Providing coverage of Alaska and northern Canada's oil and gas industry
November 2010

Vol. 15, No. 45 Week of November 07, 2010

LNG comes into focus

Shale raises export interest; Shells says costs must fall to make projects viable

Gary Park

For Petroleum News

The vigorous pace of shale gas activity in northern British Columbia is being accompanied by an expanding debate over the prospects of production from that region being exported as liquefied natural gas to Asia.

Marvin Romanow, chief executive officer of Nexen, told analysts Oct. 28 that the Calgary-based independent is weighing the prospects of joint ventures to develop its rapidly expanding holdings in the Horn River, Cordova Embayment and Liard plays and LNG opportunities.

Without making specific reference to any LNG project, he made it clear that Nexen is interested only in partnerships with companies that are capable of multiyear investment programs to build capital infrastructure.

The one LNG venture that is currently on the table is the proposal to build a terminal at the northern British Columbia port of Kitimat, a scheme operated by Apache with EOG Resources as a joint-venture partner, with the objective of converting 700 million cubic feet per day of gas into LNG, possibly as early as 2015.

Apache and EOG have cautioned that there is a long way to go in arranging gas suppliers and end-use customers and dealing with formidable opposition from First Nations and environmentalists to an overland pipeline to Kitimat and tanker traffic off the British Columbia coast.

But quiet headway is being made on the commercial side, with four other producers signing memorandums of understanding to deliver gas to the project.

Shell sees growing demand

However, the challenges to be overcome were laid out Oct. 28 by Lorraine Mitchelmore, Royal Dutch Shell’s top executive in Canada, who said the cost of developing gas in Canada must be reduced before the fuel can take advantage of a global LNG opportunity.

“Our view is that global gas demand could rise by one quarter by 2020 and almost 50 percent by 2030,” she told the Calgary Chamber of Commerce.

She said that forecast is underpinned primarily by forecasts that China alone wants to more than double the share of gas in its energy mix to about 8-10 percent by 2020.

“As a result, within a decade China’s annual gas demand could be comparable to half of the current U.S. demand,” Mitchelmore said.

“This is part of the reason why, even in these difficult times, China and other Asian countries remain keen to secure supplies through long-term contracts.”

She said the world has enough “technically recoverable” gas to last 250 years at current production rates, much of it stemming from the acceleration of shale gas production.

Costs need to come down

Mitchelmore said the difference between gas prices in North America and Asia (where the price is tied to oil) is sufficient to justify construction of an LNG export terminal on the British Columbia coast.

“But we’ve got to think about ways to drive our costs down as a country to attract the Chinese and other Asian countries to enter our market,” she said. “It’s very important for us to access that growing market.”

Shell, which doesn’t provide a breakdown of its Canadian production, is a key player in the Montney and Deep basin plays of northern British Columbia and Alberta, after paying C$5.8 billion in 2008 to take over Duvernay Oil.

Mitchelmore also argued that the gas sector is “hampered” by the existing infrastructure and must find a timely way to open up new markets for Canadian energy, notably through Enbridge’s Northern Gateway project to ship oil sands bitumen to Asia, TransCanada’s Keystone pipeline from the oil sands to the U.S. Gulf Coast, the Mackenzie Gas Project and an LNG export terminal.

Nexen land holdings up

Nexen has more than tripled its land holdings in northeastern British Columbia, moving this year from 90,000 acres at Dilly Creek in the Horn River basin to more than 300,000 acres in Horn River, Cordova and the newly emerging Liard play.

It is now on track to start Horn River production this winter, with an initial target of 50 million cubic feet per day from Dilly Creek, where recoverable gas is estimated at 3 trillion to 6 trillion cubic feet, based on a 20 percent recovery factor. Romanow promised to release estimates of his company’s “resource potential” for its complete B.C. prospects within the next month.

The company reported that it has recently completed a 144-well fracture program on an eight-well pad at an industry-leading 3.5 fracs per day with 100 percent success.

He indicated Nexen favors 18 fracs for each horizontal well, with the laterals extending about 1,800 meters, estimating the cost of a nine-well pad at C$115 million.

“The economics are very strong,” he said, while cautioning that Nexen was “still on a learning curve.”

Nine-well pad this winter

Romanow said a nine-well pad will be drilled this winter, with first production targeted for the final quarter of 2011, while an 18-well pad is expected to come onstream in late 2012.

“Our performance in Horn River continues to be top quartile with the successful execution of our drill and frac strategies,” he said, adding the pay is expected to earn a 10 percent rate of return with gas prices at US$4 per thousand cubic feet.

Romanow said Nexen has had a number of unsolicited approaches from companies eager to take a stake in British Columbia, but emphasized his company will move carefully before doing any deals.

“We don’t have to do a joint venture, but we will look at offers when somebody can bring more than cash to the table,” he said.

Nexen also disclosed that it has been one of the successful bidders for land rights in the Liard basin, joining Apache and EOG, along with a handful of junior companies.

So far this year, companies have invested about C$110 million in Liard land, or about 14 percent of the total successful bids at government auctions, adding to about C$80 million in the previous two years.

Liard and its associated Fold Belt region cover more than 3 million acres and extend into the Northwest Territories and Yukon as part of the Western Canada Sedimentary basin.

Analysts and government officials rate the Liard shales as similar to, although deeper than those of Horn River, pointing to the need for more exploration to evaluate the commercial prospects.

The government says Apache and EOG have completed drilling wells, but have yet to release any results.

Transeuro Energy, which is also active in Ukraine and Armenia, has tentatively set a capital budget of C$15 million for Liard in 2011, although its spending will depend on results at its other operations.

Transeuro Vice President David Parry said two of the three wells drilled at Liard have been producing for two years and four years.

Edward Kallio, director of gas consulting at Ziff Energy Group, said it is too early to be certain that Liard shales can be fractured to release gas in commercial volumes.

But the B.C. government hopes producers will be able to apply lessons learned at Horn River in the Liard play within two or three years.

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