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

Vol. 15, No. 18 Week of May 02, 2010

Encana turns pitchman

Big producer sells gas as source of power, transportation fuel; campaign could have positive spinoffs for Arctic development

Gary Park

For Petroleum News

Leading North American natural gas producer Encana has its own motives for touting the wider, greater use of gas to generate power and fuel motor vehicles.

In the process, however, it could become an indirect lobbyist for development of Arctic gas in Alaska and Canada’s North.

Encana Chief Executive Officer Randy Eresman never lets a chance pass him by these days without pitching the cost effectiveness and environmentally sustainable advantages of gas over coal, noting that gas is now competing with coal as a fuel source for power generation in the United States.

“We think that could very quickly remove some of the current surplus supply,” he told analysts.

Eresman said the message is starting to be heard, but faces a challenge to win over utilities, who remember a few years ago when the gas industry put our dire warnings that it was running out of supplies.

He said that even Encana believed those forecasts until unconventional gas development in North America’s shale and tight deposits started taking place and, faced with indications of 100 years’ supply, it began looking at ways that would help support gas demand.

“We have a long-term reliable supply of natural gas in North America and the end use of this fuel makes the most economic and environmental sense in any efficient production mode,” he told Encana’s annual meeting.

Power generation

Eresman said the leading opportunity for gas is as a fuel source for power generation, noting there is excess capacity at gas generating plants, which are typically operating about 25 percent of the time compared with 80 percent for coal-fired facilities.

“There is a real opportunity to switch over,” he said. “The question has always been at what cost,” he said, adding that Encana is forecasting long-term gas prices of $6-$7 per thousand cubic feet.

Because of the current low price, gas is actually forcing coal out of the market and if a carbon tax or cap-and-trade system was imposed that pace could accelerate, he said.

Encana Chairman David O’Brien said the dramatic change in his company’s own reserves and resources amounts to a “real game changer,” but it will take time to convey that point to politicians.

“With the advantage in terms of clean energy of natural gas and its cost competitive nature, I think over the next period of time you will see a dramatic increase in the use of gas both in power generation and transportation,” he said.

Eresman told analysts that Encana is thinking about proceeding with $500 million of optional spending this year to advance its system of “gas factories” for its key resource plays by combining its technical gains, advanced manufacturing practices and operational abilities in regions such as Haynesville in the Texas-Louisiana area to demonstrate “what the future might be.”

For the first quarter of this year, the company’s combined operating and administrative costs were $1.02 per thousand cubic feet, about 18 percent below guidance because of lower field operating costs and long-term incentive costs.

The company said that in the emerging Horn River shale gas basin of British Columbia, operating efficiencies are making rapid gains.

They include drilling 16 horizontal wells from a single pad and 20 fracture stimulations per well, with laterals extending 8,500 feet.

Fueling stations needed

As part of its gas sales job, Encana is also asking the Canadian government for C$1 billion to kick-start the construction of a network of hundreds of compressed and liquid natural gas fueling stations along Canada’s busiest highway from Windsor, Ontario, to Quebec City.

It also wants federal tax incentives for trucking companies to convert their 18-wheelers from diesel to natural gas engines —an idea that a government spokesman said would get consideration as an “alternative and renewable” fuel source.

Eric Marsh, Encana’s executive vice president of natural gas economy, said natural gas is entering an age where it will be “abundant and affordable,” requiring more ideas for making gas an “acceptable fuel for the future.”

Despite all that enthusiasm, Jeff Wojahn, president of Encana’s U.S. division, said the scramble to develop shale has is attracting some “storm clouds,” as the global economic recovery raises steel prices by 6 to 8 percent this year.

Eresman conceded that “inflationary pressures are becoming a concern to us.”

But he also said the current gas price environment is “unsustainably low given what it costs to balance a normal market. Therefore, we plan to invest based on what we believe to be a more sustainable long-term price. Over the long-term, we are confident that we can profitably grow production as we work to capture market share from higher-cost producers,” he said.

And Encana sees no why reason why it can’t reach its goal of doubling gas output from the current 3 billion cubic feet per day within five years, he said.






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