september 2013 ceri commodity report — natural gas · trilogy energy orp., whose operations are...

Relevant • Independent • Objective

100 wells drilled and only around a third of those currently producing.3 Preliminary results in the Duvernay have been promising with the liquids content ranging from 50 to 150 barrels per million cubic feet4 (Mmcf). Trilogy Energy Corp., whose operations are concentrated in the areas around Grand Prairie and Kaybob, announced in September 2013 some impressive initial production results. A four-well pad operation had production testing results of 3.4 Mmcf/d of natural gas and 1,366 bbl/d of natural gas liquids.5 The Montney The more mature Montney play, located in northeast British Columbia in the Dawson Creek and Fort St. John area, is British Columbia’s largest unconventional play and is estimated to have reserves of 450 Tcf of natural gas6 and 260 million barrels of NGLs.7 The Montney has proved itself to be a profitable development area. Improvement in horizontal drilling and completion techniques has resulted in significant production from areas within the Montney play region. The application of these techniques and the added value of liquids-rich gas production have been key to unlocking the economic potential of the region. Development of Montney liquid-rich gas began in about 2009, as natural gas commodity prices fell and it was recognized that significant NGL production enhanced economic returns. Between 2007 and 2011, total NGL production increased 28 percent from 8.9 million bbl to 11.4 million bbl.8 There are currently over 1,000 active gas wells, mostly horizontal, with production accounting for more than 40 percent of British Columbia’s total gas production.9

Supply Cost Analysis Forthcoming research by CERI calculates the supply cost of producing gas on both a dry-gas basis (accounting for revenue and costs from only dry-gas production) and on a liquids basis (including the revenues and costs for both dry gas and NGLs) for numerous areas across Western Canada.

September 2013

CERI Commodity Report — Natural Gas

Natural Gas Supply Costs in the Liquids-rich Duvernay and Montney Plays The exceptional economics of shale gas development in the United States has largely killed Canadian dry-gas development, with conventional production having declined every year since 2006. The abundance of shale gas developments in the United States has led to sustained low natural gas prices across North America, making the majority of Canada’s dry gas resources uneconomic to develop.1 The exception is those resources that contain significant amounts of natural gas liquids (NGLs). The Montney and Duvernay are two such liquid-rich resource plays in Western Canada. With the price of NGLs generally linked to oil prices instead of natural gas prices, the presence of liquids improves the potential returns from developing these types of resources. The Duvernay The Duvernay play, in west-central Alberta, is estimated to hold 443 trillion cubic feet (Tcf) of total gas in place, 11.3 billion barrels of NGLs and 61.7 billion barrels of oil.2 The liquids-rich section of the play runs for more than 300 kilometers from Grand Prairie in northwest Alberta to Olds near Calgary. The Duvernay is a well-known play that dates back to the 1940s. It is the source rock for the original 1947 Leduc oil discovery. It’s now experiencing a resurgence in activity due to the technological advancements of hydraulic fracturing and horizontal drilling, unlocking gas that was previously not economically recoverable. The Duvernay shale play is in its early development phase, with around

CERI Commodity Report – Natural Gas Editor-in-Chief: Dinara Millington ([email protected]) Contents Featured Article ................................................................................. 1 Natural Gas Prices.............................................................................. 4 Weather ............................................................................................ 6 Consumption and Production............................................................. 8 Transportation................................................................................... 10 Storage .............................................................................................. 12 Liquefied Natural Gas ........................................................................ 15 Drilling Activity .................................................................................. 17

CERI Commodity Report - Natural Gas

The supply cost represents the gas price that is required to recover all costs (capital, operating, royalties and taxes) and earn a positive return on investment (10 percent real). Simply put, if the supply cost is lower than the current natural gas price,10 that area is considered economically viable to develop.11 On the conventional dry-gas side, the Montney is one of the most economic areas to drill in Western Canada, with a supply cost of $0.97/mcf, well below current gas prices. The significant volumes of gas produced in this region make this play very profitable. The Duvernay on the other hand, with a dry-gas supply cost of $2.63/mcf, just $0.01 lower than the 2012 average Henry Hub natural gas price, is right on the borderline of being economically viable. However, once the additional costs and revenues associated with the NGLs are included in the analysis, the supply cost for the dry-gas portion falls for both plays. Note that once the liquids are included, the total supply cost for each area increases. This is because additional operating and processing costs for the liquids have been included. However, after accounting for the additional revenues gained from the liquids, the gas price required to cover the remainder of the costs falls. This is illustrated by the blue sections in Figure 1. Figure 1: Duvernay and Montney Gas Supply Costs, Dry and with Liquids

Source: CERI This is most obvious for the Montney play, where the gas price required to ensure economic viability falls from $0.97/mcf on a dry-gas basis to $0.08/mcf after

accounting for the revenue from NGLs. This means that the revenue from the liquids alone is almost enough to cover all the costs of the development and earn a return on investment. The supply cost for the dry-gas portion in the Duvernay also falls, and is now well below current natural gas prices, substantially improving the economics of drilling in this area. While the two plays are similar in terms of their liquid-rich resource, they have different production and cost structures, which contribute to the difference in supply costs. Table 1: Supply Cost Comparison

