broken_legs
09-27-2009, 08:09 PM
I wonder how this will play out.
Shale plays put Alberta gas sector up in air
NATHAN VANDERKLIPPE
18:42 EST Sunday, Sep 27, 2009
CALGARY — The extraordinary changes in the business of natural gas have raised new concerns about the viability of an industry that has long sustained Alberta.
Conventional natural gas, the kind that roars from the Earth when its reservoirs are pricked by wells, has for decades been the bedrock of the province's economy. Until this year, when a nosedive in prices helped sink the province into a $7-billion deficit, natural gas brought in fully a quarter of Alberta's annual budget. Last year, Alberta collected $6-billion in natural gas royalties, fully 50 per cent of its revenue from non-renewable sources. The vast majority of that came from conventional gas.
But analyst Brent Watson has blunt words for the province: even after this downturn, it's not coming back. “Conventional is kind of toast, really,” the Cormark Securities analyst said.
It's not just the current downturn in gas prices – which is showing some signs of reversing – that has Mr. Watson worried. It's the bigger changes that have swept the sector. The discovery of huge new unconventional gas supplies, such as shale gas in Texas and north-eastern British Columbia, require labour-intensive underground work to bring to the surface, has suddenly introduced a massive new supply to the continent.
Combine that with a technological revolution that has allowed firms to profitably extract shale gas at $4 to $5 per thousand cubic feet, compared with $7 or $8 for new Canadian conventional supplies, and Alberta gas may find itself simply priced out of the market.
Investors are already avoiding small conventional gas companies, in part because of worries they won't have the resources to develop capital-intensive unconventional supplies.
Calgary investment firm ARC Financial Corp., for example, used to invest in companies of $30-million or larger. It now won't touch anything smaller than $100-million, and in some cases $500-million.
“It is a new world order,” said Lauchlan Currie, president of ARC Financial. “We will be exposing less to conventional oil and gas, and there will be a bias toward the unconventional.”
Industry heavyweights are voting with their feet, too. Suncor Energy Inc. [SU-T] is selling off a big chunk of its gas wells, many Canadian junior companies have stopped investing in gas and EnCana Corp. [ECA-T] – the largest gas producer in North America – aims to offload many of its conventional assets.
“Canadian plays in general have some challenges because of the higher cost structure and greater distance to market,” EnCana chief executive officer Randy Eresman said this month.
Alberta, of course, has its own unconventional assets to develop, and there are many who say conventional wells are far from dead. They believe gas prices will eventually rise and nourish a healthy Alberta gas industry. They say shale gas wells, which have a relatively short history, may not produce as strongly as expected. And they argue that conventional wells drilled in areas already serviced with pipelines will continue to be cheaper than shale gas.
“I'm not sure that we view the conventional business as going away,” said Dan Barclay who heads BMO Nesbitt Burns' Canadian mergers and acquisitions group.
Mr. Barclay believes the industry's importance to the province will continue for at least the next decade, once prices recover. “It will continue to generate the royalties it generates for the province of Alberta, the employment for the services business and all that.”
But even the head of the Small Explorers and Producers Association of Canada, the main body representing the province's army of small gas producers, is nervous that the ready supply of cheap shale gas will keep prices from rising high enough to support Alberta's wells.
“There may well be a ceiling on North American gas prices,” Gary Leach said. “We may be range-bound – at the top end, around $6, $6.50 – and a lot of Alberta natural gas needs prices higher than that.”
Gas flows more cheaply from wells that have already been drilled, but these decline in productivity at an average rate of 25 per cent a year.
Worse, “our reserve life as it is, is probably the shortest in the world for gas,” said Paul Ziff, president of consulting firm Ziff Energy Group. What's needed, he said, is what one small gas producer called “a fundamental change.” To survive, conventional gas companies must geographically consolidate assets, negotiate contracts that reward drilling companies for better performance, and even break with the traditional winter drilling schedule and work year-round, Mr. Ziff said.
“Either they bring down the costs and there will be a larger industry, or the costs remain the same and it will be a much smaller industry,” he said.
