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Firm makes case for conventional gas Ziff Energy Group lays out strategy to rescue ‘old’ gas from loss of production, capacity, jobs; push into resource plays continues Gary Park For Petroleum News
Encana has opened the door to as much as $2 billion per year of joint-venture investment to speed up development of its unconventional natural gas holdings.
ARC Energy Trust is buying Storm Exploration in a deal worth C$680 million in shares and debt, bolstering its stake in the Montney unconventional gas field in Western Canada.
Spectra Energy is responding to customer demand in the Montney play of northeastern British Columbia by unveiling plans for a new gas processing plant as part of a C$1.5 billion investment plan for British Columbia.
That flurry of action occurred in a four-day span in June, reinforcing, if it were needed, the growing tilt towards shale and tight gas in the region.
Ziff plea for rescue But those developments were accompanied by a plea from the Ziff Energy Group to producers and service companies to come to the rescue of Western Canada’s conventional gas, or face a sweeping and possibly lasting loss of production, industry capacity, jobs and government revenues.
In a 20-page paper, the consulting firm echoed the alarm bells rung by the industry’s minnows at a Small Explorers and Producers Association of Canada conference.
Ziff said conventional production could slump to 50 percent of the region’s total output by 2020 from its current 70 percent if the industry follows a business-as-usual strategy without taking a longer-term, strategic view.
Paul Ziff, the firm’s president, said that “as reserves are cannibalized to sustain current gas production levels, the proven reserve base is produced into a low gas price environment.”
“With low conventional gas drilling, concurrently the reserve base shrinks, thereby decreasing loan amounts, which can lead to a death spiral,” he said in a press release.
His paper praised the Alberta government’s latest round of royalty changes, but warned that unless the industry makes a shift of direction “then the overall size of the industry is guaranteed to progressively get smaller, hurting all stakeholders.”
“The reason is that annual production decline is large and the capital to replace reserves and production is mobile,” Ziff said.
He noted that many of the largest players are already abandoning conventional gas for resource plays or international oil.
Call for new type of alliance Ziff called for a change in industry practices from the current pattern of service companies hiking their rates when energy prices are high and producers taking advantage of drillers and service providers when prices are low — an up-and-down cycle that hurts staffing and equipment capacity.
Instead, he called for the adoption of “challenging” alliances and gain sharing to align the interests of producers and service companies.
Ziff cited as one example Wal-Mart’s strategy of lending efficiency specialists to suppliers to jointly reduce costs.
“It is time for producers and service companies to explore and implement new business relationships,” the firm’s paper said, citing the success of alliances in fracing, gathering and compression in opening up and developing a number of U.S. basins.
“The key is to create win-win outcomes, such as the incentive return contracts between producers and pipelines, or local distribution companies and customers, whereby the two parties share in savings achieved by the pipeline — in contrast to the traditional flow-through model where the producer, or end-use customer, bears all costs, and the operator has no economic incentive to be more efficient,” the paper said.
“With multi-year contracts, as opposed to bidding every winter-drilling season, there could be better planning and everyone could work toward a steadier program.”
Spin-off benefits would include hiring and retaining trained service-sector staff by offering year-round employment and reducing turnover, as well as creating greater efficiencies and safer operations.
The paper said Chesapeake Energy has shown the way by investing in service capacity, developing capacity in-house and buying a strategic supplier such as a frac company.
On the positive side, the consultancy said the industry has made progress in alleviating seasonality in drilling since 2003, with governments and industry associations taking steps to spread work through the year.
Ziff also recommends price hedging as a way to ensure predictable cash flow, capital programs and dividend payments from the “most volatile commodity in the world.”
“The goal is not to ‘beat the house,’ or try to outsmart the market, rather to generate predictability for investors and create a sustainable spending program,” the paper said.
Ziff also said it preferred to see production shut-in during price slumps, which may cause analysts to “squawk,” but is a temporary and discretionary measure to preserve shareholder value.
Relentless march However, the push into resource plays is on a relentless march, with Encana Chief Executive Officer Randy Eresman noting that his company has attracted interest from sovereign wealth funds, national oil companies and other atypical sources looking to buy into unconventional gas projects.
He said the wide-ranging offshore investors are eager to learn about what is happening in North America, with the prospect of taking those ideas back to their home countries.
Without offering specifics, he said Encana is considering “quite a few (deals) right now,” with the hope of attracting at least $1 billion of third-party money annually and possibly doubling that investment.
Eresman said Western Canada has already been able to attract “exciting” amounts of investment that can be applied directly to a company’s capital programs, including state-owned Kogas from South Korea, which will spend $565 million over three years to earn 50 percent interests in Montney and Horn River lands that might not otherwise have been developed.
Penn West Energy Trust has just negotiated a C$1.25 billion cash-and-equity infusion from China Investment Corp. to develop Peace River oil sands assets in Alberta that Penn West President Murray Nunns said would otherwise have taken a back seat in his company’s lineup.
He said foreign investment funds often have higher, long-term ambitions to secure both energy and technological know-how.
The ARC-Strom deal gives the trust daily production of 49.5 million cubic feet of gas, 9,861 barrels of oil equivalent and 1,556 boe of liquids from 43.2 million boe of proved plus probable reserves, boosting ARC’s 2010 guidance to 72,500-74,500 boe per day.
An estimated 84 percent of production comes from the Parkland Montney field, just eight miles northwest of ARC’s Dawson Montney play, which an independent report rates as being the “lowest cost unconventional gas play in Canada,” said ARC Chief Executive Officer John Dielwart.
Spectra’s new gas plant west of Dawson Creek is designed to process 200 million cubic feet per day of gas and will come on stream in two equal phases in late 2011 and early 2013.
The company said British Columbia gas production in the area is forecast to double and offers and further development opportunities.
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