Deep Panuke back from Deep Six

Nova Scotia-EnCana strike deal on benefits, royalties, R&D funding for what would be province’s second offshore gas project

Gary Park

For Petroleum News

Deep Panuke is off life support and breathing on its own, but the future of Nova Scotia’s second offshore natural gas project is not yet certain.

After several days of ill-disguised provincial government build-up, there is new reason to believe that the EnCana venture is back on track after being sidelined in early 2003 pending efforts to improve the economics by finding more reserves and seeking better fiscal terms.

In a deal announced June 30, the Nova Scotia government and EnCana signed a framework package covering benefits, royalties and funding for research and development, wrapped in a guarantee of 1.35 million hours of work in the province, with 850,000 hours going to Nova Scotians.

The royalty rate is 2 percent of gross revenue until project payout when the rate would progressively rise to 32.5 percent.

Nova Scotia Premier Rodney MacDonald estimated his government could collect C$414 million in royalties over the projected 10 to 12 year operating life of the field, plus C$60 million in corporate taxes.

All that hinges on regulatory approval and a green light from EnCana’s board of directors in 2007.

But EnCana was typically measured in its enthusiasm.

Dave Kopperson, the company’s vice president for Atlantic Canada, said the pact is a “very good first step in restarting development,” although there is “plenty more work to do to make Deep Panuke production a reality.”

Filings due this summer, later in year

The project size, reserves, production volumes, timetable and capital costs will await the development plan.

A company spokesman told reporters that a mixed bag of success from exploration wells over the last three years has convinced EnCana is does not need more gas to proceed and given it a better understanding of the reservoir.

When progress was halted, the project involved spending of C$1.1 billion to tap about 935 billion cubic feet of reserves, yielding about 400 million cubic feet per day. Since then, Deep Panuke has been the only immediate hope of keeping the Nova Scotia waters viable with the Sable project showing a rapid decline in reserves and production, which fell to 320 million cubic feet per day in May.

Kopperson said a revised capital costs will be considerably less, but wouldn’t disclose the number.

Jim Gogan, an attorney for the government through the negotiations, said the reserves figures have been downscaled “significantly” since original projections.

The EnCana spokesman left no doubt that Deep Panuke could be sold, reaffirming earlier messages from EnCana executives that the company has no desire to be the long-term operator of a field that is not part of its strategic thrust.

That keeps the spotlight on Shell Canada, which analysts believe is eager to obtain more reserves to support its 31.3 percent stake in Sable.