Shale plays put Alberta gas sector up in air
NATHAN VANDERKLIPPE
18:42 EST Sunday, Sep 27, 2009
CALGARY — The extraordinary changes in the business of natural gas have raised new concerns about the viability of an industry that has long sustained Alberta.
Conventional natural gas, the kind that roars from the Earth when its reservoirs are pricked by wells, has for decades been the bedrock of the province's economy. Until this year, when a nosedive in prices helped sink the province into a $7-billion deficit, natural gas brought in fully a quarter of Alberta's annual budget. Last year, Alberta collected $6-billion in natural gas royalties, fully 50 per cent of its revenue from non-renewable sources. The vast majority of that came from conventional gas.
But analyst Brent Watson has blunt words for the province: even after this downturn, it's not coming back. “Conventional is kind of toast, really,” the Cormark Securities analyst said.
It's not just the current downturn in gas prices – which is showing some signs of reversing – that has Mr. Watson worried. It's the bigger changes that have swept the sector. The discovery of huge new unconventional gas supplies, such as shale gas in Texas and north-eastern British Columbia, require labour-intensive underground work to bring to the surface, has suddenly introduced a massive new supply to the continent.
Combine that with a technological revolution that has allowed firms to profitably extract shale gas at $4 to $5 per thousand cubic feet, compared with $7 or $8 for new Canadian conventional supplies, and Alberta gas may find itself simply priced out of the market.
Investors are already avoiding small conventional gas companies, in part because of worries they won't have the resources to develop capital-intensive unconventional supplies.
Calgary investment firm ARC Financial Corp., for example, used to invest in companies of $30-million or larger. It now won't touch anything smaller than $100-million, and in some cases $500-million.
“It is a new world order,” said Lauchlan Currie, president of ARC Financial. “We will be exposing less to conventional oil and gas, and there will be a bias toward the unconventional.”
Industry heavyweights are voting with their feet, too. Suncor Energy Inc. [SU-T] is selling off a big chunk of its gas wells, many Canadian junior companies have stopped investing in gas and EnCana Corp. [ECA-T] – the largest gas producer in North America – aims to offload many of its conventional assets.
“Canadian plays in general have some challenges because of the higher cost structure and greater distance to market,” EnCana chief executive officer Randy Eresman said this month.
Alberta, of course, has its own unconventional assets to develop, and there are many who say conventional wells are far from dead. They believe gas prices will eventually rise and nourish a healthy Alberta gas industry. They say shale gas wells, which have a relatively short history, may not produce as strongly as expected. And they argue that conventional wells drilled in areas already serviced with pipelines will continue to be cheaper than shale gas.
“I'm not sure that we view the conventional business as going away,” said Dan Barclay who heads BMO Nesbitt Burns' Canadian mergers and acquisitions group.
Mr. Barclay believes the industry's importance to the province will continue for at least the next decade, once prices recover. “It will continue to generate the royalties it generates for the province of Alberta, the employment for the services business and all that.”
But even the head of the Small Explorers and Producers Association of Canada, the main body representing the province's army of small gas producers, is nervous that the ready supply of cheap shale gas will keep prices from rising high enough to support Alberta's wells.
“There may well be a ceiling on North American gas prices,” Gary Leach said. “We may be range-bound – at the top end, around $6, $6.50 – and a lot of Alberta natural gas needs prices higher than that.”
Gas flows more cheaply from wells that have already been drilled, but these decline in productivity at an average rate of 25 per cent a year.
Worse, “our reserve life as it is, is probably the shortest in the world for gas,” said Paul Ziff, president of consulting firm Ziff Energy Group. What's needed, he said, is what one small gas producer called “a fundamental change.” To survive, conventional gas companies must geographically consolidate assets, negotiate contracts that reward drilling companies for better performance, and even break with the traditional winter drilling schedule and work year-round, Mr. Ziff said.
“Either they bring down the costs and there will be a larger industry, or the costs remain the same and it will be a much smaller industry,” he said.