Source: CERI The largest cost involved with producing gas, is the capital cost of drilling and completing wells. The capital costs in the Montney are significantly higher than for the Duvernay, due to the remote location of the resource. The distances involved limit access and increase the cost of services and supplies. Despite the significant capital costs in the Montney, average gas and liquid production

levels are so high (2.3 Mmcf/d) that the revenues they earn easily offset these costs, resulting in the cost per unit of gas being much lower than that of the Duvernay. Despite much lower average gas and NGL production levels per well in the Duvernay (23 bbl/d) compared with the Montney (92 bbl/d), early results suggest that the Duvernay actually has a higher average liquid content (76 bbl of

NGLs per mmcf of gas) reflecting the different gas characteristics of the play. If these early Duvernay results are able to be re-produced as the play develops, it would likely lead to lower supply cost estimates in the future.

Montney Duvernay

$0.97

$0.08

$1.46

$0.97

$1.55

$-

$0.50

$1.00

$1.50

$2.00

Dry With liquids

$/m

cf

Gas portionLiquids portion

$2.63

$1.61

$2.59$2.63

$4.19

$0.00

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$2.00

$3.00

$4.00

$5.00

Dry With liquids

$/m

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Gas portionLiquids portion

Montney (BC) $

$/mcf

Duvernay (AB) $

$/mcf

Capital costs 10,904,596 $0.70 3,720,874 $1.95

Operating costs – Gas 2,149,577 $0.14 803,894 $0.42

Operating costs – Liquids 6,658,610 $0.43 1,423,480 $0.75

Royalties 3,388,314 $0.22 1,799,609 $0.94

Taxes 804,714 $0.05 252,853 $0.13

Total supply costs 23,905,811 $1.55 8,000,711 $4.19


Figure 2: Comparing Gas and Liquid Production Rates

Source: CERI The Montney and Duvernay, along with other liquid-rich resources, are set to remain the focus of development in the Canadian gas industry into the future. Given the outlook for sustained low natural gas prices, developers will continue to pursue those resources that produce the highest economic value-add. The expansion of the Canadian shale gas industry and the continued refinement of production processes will only result in better economics for these liquid-rich plays. Watch for the forthcoming CERI research report which will update the natural gas supply cost estimates for Western Canada to include NGLs.

Endnotes 1CERI Study No. 136, “Conventional Natural Gas Supply Costs in Western Canada”, June 2013 2ERCB, Summary of Alberta’s Shale- and Siltstone-Hosted Hydrocarbon Resource Potential, October 2012 http://www.ags.gov.ab.ca/publications/OFR/PDF/OFR_2012_06.pdf 3Oil and Gas Journal, “Montney, Duvernay will be key to Canada shale oil, gas growth” 1 April 2013 http://www.ogj.com/articles/print/volume-111/issue-4/general-interest/montney-duvernay-will-be-key-to-canada.html 4CERI estimate 5Trilogy Energy Corp., News Release. 23 September 2013 http://trilogyenergy.mwnewsroom.com/Files/5c/5cacda07-b80d-4d37-973d-8aaca56955b5.pdf 6British Columbia Ministry of Energy and Mines, “The Status of exploration and development activities in the Montney play region of Northeast BC” 2 April 2012 http://www.empr.gov.bc.ca/OG/oilandgas/petroleumgeology/UnconventionalGas/Documents/C%20Adams.pdf 7BCOGC, Hydrocarbon and By-product Reserves in British Columbia 2011 http://www.bcogc.ca/publications/reports 8CAPP, Statistical Handbook for Canada’s Upstream Petroleum Industry, September 2012 http://www.capp.ca/GetDoc.aspx?DocId=219433&DT=NTV 9BCOGC, Montney Formation Play Atlas NEBC, October 2012 ftp://www.bcogc.ca/outgoing/OGC_Data/Geology_and_Engineering/montney_play_atlas_maps/Montney%20Format%20Play%20Atlas%20for%20NEBC.pdf 10The AECO-C price averaged $2.07/mcf in 2012 while the Henry Hub price averaged $2.64/mcf 11All results are in 2012 Canadian dollars

http://www.ags.gov.ab.ca/publications/OFR/PDF/OFR_2012_06.pdf

http://www.ags.gov.ab.ca/publications/OFR/PDF/OFR_2012_06.pdf

http://www.ogj.com/articles/print/volume-111/issue-4/general-interest/montney-duvernay-will-be-key-to-canada.html



http://trilogyenergy.mwnewsroom.com/Files/5c/5cacda07-b80d-4d37-973d-8aaca56955b5.pdf

http://trilogyenergy.mwnewsroom.com/Files/5c/5cacda07-b80d-4d37-973d-8aaca56955b5.pdf

http://www.empr.gov.bc.ca/OG/oilandgas/petroleumgeology/UnconventionalGas/Documents/C%20Adams.pdf



http://www.bcogc.ca/publications/reports

http://www.capp.ca/GetDoc.aspx?DocId=219433&DT=NTV

http://www.capp.ca/GetDoc.aspx?DocId=219433&DT=NTV

ftp://www.bcogc.ca/outgoing/OGC_Data/Geology_and_Engineering/montney_play_atlas_maps/Montney%20Format%20Play%20Atlas%20for%20NEBC.pdf




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