Tuesday, June 14, 2011

Gas to Gold

Talisman Energy is pinning its shale gas market strategy on proven gas-to-liquids technology

This article appears in the second volume of CSUG's Energy Evolution Guidebook & Directory
By Peter McKenzie-Brown
It’s hard to match Colin Soares’ bragging rights. The Calgary-based engineer was president of the company that demonstrated the shale gas potential of the Montney formation.

The way he tells the story, “from some work we’d done (with Home Oil subsidiary Scurry Rainbow) in the late 1980s. We originally thought it was the source rock, a number of us believed that the Montney formation contained an abundance of hydrocarbons to deliver, and we set out to prove it up.”

He led the formation of a private company, Rocor Inc., with initial funding of $2 million, although during the company’s brief life it raised an additional $15 million.

“Our mandate was to prove this idea, then to hand over the keys to a company with deep pockets, as it takes an awful lot of capital to develop these plays with horizontal wells. To do a job like this and become a producing company you would probably need $50 million to $100 million.”

Rocor demonstrated the existence of wet shale gas with vertical wells only. “As we were drilling we had a lot of condensate coming in and killing the well.”

The company’s thinking was strategic in several ways. “We bought 14 sections of land between two rivers,” says Soares. “Whoever owned that land could control things when they started planning facilities. When word got out about what we’d done, land prices all around us really started to go up – like in any real estate boom. We were the first in the area drilling for this resource, but obviously people with deeper pockets soon overtook us.”

In October 2008, Rocor sold out for $50 million to PetroBank, which promptly drilled a horizontal well that produced 8.5 million cubic feet of gas plus 350 barrels of condensate per day – “tremendous results,” according to Soares.

What to Do with Shaley Plays
At least part of the significance of Rocor’s efforts was that it illustrated the tie between tight gas and shale gas. According to Dave Russum, AJM Petroleum Consulting’s geoscience vice president, the Montney is a case study in a kind of “hybrid” natural gas resource – a hydrocarbon formation halfway between gas from tight sands (the prospect Scurry Rainbow had originally been investigating) and shale gas pure and simple. In fact, according to Russum, these prospects are best described as “shaley plays”. They contain shale and sand in relatively larger and smaller percentages, but whether they are more like tight sand or shale gas they require fraccing to yield economic production.

In a real sense, the shaley gas plays are an extension of Canadian Hunter Exploration’s Deep Basin tight gas developments of the 1970s. Montney occupies one end of the shaley gas spectrum, and partly includes old-fashioned tight gas. Horn River, which taps the Muskwa shales in a basin just south of the Northwest Territories and just west of Alberta, is a picture-perfect shale gas play. According to Russum, it may prove to be the biggest shale gas play in North America.

Of course, in an environment of rapidly expanding gas supply the key issue is what to do with the stuff. In recent months, Talisman Energy has placed two major bets on the use of GTL (gas-to-liquid) technology, which transforms natural gas into a combination of high-quality liquid fuels and petrochemical feedstock.

This effort began last December, when Talisman announced a billion-dollar joint venture on its Farrell Creek property in the Montney. In March, the company announced a similar deal in respect to its Montney area Cypress A properties. On behalf of the partnership, the Calgary-based oil company will operate the Cypress A and Farrell Creek projects as integrated development projects.

Talisman’s partner in both ventures is petrochemical giant Sasol, which honed its expertise in turning coal and natural gas into liquid fuels during an international oil boycott imposed upon South Africa during Apartheid. Che company’s two South Africa coal-to-liquids (CTL) facilities represent the largest and most profitable asset in Sasol’s portfolio.

Sasol and Talisman are investigating the economics of building North America’s first gas-to-liquids plant. In cautious news release language, the companies agreed to undertake feasibility studies “to examine a world scale gas-to-liquids (GTL) facility in Western Canada, with Talisman having the option to participate as a 50% partner in the facility. This could provide a strategic alternative to traditional North America pipeline or LNG markets. The GTL process produces premium, clean liquids fuel. Sasol is leading this study with a front-end engineering design decision likely in the second half of next year.”

Put another way, a decision on whether to proceed with an engineering design for the Canadian project is expected in 2012.

The Talisman/Sasol plant would turn Western Canadian gas into value-added liquid fuels and petrochemical feedstocks. Converting natural gas into liquid fuels is particularly attractive now, given the prospect of an extended period of low natural gas prices in a high oil price environment. This solution could create diesel and other fuels that are used in automotive transport.

GTL, which will become increasingly significant as crude oil resources are depleted, is operational already in a number of Sasol plants around the world. In addition, super major Royal Dutch Shell produces diesel from natural gas in a factory in Malaysia. When finished, its Pearl GTL plant in Qatar, will be the world’s largest GTL facility.

Until recently, GTL only made sense in gas-producing regions which could not build pipelines to major markets. The reason it has suddenly become economical Western Canada, of course, is that despite ample pipeline capacity to American markets, British Columbia’s shaley gas projects have created huge supply surpluses at the end of one of the world’s longest gas pipeline systems. The plant, according to the two partners, could provide “a strategic alternative to traditional North America pipeline or LNG markets.”

In a corporate statement, Talisman CEO John Manzoni put it like this: “This transaction allows Talisman and Sasol to unlock additional value in the world-class Montney shale play and potentially accelerate development of the resources in the area. The Cypress A assets are very similar to Farrell Creek and, with our partner, we will now build an integrated long-term development plan for the area.”

Sasol chief executive Pat Davies added that “this additional acquisition of another high quality natural gas asset will accelerate our upstream growth while also potentially advancing Sasol’s already strong GTL value proposition utilizing our proprietary technology.” That pretty much sums it up.

Nature’s Gift to the World
In a presentation a year ago the boss of ConocoPhillips, James Mulva, called natural gas “Nature’s gift to the world.” Taking a shot at the unbendable greens – he called them “hydrocarbon deniers” – Mulva complained that “They support renewables at any cost, and oppose hydrocarbons at any consequence….They seem not to realize that platitudes are not BTUs.” Citing the environmental advantages of gas, he argued that industry and government should ensure that the world’s gas supplies are used to their full potential.

If they do, he argued, by 2050 natural gas will have potentially helped meet four great energy challenges: achieving US and world energy supply security; providing consumers with affordable energy; driving economic prosperity and job creation; and reducing greenhouse gas emissions. He argued that vast conventional and unconventional gas resources – more than 38,000 TCF globally, by some estimates – will ensure stable supplies and reduce the risk of long-term price volatility.

Within that context, much needs to be done to develop supplies and to develop markets for natural gas. Surely GTL will play an increasingly important role in exploiting nature’s gift.

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