Petro-Canada weighs Arctic LNG

Petro-Canada is not ready to forsake the frontier mindset that was part of its birthright when it was created as a state-owned company in 1975.

Chief Executive Officer Ron Brenneman told a company-sponsored investment conference that Petro-Canada is pondering ways to develop an estimated 12 trillion cubic feet of natural gas resources that it holds in Canada’s High Arctic.

Despite losing a bidding war in mid-2006 for Canada Southern Petroleum, which has an estimated 927 billion cubic feet of Arctic reserves, and despite the distance from market, Brenneman said his company is diverting a small investment to evaluate those holdings and look at ways to exploit them.

He said a “small team” has been formed to look at the feasibility of using liquefied natural gas.

“To me that makes a pretty ideal project,” he said, while conceding the challenge of producing the gas in a harsh climate and a sensitive environment.

He said there are environmental, technological and regulatory hurdles to clear, but “this is a project that I think makes a lot of sense from a resource point of view, from Canada’s point of view.”

In the heat of the battle for Canada Southern, Petro-Canada said it had no plans to develop Arctic gas because of the challenges — technology, fiscal regime, financial strength of potential partners, commodity prices and the lead time to initial production — that blocked the delivery of gas to market in a “reasonable timeframe.”

‘80s plan to ship LNG

That concept has gained some support from the Canadian Energy Research Institute which said three years ago that High Arctic gas could be developed by 2020, using LNG, compressed natural gas or gas-to-liquids, all of which it suggested could generate more than the 15 percent minimum rate of return needed to exploit 10.2 tcf of gas-in-place on Melville Island.

That study said LNG presented two options — tanker shipments to regasification plants in Nova Scotia or New Brunswick, or transshipping LNG from icebreaking tankers to conventional vessels in West Greenland, thus reducing capital costs for vessels and offering greater flexibility in the choice of markets.

On other, more immediate fronts, Brenneman said Petro-Canada was on the verge of correcting its public image of “overpromising and under delivering.”

“With the asset base and opportunities that we have, it’s all about execution,” he said. “We have to deliver on what’s in front of us.”

On the heels of record financial results in the first half of 2007, he said Petro-Canada is on track to boost production by 15 percent in 2008, putting it somewhere in the range of 400,000-420,000 barrels of oil equivalent per day.

Because of the company’s record of missed production targets, it has lagged behind its Canadian peers on the Standard & Poor’s/Toronto Stock Exchange energy index, returning 121 percent (including dividends) over the past five years, compared with the index average of 208 percent.

Brenneman said that although Alberta’s royalty proposals will see spending shift to other areas, such as the U.S. Rockies and Syria, the portfolio of oil sands projects remains viable.

He said the projects at Fort Hills and MacKay River will be affected by the royalty increase, but “it’s not sufficient to really impair the overall viability of them.”

“At this point, they still look like pretty solid projects and I think that’s because, for the most part, we’re dealing with very high quality resources and very good projects and they’re the ones that should survive the new royalty regime.”

Petro-Canada’s confidence in the C$14 billion Fort Hills venture was reinforced when it acquired an additional 5 percent from partner UTS Energy for C$375 million after the original royalty review panel report was issued in September.

Brenneman said the company is open to taking an even larger equity interest if one becomes available.

In addition, Petro-Canada has hired an engineering firm to evaluate the potential for a 300,000 bpd oil sands project at its Lewis lease.

—Gary Park