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U.S. hopes for new gas supply basin on shaky ground ChevronTexaco, Shell Canada abandon costly wells off Canada’s East Coast, but remain confident about area’s potential; Marathon partnership not sure deepwater wildcat discovery is commercial; June call for bids cancelled Gary Park PNA Canadian Correspondent
Setbacks have outnumbered successes in the hunt by some of the world’s most skilled offshore operators for new, long-term natural gas supplies off Canada’s East Coast to serve the burgeoning U.S. Northeast market.
Even for those who believe exploration wells in such a geologically and environmentally challenging region have no better than a one-in-five chance of success, this year’s drilling record has verged on a flop.
In less than four months the high-cost exploration program on the Scotian Shelf has seen the following developments:
• In May, Shell Canada Ltd. abandoned a C$90 million well, extending the list of dusters to five.
• ChevronTexaco Corp. (in partnership with Petro-Canada and Conoco Inc.) walked away on Aug. 20 from a C$79.5 million well, declining to go public at this stage with the results.
• A partnership of Marathon Canada Ltd., EnCana Corp., Norsk Hydro Canada Oil and Gas Inc. and Murphy Oil Co. Ltd., although claiming on Aug. 13 a gas discovery from a deepwater wildcat well, says it needs to conduct more seismic and drilling before deciding if it has a commercial find.
• The Canada-Nova Scotia Offshore Petroleum Board, after reviewing the nominations it received, cancelled a call for bids scheduled for June.
Consultant upbeat One of the rare notes of optimism amid growing unease among investors and industry watchers has been delivered by Calgary-based consultant Ziff Energy Group, which is upbeat about chances of future successes as knowledge of the region expands.
In an Aug. 8 report, Ziff forecasts that production will triple to 1.6 billion cubic feet per day by 2006 and more than 2 billion cfd by 2010.
It also believes the Scotian Shelf holds substantial potential for reserves of about 50 trillion cubic feet, compared with the Geological Survey of Canada’s estimate of 20 tcf, which Ziff says is based on a very localized area.
Hope for the short-term is now focused on a junior explorer, Canadian Superior Energy Inc., and its new-found partner El Paso Oil and Gas Canada Inc. On July 6 they spudded Marquis L-35, an exploration well which is now at about 14,900 feet, or 1,800 feet short of its licensed depth.
Canadian Superior shares plunge But the string of high-profile failures and uncertainties washed over on Canadian Superior, whose shares plunged 25 percent in the two days after the ChevronTexaco announcement shares, angering company president Greg Noval.
He insisted that ChevronTexaco’s decision to abandon has been widely misconstrued, saying: “Our sources indicate that Chevron is very happy with the well (Newburn H-23 which was drilled to a depth of 19,900 feet).”
Scott Davis, manager of ChevronTexaco’s eastern Canadian business unit, said the company remains “upbeat” about the area’s potential; and was not sending out any message that it was throwing in the towel.
“We’re not going to say what we found there,” he said. “People are going to have to read between the lines.”
Brian Prokop, an analyst with Peters & Co. in Calgary, said the abandoned well is a “failure, absolutely,” partly because up to 90 percent of wells in such deep water would likely be failures.
Gord Currie, an analyst with Canaccord Capital Corp., cautioned against any panic response to the ChevronTexaco announcement, pointing to the Marathon/EnCana deepwater find from the Annapolis G-24 well.
However, had that also been a failure, the industry might have started to back away from commitments to spend C$900 million over five years exploring the Scotian Shelf.
Unease over Deep Panuke While debate and speculation swirls around these latest developments, there is growing unease in some quarters over the future of EnCana’s highly-touted Deep Panuke find, now rated at 935 bcf.
It has been targeted for start-up in 2005 at 400 million cfd — all of those volumes destined for the U.S. Northeast — as the second producing gas field after the Sable Offshore Energy Project.
But Sable — owned by ExxonMobil Corp., Shell Canada, Imperial Oil Ltd., Pengrowth Energy Trust and Mosbacher Operating Ltd. — has experienced its own setbacks this year. In production since the end of 1999 at peak volumes of 525 million cfd, the bulk exported to New England, Sable has been buffeted this year by its partners announcing dramatic downsizings of their Sable reserves by 14 to 27 percent from the original 3.5 tcf.
To keep raw gas output at current levels, a new field is expected to come on stream in 2003, rather than 2007-08.
The fact that offshore Nova Scotia has gone without an oil or gas discovery for 15 years means optimism in the region is diminishing.
On top of the disappointing drilling record, concerns are surfacing about slow progress on EnCana’s Deep Panuke plans to bring 400 million cfd into the delivery stream by early 2005.
Regulatory process lagging The regulatory process is lagging behind schedule. A Canadian Environment Assessment Agency has missed a mid-2002 deadline for handing down a decision, with no indication when one can be expected.
The Canada-Nova Scotia Offshore Petroleum Board was to have completed its review of the projection description by the end of 2002 — a timeline that also seems in doubt.
Meanwhile, analysts have started to raise questions about some of Deep Panuke’s numbers, especially assumptions that the field would have a plateau production rate of 400 million cfd for the 11.5-year life span of the project. But a production profile submitted to Canada’s National Energy Board indicates maximum volumes may last only three years before sliding to 200 million cfd in the sixth year and average only about 223 million cfd over the projected life span.
Even EnCana, in releasing its second-quarter results July 25, said a slower-than-expected regulatory process could affect plans for commercial production in 2005.
Some industry observers have suggested that unless EnCana makes a major discovery, or is able to find a partner, Deep Panuke could quickly find itself on the shelf.
How serious those speculations are could get a thorough airing, starting Sept. 30 when the National Energy Board starts hearing an application by Maritimes & Northeast Pipeline (which is 75 percent owned by Duke Energy Corp.) to expand its existing pipeline from the Sable Offshore Energy project by 80 percent to handle the forecast Deep Panuke output.
Leading the tough questions could be Canadian Superior, which obtained late intervener status over the strong objections of M&NE and whose El Paso partner is proposing a US$1.8 billion pipeline to compete with the Maritimes & Northeast system.
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