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Featured Articles
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Oct 2008
| Source: Oilweek Magazine
| | | Gas pains
| | | Ripples of uncertainty dog the unconventional gas business in western Canada
| | | by Diane Cook
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| As conventional gas reserves continue to dwindle in the Western Canadian Sedimentary Basin (WCSB), operators are starting to turn their attention to producing natural gas from unconventional sources. For the WCSB to sustain, maintain, and be competitive in the global market, the unconventional gas sector will require a stable regulatory environment, industry synergies, and new technologies.
Right now there are a number of factors that have negative impacts on the unconventional gas sector. Kevin Heffernan, vice-president of the Canadian Society for Unconventional Gas (CSUG), says with the exception of activity in northeast British Columbia, the current status of unconventional gas drilling in the WCSB is not so rosy.
"Activity to date in northeast British Columbia has been focused on the established Montney play and emerging [shale] projects in the Horn River Basin and [coalbed methane and shale projects] near Hudson Hope," he says. "This year appears to have been a ‘proof of concept´ year in both the emerging areas, and operators are optimistic about the opportunities and drilling activity levels in coming years."
The Montney area is a maturing shale and tight sand play south of Fort St. John, where operators have been continuing development programs throughout the year and extending the play through exploratory drilling, he adds. "All three areas have been active on the land sale front, which is a good indicator that increasing activity levels should be expected in the future."
In Saskatchewan, Heffernan says that although shale gas opportunities are believed to be widespread, deliverability from shale wells is typically low and activity has been restricted to a couple of smaller operators, with most of the industry taking a wait-and-see position.
"With respect to natural gas from coal seams, the province is just not as geologically attractive as Alberta is, and CSUG is not aware of any active CBM projects in Saskatchewan."
However, the situation in Alberta is considerably more complicated. "There was a rapid decline in drilling activity in late 2006 which carried into 2007 as a result of low gas prices at the time," Heffernan says. "As gas prices were recovering in 2007, Alberta entered into a prolonged period of uncertainty associated with the well-publicized royalty review, and many operators were hesitant to make capital investment commitments in Alberta without knowing what the new royalty structure would look like. This uncertainty carried into 2008, and much of the available capital moved outside the province where operators pursued opportunities."
Because Alberta´s new royalty regime doesn´t come into effect until January 2009, there remains little incentive for operators to pursue unconventional gas opportunities aggressively through the balance of this year. And the double-whammy of low prices followed by royalty uncertainty has affected drilling activity for all types of unconventional gas-gas from coal seams, tight gas, and shales.
But starting next year, Heffernan says, CSUG expects the new royalty regime will have a positive impact on the level of drilling for natural gas from unconventional sources in Alberta, subject to all the uncertainties that affect the industry, most notably production costs and gas prices.
Discussions CSUG has had with producers and service companies during this past summer suggest that, although higher-than-expected gas prices have had a positive impact on activity levels, drilling for natural gas from unconventional sources will be lower than in recent years but better than forecast in early 2008.
Bill Gwozd, vice-president of gas services at Ziff Energy Group, provides some recent unconventional gas statistics in the WCSB. "For CBM completions, there were 980 in 2004, 2,240 in 2005, 2,150 in 2006, 2,130 in 2007, and 940 in the first six months of 2008."
Gwozd says that these statistics show that in 2008, CBM wells represent 19 per cent of all gas well completions versus 6.3 per cent in 2004 and 14 per cent in 2005, which indicates that CBM activity is growing compared to other gas activity. However, less CBM exploration is occurring. CBM exploration accounted for 27 per cent in 2004 and six per cent this year.
Information on shale gas is still considered classified, so not all information is available from operators just yet. However, many operators are actively focusing on new shale gas areas in northeast British Columbia, so unconventional gas wells drilled in that area are expected to increase on a go-forward basis.
"We believe that by 2017, of the WCSB gas supply, CBM will contribute one billion cubic feet per day, tight gas will produce 1.5 billion per day, and shale gas will account for about 500 million cubic feet per day," Gwozd says.
Looking ahead, Heffernan agrees with Ziff Energy´s predictions that natural gas from unconventional sources is expected to be an increasingly significant contributor to Canada´s natural gas supply, a reflection of the fact that conventional opportunities are becoming smaller and generally have a lower deliverability.
"We will in effect mimic the supply evolution path that has occurred in the United States during the past 20 years or so," he says. "Of course, the pace of drilling and development of supply from unconventional sources in the WSCB is going to be affected by many factors including price, cost and return relationships, the emergence of alternative supplies elsewhere, especially within North America, as well as a host of technical, political, social, and regulatory factors."
For the WCSB to remain competitive in the global market, several landscapes will need to change. During the past few years, the industry has recognized that as conventional opportunities decline and a greater focus on development of natural gas from unconventional sources emerges, so too do a variety of new challenges.
Heffernan says unconventional reservoirs often don´t behave like conventional reservoirs, and the industry is experiencing longer lead times and higher costs in order to overcome technical hurdles and reach confidence levels that support commercial development.
Similarly, investment and cash flow profiles may be radically different from what industry has grown accustomed to seeing with the development of conventional natural gas resources, and governments need to understand how this affects operators, and how it affects them as owners of the resource.
