Shale plays put Alberta gas sector up in air

[broken_legs]

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.

[prae]

I can say that my co has really felt it. We sell to NG upstreamers like EnCana.

[Super_Geo]

NE-BC is where the action is at these days. You can tell the big oil companies are going in, just look at land sales values in the Fort St Johns and Dawson Creek area in the past 4-5 years... been going up like a motherfucker.

TCPL is installing a huge pipeline from Gordondale in NW-AB to NE-BC, possibly crossing BC to the new Kitimat LNG port on the coast. Anyway, shale is where it's at for the next while... unless the wells die off or water out way faster than expected.

[cooker99]

Super Geo hit the nail on the head.

A few people I know with EnCana have said that it is like a giant garage sale now with the conventional stuff they own. They recently sold off a huge area near Red Deer.

[Hakkola]

I find it kind of hard to believe that gas prices are going to stay so low, but I'm not involved with the industry, that's just my pessimistic optimism.

[cooker99]

The optimistic side of me says that this time next year we will have 5.00+ gas.

[Xtrema]

I'm surprised shale production is cheaper than conventional.

So if Encana is selling off conventional, are they strictly playing in shale?

[cdnsir]

Another article about this situation. Never thought NG here is in that much trouble up till now.


SOURCE: http://www.cbc.ca/canada/british-col...s-alberta.html

TD sounds alarm for Alberta's natural gas industry
Faces fierce competition from B.C.

Last Updated: Monday, September 28, 2009 | 12:12 PM PT

Alberta's natural gas industry faces risks that "are significant and growing," according to a report released Monday by TD Economics.

The report by Derek Burleton, TD's director of economic analysis, cites competition from British Columbia's increasing gas production and the potential loss of the U.S. as an export customer.
Companies have spent $4 billion drilling in British Columbia since 2006.Companies have spent $4 billion drilling in British Columbia since 2006. (CBC)

Natural gas exploration and development is a cornerstone of Alberta's economy, generating $35 billion to $40 billion — or one-tenth of the provincial economy in 2008 — and directly employing up to 140,000 people.

In 2009, the industry has been ravaged as prices for the heating fuel have fallen to $3 US from $8 per million British Thermal Units.

Prices have fallen to seven-year lows not only because of a combination of last year's mild winter and falling demand because of the recession, but also because of increasing production from shale formations.

Domestic production in the U.S., which in the past has relied on Alberta for up to one-seventh of its consumption, has boomed since 2004, as new technology opens up new areas. The technology fractures and props open formations that were previously inaccessible.

In June, the Colorado School of Mines came out with a report showing shale gas production has boosted American supplies by 35 per cent, its largest jump in the 44 years it has been collecting data.

"There has been some speculation that the U.S. might one day join the small list of countries no longer relying on net imports of natural gas," Burleton said in the commentary.

At the same time, competition for the American market is heating up. Shale gas formations are opening up in Quebec, Atlantic Canada, and Saskatchewan, but especially in British Columbia's Horn River and Montney Basins. Companies have invested $4 billion for drilling rights in B.C. since 2006 and are now producing one trillion cubic feet a year, making that province Canada's second largest producer.
Some win in the shift to shale

The shift to shale is also favouring the stocks of some companies that provide production services that use that new technology. The financial services firm UBS tracked share prices and said in a report released Monday that over the past month, Calfrac, Trican and BJ Services have outperformed their drilling peers by as much as 33 per cent. While it predicted several quarters of weak earnings yet, it expected shale service companies to do better than conventional drillers.

Still, shale gas may end up overrated. What's uncertain are its decline rates, the rates at which wells are exhausted. Limited evidence shows these to be higher than conventional gas wells. There are also environmental concerns about water contamination, which could discourage investment.
Natural gas prices have fallen to a seven-year low this year.Natural gas prices have fallen to a seven-year low this year. (CBC)

Some companies have blamed the Alberta government increase in royalties for adding to the problem. Burleton's analysis found, depending on market price and production levels, natural gas royalties were raised to 15 to 50 per cent from 15 to 35 per cent by the changes, which took effect this year.

By comparison, natural gas royalties in B.C. ranged from nine to 27 per cent, depending on price. Despite the complaints, at low natural gas prices, Alberta royalties remained competitive, Burleton said.

What's not debated in Alberta is that companies have laid off workers, drilling rates have plummeted, and firms have "shut in" production by turning off wells.

"It appears that Alberta's economy continues to contract as most other regional economies in the country show signs of renewed life," said Burleton.

"The potential for an accelerated long-term decline of an industry that does so much of the heavy lifting in the Alberta economy is arguably the number one risk facing the province's standard of living," he wrote.

Burleton concluded that Alberta's natural gas industry will never return to as prominent a position in the Alberta economy as it enjoyed only five to 10 years ago. Still, he refused to count out Alberta natural gas. Future markets would suggest prices will return to $5 or $6 per million British Thermal Units by March of next year. That would help some, but not all producers, according to the Ziff Energy Group.

What is certain, said Burleton, is the need for the Alberta government to rein in spending. Already, falling royalties have contributed to a deficit expected to hit almost $7 billion this year.

The "rapid spending years of the past half decade — when annual outlays rose at a double-digit rate — will need to be relegated to Alberta's history books," he said. "Parsimony in non-priority areas will need to be the watchword even once surpluses re-emerge. On the plus side, the growth-related pressures that drove much of the robust spending increases earlier this decade appear unlikely to return over the foreseeable future."

[atgilchrist]

Originally posted by Xtrema
I'm surprised shale production is cheaper than conventional.

So if Encana is selling off conventional, are they strictly playing in shale?

Selling off *some* conventional, they still have lots.

They also have vast sections of land to develop CBM in.

[Crymson]

Right now, conventional is still "cheaper" than unconventional. The problem is that conventional plays in Alberta do not have legs to grow a large company anymore.

A larger company is incapable of even spending enough capital to maintain it's production and reserves via conventional drilling. Pools are simply too small, too risky, and too labour intensive to target as an effective way to grow your company.

Unconventional, although more difficult, more expensive, and less production is much more like a factory where wells and fields are manufactured on a large scale and can utilze scales of economy.

For an E&P company - an unconventional play in Alberta is like a factory that makes Honda Civic's VS making Bentleys (conventional). You make alot of money on an individual Bently, but it's tricky to build, each one takes a long time - where you can make 1000's of honda civics, relatively simply once you have the process down and more importantly, you can just throw money at the factory to make more civics, whereas to make the same gross profit from Bentey's you'd need 1000 times the employees building cars by hand, which is essentiall what conventional plays are like in Alberta.

If that makes any sense.