The beginning of the end may be when Premier Ed Stelmach raised the royalties exploration companies were paying to the province of Alberta. The industry warned that such changes would only force them to move to Alberta’s more competitive neighbours British Columbia, and Saskatchewan where the royalty rates were lower and remaining in place.
At the same time that these royalty changes were being tabled in Alberta, companies started to announce massive discoveries in shale plays in the BC’s Horn River basin and across North America. The laws were passed, oil and gas prices were running high on demand… and then the market crashed. And the price of oil and natural gas crashed along with it in the months to follow. Recently, Premier Stelmach changed the royalty scheme again… perhaps its all too late and may be irrelevant given the overall economics of shale gas vs. conventional gas.
Many predict that the gas production of British Columbia will surpass the total production of Alberta by 2020. More recently analyst Michael Mazar of BMO Capital Markets has stated; The Horn River Basin “has the potential to render those plays obsolete.”
The problem is that in Alberta, companies drill shallow gas wells to get 1,000 cubic feet per day with a break-even point of $7.00 to $7.50. In the Horn River basin, the initial costs are higher but the long life and high daily production potential provide better economics. Most majors state that the break-even point for them is in the $5.00 to $5.50 range in the Horn River. Higher up-front costs are coming down though, and the BC government along with industry players are making major investments into the area which will dramatically reduce the up-front costs. Some estimate that the break-even point comes down to ~$4.00.
Earlier this week Tim Cejka, head of global exploration at Exxon Mobil Corp. (NYSE:XOM) stated in an interview with the Wall Street Journal that initial results on three of their Horn River Basin wells suggest production levels of 16 million and 18 million cubic feet of gas per day. Exxon and others are making the Horn River basin their primary investment area for natural gas.
Current, prices in natural gas are hovering at just above $3.00. Investments being made today in the Horn River basin will pay off when gas prices firm up and provide companies a faster return. Conventional natural gas production and exploration has been scaled back and to many anlysts, including Calgary’s Tristone Capital, the turning point for natural gas is July and appreciating prices are inevitable as we will see current inventories begin to decline and lead to appreciation in prices. (see Horn River News: “The time to buy natural gas stocks is now”)
The second point of upward price pressure will come from increased demand. There are two areas that demand for natural gas. The first is the return around in economic activity will lead to increased demand. No one can say with 100% certainty when this will occur, but there seems to be a general consensus for the first quarter of 2010. The second area of demand will be from new customers. Natural gas is a cleaner burning fossil fuel comparative to others such as coal and oil. In 1971, natural gas represented a 32% market share of the energy mix in the US. Today it is merely 22%. This will likely increase as governments look to reduce carbon emissions. (see Horn River News: “Natural gas will play increased role in the North American energy mix”)
And perhaps the biggest “new” customer may be the North American transport network. Specifically, cars and trucks. Around the world, natural gas has been extensively used as a fuel source for vehicles. In North America the primary fuel source is gasoline and then diesel – both oil based fuels.
This past week, T. Boone Pickens met with nearly 40 members of the U.S. House and Senate and participated in the introduction of the NAT GAS Act in the U.S. Senate, sponsored by Senator Robert Menendez (D-NJ) and co-sponsored by Senator Orrin Hatch (R-UT) and Majority Leader Harry Reid (D-NV). (see Horn River News: “Natural gas is critical to the environment and energy security”) This legislation would increase the tax incentives to offset the costs of natural gas vehicles and conversion of vehicles in hopes to dramatically increase the number of vehicles using natural gas. This means new demand and consumption.
When demand for natural gas increases, exploration companies will focus their efforts on those areas with the lowest costs and the best returns. Increasingly this appears to be production from shale gas, and increasingly in the Horn River basin where investments will reduce the front end costs and further improve the economics and competitiveness. It may not be in conventional production from Alberta. Which is a big problem for Alberta.
Certainly, the oil sands production of Alberta will generate significant revenues for Alberta – especially if it can put solutions in place that reduce the carbon footprint to a point comparable to other oil sources. But if gas exploration and development is not competitive, and Alberta loses this massive source of revenue it puts significant strain on the province’s budget. Strain that became evident with the dramatic reduction of exploration activity brought upon by the global economic downturn.