"A sustainable future for the gas sector requires that technological challenges are addressed with vigour and commitment and working to help regulators understand those challenges and the limitations imposed by regulations that evolved in response to the development of conventional gas reservoirs," Heffernan says.
He also suggests that technology will be critical to the survival of the gas sector. "New technology and new applications of existing technology will make projects viable resulting in sustained revenues for both industry and government and will result in a reduction of our footprint in areas where the industry operates."
Gwozd believes that government fiscal stability, technology research, and cost control on finding and development are key to securing the gas sector´s future.
"The trust tax changes announced in the fall of 2006, the royalty review in the fall of 2007, and now an environmental push seem to have resulted in the industry being pushed downward. If the government could provide fiscal stability on future changes to the industry, it would be helpful."
As well, Gwozd says research credits for technology should be shifted into unconventional gas. "For example, the wetter CBM in the Mannville has not really come into fruition. While there are never any guarantees that more research will stimulate more wet CBM development, it might be the kick-start that industry needs."
Better control over finding and development costs and production operating costs is also needed.
"When energy prices rise quickly, action to correct poor practices sometimes gets missed as the revenue simply offsets the expenses. However, improved profitability results whenever operators drive down their costs," Gwozd notes. "Producers add direct shareholder value when they strive to achieve the top quartile cost structure."
Several large gas producers are already working toward adding more unconventional resources to their portfolio to balance their production from conventional and unconventional natural gas sources.
Devon Energy Corporation, one of the largest independent oil and gas producers in Canada, gets 65 per cent of its production from natural gas. Devon has CBM operations in the Wimborne area in the Horseshoe Canyon formation in Alberta; tight gas in the Montney area and the Cadotte area in northwest Alberta; and shale gas in the Horn River Basin.
Approximately three per cent of Devon´s current gas production comes from its unconventional gas sources. "In 2007, approximately 23 million cubic feet per day of our gas production came from unconventional gas sources," says Gerry de Leeuw, vice-president of exploration at Devon Energy Corporation.
According to de Leeuw, in addition to Devon´s unconventional gas program, which is ramping up, the company will maintain a robust conventional gas program in areas such as the Foothills, the Deep Basin, and the Peace River Arch. "Over the next two to three years, we plan to maintain a drilling program that is balanced between conventional and unconventional sources."
Devon concurs with Heffernan´s thoughts on what it thinks needs to happen for the WCSB to sustain, maintain, and be competitive in the global market.
"We, as industry, need government to understand the complexity, cost, and risk associated with unconventional resource development and for the government to develop and modify their regulations and fiscal regimes to better reflect these challenges," de Leeuw says.
"We need government to provide regulations and legislation that encourages the research and development required to discover these unconventional resources and that promotes the orderly development of this style of resource. Provinces such as British Columbia have made significant efforts to be competitive in this market and attract oil and gas activity to their province."
Devon is currently putting a lot of focus on its properties in British Columbia, where the company has established significant land holdings.
"We´re being proactive in terms of discovering new sources for resource plays and pushing research and development," de Leeuw says. "We have allocated staff and capital resources to focus solely on technology, research, and development for unconventional gas, and we have developed specialized teams in reservoir engineering, geology, drilling, and completions."
For the unconventional gas sector to sustain and maintain its current position now and in the future, Devon believes it has to participate vigorously in technological advances, innovation, research and development, as well as encourage continuous improvement in its operational processes to be sustainable for the long term.
"We need to ensure we have a progressive government that wants to attract investment to its province and understands what it takes to compete and survive in the unconventional market," de Leeuw says. "We have to direct our manpower and resources to jurisdictions that are progressive, that want to attract investment, and understand what regulations and fiscal regimes are required to encourage an unconventional activity market."
Another global energy leader, Nexen Inc., is ramping up its CBM and shale gas production in the WCSB. Approximately 15 per cent of the company´s current Canadian production comes from its CBM developments at Corbett, Doris, and Thunder in the Fort Assiniboine area of Alberta.
"Commercial development in the Upper Mannville coals began in 2005, and our current production rates are at 40 million cubic feet per day," Nexen spokeswoman Carla Yuill says.
Nexen recently reinstated its investment program for its Mannville development project following modifications to the royalty regime by the government of Alberta, which restored the economics associated with this play. But the company hasn´t specified any further drilling plans yet.
Nexen has also acquired 126,000 net acres of land in the Horn River Basin in the last two years.
"Our capital program over the past two winters focused on the Dilly Creek area," Yuill says. "Since we are still in the testing stage, we are only producing a nominal amount of gas at this time. However, we plan to drill two horizontal wells this summer and 8 to 16 horizontal wells next winter. Based on results to date, this gas play has the potential to double our existing proved reserve base."
Unconventional natural gas operators have a challenging road ahead of them. They´ll have to continue to switch gears from what used to work for them from producing gas from conventional sources to unconventional sources.
Industry, government, and stakeholders will also have to join the challenge on new regulations, research, technologies, and costs to ensure that the WCSB can remain competitive in a global market in the future.
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