Natural Gas Comes Roaring Back in Western Canada
You know you’re in Fort Nelson upon reaching the "Mile 300" sign on the Alaskan Highway.
Created as a trading post in 1805, this town of a few thousand is one of the last places in British Columbia before you reach the Yukon Territory. While also the administrative center of the new Northern Rockies Regional Municipality (the first in a novel approach by the government), it is best known for two things: a stop for tourists on their way to Alaska and natural gas.
These days, the latter is making the big headlines.
Fort Nelson is the entrance into the Horn River shale basin. And Horn River just might end up being the biggest gas play in North America. That’s good news for this part of Canada.
The Western Canadian Sedimentary Basin – centered in Alberta and extending into British Columbia and Saskatchewan – is the largest production area in North America. It provides almost 98% of all Canadian gas and most of its crude oil. Yet during the collapse in oil and gas prices extending from September of 2008 through the summer of 2009, the region was the hardest hit.
At one point, more than four out of every five drilling rigs were off-line, and companies were falling like autumn leaves.
And its traditional production is maturing. That means extraction levels from conventional sources have been declining.
It is the unconventional sourcing – oil sands, along with gas trapped in dense rock (shale gas) or found in lenses amidst packed sandstone deposits (tight gas) – that comprises the really major additional volume.
And now that the gas side of the equation is taking off, so are the prospects for a handful of companies, both large and small…
They’ll Be Exporting Liquefied Natural Gas to Asia
Despite the low price for natural gas contracts, prospects of huge volumes, at a discount to the market, are propelling renewed drilling and some staggering reserves potential.
Not long ago, the discovery of huge shale gas reserves in the Marcellus Shale (in Pennsylvania) was about the worst news imaginable for the gas producers in British Columbia and Alberta. Their production would largely find its way to the northeastern U.S. In fact, the development of western Canadian fields was largely dependent upon that continuing demand. With the Marcellus emerging as a local source right in the middle of that market, however, there was no end consumer to take up the increasing Canadian volume.
Two developments changed the picture…
The first was the Canadian government’s decision on a liquefied natural gas (LNG) terminal at Kitimat on the Pacific coast of British Columbia. Scheduled for completion in 2014, it had been planned as an LNG receiving terminal. Now it is being transformed into a processing and export terminal, too. Gas coming from western Canada will be liquefied and moved by tanker to an Asian market that will take everything it can get.
Second, both Alberta and British Columbia have revised their royalty laws to make it more profitable to drill there, despite depressed gas pricing. As a market surplus continues, North America will find less expensive gas replacing more expensive. Current indications are that gas coming from both the Horn River Basin and the equally large Montney Shale – straddling the British Columbia-Alberta border just south – will be able to trade at a discount of up to $1.25 to Henry Hub (the U.S. spot price).
And then there is the available gas. A lot of it…
The British Columbia Ministry of Energy, Mines, and Petroleum Resources estimates the province has from 200 trillion to 1.2 quadrillion cubic feet of unconventional gas, while the Alberta Geological Survey projects as least 500 billion cubic feet on its side of the border.
The expected recovery rate is also impressive. Based on drilling to date, the Horn River Basin should return 20% to 40% of available gas; Montney 15%. Compare that to an average of 7% in U.S. shale plays.
How to Profit
What is happening in western Canada will have limited impact on American shale development. There may be some displacement, but we are largely seeing the emergence of dominant localized sourcing, and that regional sourcing will put a premium on the companies operating in a particular basin.
For the shale and tight gas producers in British Columbia and Alberta, the objective is an expanding volume out of Kitimat and several other LNG facilities now certain to emerge for the export of additional volume. That is not in direct competition with American producers. For that matter, we may well see some Marcellus shale gas moving to a reconverted LNG facility at Cove Point, Maryland, for export to Europe before too long.
The Canadian drilling companies of interest are in two major categories.
For Horn River, the group comprises mainly larger concerns. Among the leaders are Exxon Mobil Corp. (NYSE:XOM), EOG Resources Inc. (NYSE:EOG), EnCana Corp. (NYSE:ECA), Apache Corp. (NYSE:APA), Imperial Oil Ltd. (AMEX:IMO), Devon Energy Corp. (NYSE:DVN), and Nexen Inc. (NYSE:NXY).
However, at the Montney and its many sub-basins (for instance, Duvernay, Muskwa, Groundbirch, Doig, and Kaybob), more of the development is handled by smaller outfits.
These would include Celtic Exploration Ltd. (Toronto:CLT.CA), Orleans Energy Ltd. (Toronto:OEX.CA), Yoho Resources Inc. (Toronto:YO.CA), Mooncor Oil & Gas Corp. (CDNX:MOO.CA), Delphi Energy Corp. (Toronto:DEE.CA), Galleon Energy Inc. (Toronto:GO.CA), and Sonde Resources Corp. (AMEX:SOQ).
This is a quickly moving target, with projections now driving drilling expectations, but the volume still not out of the ground. Nonetheless, in my judgment, we will be hearing much more about this, and targets will be developing for investment plays.
I am currently following no fewer than 71 companies developing fields in western Canada. And I’m developing a personal index to compare prospects once they are clearer.
And I’ll let you in on the developments when they finally become liquid plays.