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EnCana to EnTexas? CEO insists there is no tie between Texas investment, Alberta royalty hikes, but… Gary Park For Petroleum News
On Sept. 28, EnCana Chief Executive Officer Randy Eresman dumped gasoline on the blazing Alberta royalty debate by warning that if the government review panel’s recommendations were adopted in full many of the province’s new and emerging resource plays would not be economically viable.
If that happened, Canada’s leading gas producer, would “have no choice but to slow down our Alberta-based activity and move investments to other areas of Canada and the United States that are more economically attractive.”
That was accompanied by the threat of a US$1 billion cut in 2008 spending.
On Nov. 5, Eresman announced that EnCana was buying out its 50 percent partner in the Deep Bossier natural gas play in east Texas for US$2.55 billion.
But he was emphatic that there was no link between Alberta’s proposed new royalty regime and the Texas move.
“It is a normal strategic event,” he said. “This transaction has nothing to do with EnCana’s future plans as they relate to the Alberta government’s new royalty framework.”
In fact, EnCana has repeatedly said it needs more time to figure out the impact of the 20 percent across-the-board hike in Alberta royalties by 2010 and what affect that will have on its investment plans.
Eresman said the answer won’t be made public until December when his company releases its capital spending for 2008.
However, he said “high risk exploration and development activity, particularly for projects that require higher commodity prices to be economic, will be challenged under the new regime.”
Eresman said the decision to buy out its Deep Bossier partner, privately held Leor Energy, should not be seen as a signal that EnCana wants to raise investment outside Alberta.
But he also said the many opportunities generated by the Deep Bossier acreage and potentially other zones and play types could result in divestitures of lower-quality assets, without specifically placing Canadian properties on that list.
Deal one of EnCana’s largest Taken on face value, the deal is one of the largest in EnCana’s history, giving it full control over the Amoruso field, which Eresman said has the “potential to be the leading resource play in our North American portfolio.”
The value of the field to EnCana is evident from its progressive acquisitions, starting at 30 percent in July 2005 and moving to 50 percent in June 2006, with the second chunk costing US$243 million.
But Moody’s Investors Service said EnCana is “paying an aggressive price” of $18 per boe for finding and development costs — “substantially higher than the company’s 2006 three-year all-sources F&D costs.”
It noted there is “substantial execution risk, as these estimated incremental reserves (of 1.3 trillion to 1.8 trillion cubic feet of gas) will need to be proven over time and will require additional capital spending.”
“Furthermore, the acquired field has a number of technical challenges, including reservoir characterization, high pressures and completion techniques,” Moody’s said.
Deep Bossier wells cost $10M Jeff Wojahn, president of EnCana’s U.S. operations, told a conference call Deep Bossier wells have already cost EnCana about $10 million each to penetrate depths of 15,000-20,000 feet and tap wells with reserves of 8 billion to 13 billion cubic feet.
He expects those costs will drop by about $1 million in 2008 with more efficient well designs and improved drilling and completion techniques.
Offsetting some of the technical challenges, EnCana qualifies for the 10-year production tax holiday available for deep wells in Texas, combined with operating and capital costs that are lower than in Western Canada, plus easier access to pipelines and markets.
Canaccord Adams analyst Richard Wyman said the cost structure in East Texas yields profits in the range of $6.30 per thousand cubic feet of gas (based on projected gas prices of $7.50). He said that translates into roughly double the net earnings available in Canada per barrel of oil equivalent sold.
EnCana said Amoruso holds some of the largest producing onshore U.S. gas wells of the past five years, with initial output from two wells exceeding 50 million cubic feet per day and the most recent well reaching 65 million cubic feet per day.
The Deep Bossier wells intersect shale and sandstone formations that are 2,000-3,000 feet thick, the company said.
Those are similar to the deeper, complex, high-cost wells whose economics EnCana suggests will be negatively impacted by Alberta’s new royalties, even though the government is offering some breaks for deep and unconventional drilling.
EnCana expects production from Amoruso to top 220 million cubic feet per day by the end of 2007 and average 315-355 million cubic feet per day in 2008.
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