January 6, 2014
In the past Canada Shale Newsletters we covered the five largest unconventional plays in Western Canada. This quarter we provide an overview of the latest developments and a short-term forecast of production and spend in the unconventional plays.
Western Canada Shale Plays (Source: Rystad Energy)
Overview of Geology. As shown above, Western Canada represents the treasure for Canada in terms of unconventional plays. Historically, Western Alberta has been covered by the ocean during several geology ages. During the Devonian age, the sediments of Horn River Shale (Middle Devonian) and Duvernay Shale (Late Devonian) were deposited, followed by the Mississippian age, which contributed to the deposition of Alberta Bakken Play (younger Banff and Exhaw formations are Mississippian age, underlying Big Valley is late Devonian). The two younger formations are Montney Play deposited in Middle Triassic and Cardium Play (Cretaceous). While Horn River and Duvernay are pure shale plays, Alberta Bakken is a mix of shale and tight sediments, Cardium is comprised primarily of sandstones, and Montney is a hybrid of conventional formations, tight sands and black shale. The structure of the formations is especially complicated in the area of Foothills in the province of Alberta, where Duvernay, Montney and Cardium form a stacked potential, with Duvernay depth ranging from 3,000 – 4,500m; the depth of Montney ranges from 2,000 to 3,300m and Cardium being 1,000 to 2,500m deep. All three formations get deeper towards the Rocky Mountains on the border between Alberta and British Columbia [Source: NASReport; NASMaps].
Development of Rigs. The first chart underneath represents a clear seasonality of rigs in the Western Canada, where the rigs in Alberta represent an average of 82% of the total rigs over the period of the last three years (2011-2013). The lowest rig count is typically in May, when the soil is very muddy making the transportation and drilling problematic. May is the month in which snow melts due to raising temperatures and the rainfalls grow from ~30 to ~60mm. The highest rig count is typically peaking in winter (February). In February 2013, the rig count peaked at 319, which is 8% lower compared to 345 rigs in May 2012. The lowest rig count in May 2013, however, was higher than in the respective month of 2012 (109 rigs in May 2013 vs. 98 rigs in May 2012). All rigs taken into account represent horizontal rigs in Alberta and British Columbia [Source: NASReport].
E&P Spend in CA Shale. The second chart represents the E&P spend in the unconventional plays in Canada by service segment group. In 2013 ~23% of the total spend was represented by hydraulic fracturing services and ~8% by land rotary rigs. Compared to 2012, the hydraulic fracturing services decreased by ~13% (or by ~$0.5 billion in real terms). This was due to decreased drilling activities primarily in Horn River Shale, Cardium Play and the Canadian version of Bakken Shale in Saskatchewan. The foreseen increase of spend for hydraulic fracturing services in 2014 by almost $1 billion compared to 2013 is estimated to be driven by increased drilling in Montney and Duvernay plays. In 2013, the Canadian unconventional plays produced ~250 thousand boe/d of oil (crude and condensate); and above 3.5 bcf/d of gas and NGL. By 2020, the production is estimated to reach above 500 thousand boe/d in of oil and ~12 bcf/d of gas and NGL [Source: DCube; NASCube].
Transactions in Canada. The third chart represents the transaction value in the USA and Canada over the past 5 years. Typically, transaction values in Canada have been smaller than for the US, with the exception of 2012 when transactions in Montney alone rivaled total US transactions. Montney is the clear leader in terms of transaction activity, accounting for over 75% of total Canadian activity [Source: NASReport].
RYSTAD ENERGY INDUSTRY OUTLOOK
· LNG development. As of November 2013, there are no approved LNG export terminals in Canada. Three projects have been identified as ‘Proposed projects’: Kitimat – Apache, Douglas Island and Kitimat – LNG Canada, all located in British Columbia with a cumulative capacity of 4.18 Bcf/d. Additional potential export sites in British Columbia would have, if approved, a cumulative capacity of 11.07 Bcf/d. In the best case scenario (assuming the approval of all the projects), the combined capacity of 15.25 Bcf/d would make it possible to export the entire gas production from the largest gas producing projects in Western Canada – Montney Play, Horn River Shale, Duvernay, Liard Shale, Corodova Shale etc. The estimated gas production in Western Canada as of 2030 is ~18 Bcf/d – all projects combined. As of November 2013, the LNG landed prices in Korea and Japan reached $15.65/MMbtu. This is 17% above November 2012 ($13.02/MMbtu) and 7% below the November 2011 levels ($16.68/MMbtu) [Source: FERC].
· Shift towards liquids. The three largest unconventional projects in Western Canada with a combined production of gas and liquids (Montney, Duvernay and Cardium) have experienced a shift of the E&P activities towards liquid-rich areas. This shift is most notably visible in the Montney Play, where the liquid content (oil and NGL combined) increased from ~10% in 2011 to ~19% in 2013 (about half of which is represented by crude and condensate). Companies like Long Run Exploration, Shell, Arc Resources, Trilogy Energy are increasing the drilling activities in liquid-rich areas of Montney (e.g Gundy, Ante Creek or Kaybob) [Source: NASCube].
· Largest unconventional acquisition in Q4. In November 2014, the Malaysian state operated E&P company Petronas announced the acquisition of parts of the Montney acreages from Talisman Energy for $1.4 billion, whereby it entered into a JV with Sasol. Rystad Energy values Farrel Creek and Cypress A acreages at ~$1.5 billion in a $4/kcf gas price assumption. Petronas now holds over 900 thousand net acres in the gassy part of the Montney Play in British Columbia and is the second largest landholder after CNRL. In 2012, Petronas acquired Progress Energy Resources with significant dry gas acreage in Montney for $5.5 billion (Can.). Petronas is amassing large Montney acreages due to foreseen LNG exports towards Asia.