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A lady gone Ladyfern production dropping steeply after only a few years Don Whiteley Petroleum News Contributing Writer
Picture four 10-year-old boys — each with a straw, but only one milkshake — and calculate how long it will take for the milkshake to disappear.
About four seconds?
That sums up British Columbia’s prolific Ladyfern field — a small-area Slave Point natural gas reservoir with spectacular pressures, porosity and permeability that’s as good as it gets, and four big, well-financed companies sinking wells as fast as they could.
A virtually unknown swamp in northeast British Columbia until 1999, Ladyfern appears likely to set records for speedy exploitation of a major resource — from major discovery to low-volume backwater in five years. Fingers are now being pointed over its rapid depletion.
“It’s a national disgrace,” says veteran Calgary oil and gas analyst Ian Doig, “Greed has won out.”
American giants Murphy Oil & Gas and Apache, along with Canadian heavyweights Canadian Natural Resources and EnCana — are well on their way to sucking Ladyfern dry.
British Columbia Energy Ministry records show that Ladyfern production peaked in March 2002 at an impressive 665 million cubic feet of gas a day, and is now pumping out less than 200 million a day. Calgary-based First Energy Capital Research Director Martin Molyneaux says it will be done by the end of 2004.
Where were the regulators? A debate now rages over whether or not there should have been more controls over production, and whether or not quick profits were realized at the expense of a longer, and perhaps more valuable production life.
Doig pulls no punches. He believes that both the government and the producers were so eager for the spectacular profits and royalties that they abandoned any thought of conservation for the quick hit.
“When a discovery like this comes along, the producers blow their brains out and there’s no such thing as conservation,” Doig says. “Certainly if we went back 10 years ago, it wouldn’t have occurred. Regulatory agencies would have told them what they could produce. Where were the regulators?”
Steve Roberts, British Columbia’s assistant deputy minister of Energy, takes issue with that comment: “there was no conservation issue at Ladyfern. Our engineers were satisfied that restricting gas production would only slow down the flow; it wouldn’t get more gas.”
Roberts said the government encouraged industry to reach an agreement to cap production at 750 million cubic feet per day.
“They reached it on their own,” he said. “We have the authority to do it, but we leave industry to deal with these things, unless there’s a resource conservation issue to deal with — which there wasn’t. The rate at which gas was produced is a nature of the reservoir. Ladyfern is very porous, and permeability is as good as it gets.” Was agreement too late? But Doig suggests that the agreement was too late, and that such a rapid depletion is costly to the owner of the resource.
“So who is the loser? In this case, it’s the citizens of B.C.,” he said. “A lot of money flowed in, but if you work it out, a lot more money could have flowed in if they had something called good conservation methods attached. Each company says they made money, but when you ask them ‘could you have not made more money,’ they don’t deny that.”
Doig has a point. At Ladyfern’s production peak more than a year ago, gas prices were about $3 per thousand cubic feet. A year later, with Ladyfern production down by 70 percent, those prices had more than doubled. At today’s gas prices, gross revenues from Ladyfern at peak production rates would be $4 million per day, as opposed to $1.2 million per day at current production levels.
Analyst Molyneaux isn’t so sure: “It is a big reservoir, but it doesn’t cover a huge areal extent,” he said. You’ve got four companies that put straws into this thing and pulled on them hard. We’ve modeled this out and we can’t make the case that it was done too hard, not with what was known at the time. In hindsight, maybe you could have been a little more gentle.”
Molyneaux also points out that Ladyfern’s production was a North American lifesaver — providing a huge incremental volume of gas at a time when demand was extremely high and other supplies were in decline, or at best staying flat. “I don’t know where we would have been without it,” he said. EnCana: it took a lot of capital Michael Graham, EnCana’s senior vice president, Foothills region, says the rapid rate of production was definitely a result of competition among the four big players.
“Oil companies would normally develop it on quite a bit longer life,” he said. “I don’t think we’ve lost anything; we’ll ultimately get our share. But we’ve done it quite a bit quicker spending quite a bit more capital than maybe we would have liked.”
All the players went to ridiculous, and costly, lengths trying to get an upper hand on what looked like a spectacular find (some of the first wells flowed at unheard of rates of 100 million cubic feet of gas per day). Analyst Molyneaux described the rush as “hand to hand combat.” Not the first evaporating gas discovery This isn’t the first time British Columbia has seen a spectacular natural gas discovery evaporate. In the 1970s Amoco Petroleum made two huge natural gas discoveries called Beaver River and Pointed Mountain — a mountain range to the west of the current Ladyfern discovery. But before any gas started flowing, the gas reservoir became flooded with water, making it impossible to produce the gas. Westcoast Transmission (now Duke Energy) suddenly lost more than 30 percent of its required volume. At the time, under total regulation, Westcoast did all the contracts for export sales and ran the main gas transmission line through central British Columbia, connecting with U.S. markets through Sumas, Wash.
The Ladyfern problem, fortunately, won’t cast the same long shadow. British Columbia’s productive capacity has already made up for the decline, and is expected to keep growing.
“If you look at drilling success, in the last six months, a lot of it has been on the B.C. side of the border,” says Molyneaux. “A growth of somewhere between 2 percent and 5 percent over next five years looks doable. Northeast B.C. will be very active for quite a while yet.”
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