Saturday, June 11, 2011

A sustainable future

Effectively marketing Canada's vast unconventional gas resources can help ensure global sustainability

This article appears in the second volume of CSUG's Energy Evolution Guidebook & Directory
By Peter McKenzie-Brown
If you want to understand how important unconventional gas has become, consider a couple of facts from EnCana – one of North America’s premier gas-producing companies.

According to company spokesman Alan Boras, in 2010 “we replaced 250 percent of our production. We (now) have14.3 tcf of proved reserves.” Of course, much of the company’s new reserves have come from its aggressive shale gas development. But consider this: “Coalbed methane is also an important part of our production – about 10 percent.”

EnCana’s numbers illustrate the remarkable success of the unconventional gas narrative. The big kid on the block is shale gas, but other sources like coal bed methane and tight gas are also important parts of the mix. Unless market conditions somehow kill the development of new supply, gas will remain plentiful and affordable for a long time to come.

This prospect provides Canada’s petroleum sector with a number of opportunities. One is the development of LNG capacity. Another is to use the fuel as a cheap input for oilsands development. A third is to go into shaley formations in the quest for NGLs and other valuable light liquids. The fourth is for oilsands producers to develop both gas and NGLs for financial hedging. Let’s look at these in turn.

Even though the federal government has given Cabinet approval for Arctic pipeline development, many people in the oilpatch are skeptical that development will begin soon. Put another way, such legacy assets as Canada’s arctic gas fields look increasingly like white elephants.
For example, Robin Mann, president of AJM petroleum consultants puts the issues in a complex question. “Because of the development of shale gas formations like (BC’s) Montney and Horn River and others with great potential right next to infrastructure and pipelines, and with our existing conventional gas and our exports to the United States going down daily, we have more than enough (gas) for our own (use) so why is it important to build these pipelines? Why are we worrying about anything north of Alberta and BC?”

He adds that the costs of the northern pipeline keep going up. “Maybe the best way is to develop LNG facilities in the north, but what will the economics of that kind of project be? Will the price of (Arctic) LNG justify building facilities up there?”

Bill Gwozd, a vice president of Ziff Energy, is much more sanguine about arctic gas. His firm’s model suggests there will be a North American market for Arctic gas beginning in the 2020s, “so it’s important to get ready now to activate those pipelines,” which will take a long time to build and commission.

The need for Arctic gas in North America 15 years from now doesn’t exclude the prospect of beginning now to develop overseas exports, however. In fact, three big and successful companies – Apache, EOG and EnCana – are betting good money that they can make a serious buck out of the Kitimat LNG Project. According to Gwozd, the chances of winning that bet are pretty good. “World-wide, LNG is maybe 10 percent of supply. There’s plenty of room to grow it.”

According to the Kitimat LNG Project’s founding president Rosemary Boulton, “the development of shale gas has developed a gas bubble that’s especially big in Canada. (For conventional gas) it’s worse than anything we’ve seen in a very long time. That makes LNG development more important now than ever.” She adds that “Shale gas is basically a technology play. The industry has found ways to get it gas that we knew was there before, but couldn’t develop. And the better companies are finding ways to producing more efficiently. Efficiency and technology translate in a fairly linear way to a decrease in cost.”

“These projects are all about location,” she adds. “You really have to have a supportive community to make them happen. First Nations and other communities along the pipeline route and around Kitimat were very supportive of the idea of having this project there.” Because the company was able to develop this support under her leadership, both the pipeline and the terminal had received regulatory approvals before the new owners acquired the project.

The Athabasca Oil Sands Story
In a rapidly evolving industry, companies are finding imaginative ways to develop natural gas plays. One of the most interesting examples is Athabasca oil Sands Corp., which has become well known for several years as an oilsands producer wannabee. Through a series of summertime raids at Alberta land sales, in 2006-2007 the company became the single biggest landowner in the oilsands sector – a position it held until the Suncor/PetroCanada merger. But oilsands development is a long-term proposal, and after farming out some of its land to PetroChina, the company had cash in the bank but no cash flow in prospect until its first in situ project comes to life next year.

So what did the company do? Still holding a very large oilsands land position, the company acquired more than a million acres in northwestern Alberta’s gassy Deep Basin. “This is an excellent way for Athabasca to use its cash until needed for our oil sands development,” according to president and CEO Sveinung Svarte. “This area offers the potential for a very short pay-back time and we plan to reinvest that quick return in the oilsands.”

Athabasca’s exploration strategy is to look for liquids and light oil in a gas-prone basin. The company will do this by drilling into Deep Basin formations, where it believes liquids are likely to be found and easily developed. The Athabasca story is almost a reverse image of the breakup of EnCana into pure play companies. According to Svarte, within his company the synergies of diversifying its land position are great. His geoscience and drilling teams can work in oilsands or tight sands with equal dexterity.

More importantly, perhaps, iversification will hedge the company as its oilsands projects begin coming on stream. If diluent prices are high and bitumen prices low, having diluent production of its own will help make that problem right. Of course, the sector in general uses a lot of natural gas – to supply heat for production and upgrading operations, to produce hydrogen for upgrading, and to generate electricity. Companies with gas production could find themselves well hedged if gas prices rise. As Svarte puts it, “we expect gas to be almost a free by-product of our Deep Basin development, so this hedge is well-priced.”

With the help of an Ottawa-based thinktank called whatIf? Technologies, Alberta’s former ADM for Oil, Bob Taylor, thinks a forecasting tool he helped develop could enable policy-makers to better feel, touch and imagine Canada’s possible energy futures. According to Taylor, the recent surge in gas supply reflects a pattern that has been continually recurring in Canada for a century: “Too much gas; too little price.”

Part of his solution to the dilemma this creates was a computer model that could deal with supply and demand without factoring in price. Economists would call that heresy; Taylor calls it “dynamic and robust.” Using numbers the Canadian Society for Unconventional Gas generated using the whatIf? model, he added that the potential ranges of recoverable resource range from a conservative case of 636tcf to an optimistic case of about 1400 tcf.

Those are extraordinary numbers, but such energy wealth won’t be developed without trials. “My worry is that much of this unconventional gas potential remains unproved. For that reason I recommend joint government-industry efforts,” according to Taylor. For political reasons and because of local worries, he adds, it “may not be recoverable in places like Eastern Quebec and offshore BC.” While these are serious concerns, he believes they can be resolved – “but it will require leadership and action.”

A lot is riding on the outcome. If the technical and environmental issues are solved, Taylor thinks Canada’s plentiful supplies of unconventional gas “can be a contributor to helping the world achieve 9 billion sustainable lifestyles by 2050.”
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