canadian Society for Unconventional Gas, told the conference that interest in the Duvernay points to industry confidence that “there is a huge, emerging potential” shale play that could amount to two or three plays the size of Horn River.
In addition, Alberta has lightly explored deep Colorado plays that “may have some good potential,” he said.
Dawson said Alberta’s shale gas will be challenged by fierce competition from unconventional gas in the United States because Alberta’s finding and development costs are higher due to seasonal restrictions.
He said that what Alberta does this year with its “competitiveness review” will be a critical factor in reviving the gas industry and promoting a concerted industry-government investment in research and development of technologies.
Those assessments came on the heels of comments by Mike Graham, president of EnCana’s Canadian division, who told analysts the Alberta Devonian shale could emerge as a big play.
Related or not, EnCana Chief Executive Officer Randy Eresman teased the same analysts when he said his company is capturing land in a “new prospective shale gas play in Western Canada.”
When one caller said analysts were eager to learn more, he said: “And so they should be,” but refused to drop any more hints until the specifics were in place.
Quebec different case Quebec is a totally different case. It has no record of commercial development and doesn’t even have a regulatory system for distributing oil and gas leases.
But it also appears to be on the verge of a breakthrough in the Utica shale play, with word Feb. 22 that a horizontal well flowed at initial production rates of 12 million cubic feet per day and averaged 6 million cubic feet per day, giving an immediate boost to shares of companies operating in the play.
The well was drilled by Talisman Energy and junior company Questerre Energy.
Questerre Chief Executive Officer Michael Binnion dropped a hint in mid-January when he told a Norwegian newspaper that his company was involved in a “giant discovery of shale gas ... a ‘pinch me in the arm, I hope I’m not dreaming situation.’”
He said Feb. 22 that the initial rates from the well “exceed our internal threshold for commercial production on a per well basis, based on targeted development costs.”
Despite the sudden drop in volumes from the well, Talisman is moving ahead with three more wells this year, with Chief Financial Officer Scott Thomson conceding his company doesn’t know a lot about Quebec yet “because we’re still in the early phases.”
But Questerre is eager to tout the prospects, estimating the Utica region holds more than 20 trillion cubic feet of recoverable gas, giving it a place “among the top 10 shale deposits in North America,” said Binnion.
However, he, too, agreed it might take many years to determine the accuracy of those numbers.”
“One well is not proof that you can take down to the bank and get a loan,” he said.
Spotlight on government The spotlight is also landing on the Quebec government, to determine whether it is prepared to follow British Columbia’s example and offer incentives to build infrastructure.
Interest is also spreading to the neighboring province of New Brunswick, where early exploration — like elsewhere in North America — bypassed shale rocks, but where the potential is viewed as considerable. That in turn opens the door to Nova Scotia and Newfoundland.
In the immediate fallout from Quebec, shares of Questerre soared 36 percent to C$5.05 and other players — Canadian Quantum Energy, Junex and Gastem — made gains of 30-35 percent.
Forest Oil, although shedding some of its Canadian assets, said it will shoot seismic in the Utica shale once the snow melts in preparation for a horizontal well expected to spud this year.
Chief Operating Officer J.C. Ridens told a conference call that “our large acreage in Quebec has excellent terms, a favorable royalty and tax regime. This, combined with a premium gas market, results in an enviable position for Forest.”
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