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Information on the Horn River Basin
There doesn’t seem to be much question about the potential for natural gas out of the Horn River Basin, Liard Basin, and the Cordova Embayment in Northeast British Columbia. The Horn River alone may possess up to 650 Tcf of reserves, and one eye opening estimate prepared by Sproule Associates in 2012 suggests these three formations may have combined resources between 809 and 2,222 Tcf. What is in question, however, is just how much these areas will be developed, and can it be done economically? That remains to be seen, but as we discuss below, there are several companies who are betting that it will.
Our main focus in this article is the Horn River Basin, and we will refer to that almost exclusively hereafter, since that area is farthest along in its development among these three plays (although activity in the Horn River itself is still in its infancy). However, many of the issues we raise below apply to all three areas.
First, a quick description of these areas:
Horn River Basin – The Horn River Basin is a dry natural gas basin that encompasses 1.1 million hectares, and contains several separate shale formations: the Evie, Klua, Otter Park, and Muskwa Shales. These shales lie at vertical depths between 6500’-13000’. Horizontal drilling in the Horn River began in earnest in 2008.
We estimate that total natural gas production in the Horn River was less than 250 MMcf/d as of July 2013. One of the factors for this is that production from the Horn River is generally sour gas, which must be treated before it is of pipeline quality. The main processing (treating) plant in the area is Spectra’s Fort Nelson plant, which exited 2012 with 250 MMcf/d of capacity. However, the company is expanding capacity there to 1.2 Bcf/d in 2013 (see below).
In June 2013, Encana pegged Horn River horizontal drilling and completion costs between C$16-C$22 million per well, with IP rates at either side of 30 MMcf/d, and EURs between 15-35 Bcf, depending on lateral length. Many wells in the area are now being drilling via multi-well pads.
Liard Basin - Questerre Energy and Transeuro Energy did some of the early drilling in the Liard Basin, but more recently, the Apache Corporation (APA) may have advanced the ball quite significantly. In June 2012, APA announced long-term test results from three wells at Liard, including the D-34-K well, which was drilled to a vertical depth of 12,600 feet with a 2,900-foot lateral and a six-stage hydraulic fracturing completion. The 30-day initial production rate averaged 21.3 MMcf/d, or 3.6 MMcf/d per frac stage. The ultimate recovery from the D-34-K well is estimated to be a prolific 18 Bcf. Chevron has since partnered with APA in the Liard.
Other companies with a presence in the Liard are CNOOC (through Nexen Energy), Paramount Resources, and STX Energy.
Cordova Embayment – This area is very similar geologically to the Horn River Basin, and is underlain by the same shale formations. The Cordova lies over a much smaller area, though, just 379,000 hectares in the Northeast corner of BC and extending into the Northwest Territories. There are not many players in the Cordova just yet, and only a handful of wells have been drilled to date. Interestingly, much of the potential interest in the Cordova is coming from Asia, should the Cordova ever turn into an international supply basin. In 2010, Mitsubishi purchased 50% of Penn West Energy Trust’s Cordova acreage, and a year later, Mitsubishi sold pieces of its stake to Chubu Electric Power, Tokyo Gas, Osaka Gas, and KOGAS. CNOOC also holds acreage there, through its acquisition of Nexen.
Jean Marie (not pictured) – This natural gas play is more a mix of traditional conventional, carbonate, and tight sands. There have been very few horizontal wells drilled here to date.
Development in the Horn River may still be in its early innings, but there are a number of companies who are working to ramp up production in the play. Eleven of the largest acreage holders in the Horn River Basin have combined to form the Horn River Basin Producers Group (HRBPG), in an effort to share information about the basin, to minimize land surface disruptions, and to serve as a liaison to the surrounding community. HRBPG members include Apache, ConocoPhillips, Devon, Encana, EOG Resources, Exxon/Imperial Oil, Nexen (now part of CNOOC), Pengrowth, Quicksilver Resources, Suncor, and Stone Mountain.
Quicksilver Resources (KWK) certainly has an added incentive to develop the Horn River, as it has transportation commitments to deliver up to 1.1 Tcf of Horn River production over the next ten years, depending on the ultimate outcome of the now delayed Komie North Pipeline project (more than 900 Bcf of that commitment is after the year 2017). As of year-end 2012, KWK only had 105 Bcf in proved reserves, only 10% of its committed volumes.
In addition, Chevron made a substantial commitment to Northeast British Columbia in December 2012, when it agreed to pay an estimated $1.3 billion for a 50% stake in the proposed Kitimat LNG export facility and connecting Pacific Trail Pipeline, and a 50% interest in approximately 644,000 acres in the Horn River and Liard Basins.
In February 2013, the National Energy Board of Canada said projections that Horn River production could grow to 3.5-4.0 Bcf/d were “plausible.” Current low natural gas prices are choking off some investment in the play for now, but most operators in the Horn River have up to 10 years before they start losing their lease positions. However, in order to achieve significant large scale production in the Horn River, we believe the industry must overcome the following issues that face all the natural gas formations in Northeastern British Columbia:
Lumpy Progress on Infrastructure – Midstream capacity in the Horn River continues to grow, but at a very uneven pace. In May 2012, TransCanada Corporation expanded its Alberta System into the Horn River Basin, which added 1 Bcf/d of takeaway capacity from the play. However, plans to further expand into the Horn River were shot down when the NEB rejected TransCanada’s proposed Komie North Expansion project, because the company had only obtained one shipper (Quicksilver Resources). Quicksilver now believes Komie North will not be completed until 2017.
Things are similar on the processing side. As mentioned previously, Spectra Energy exited 2012 with 250 MMcf/d of treating capacity at its Ft. Nelson processing plant, but it expects to expand that to 1.2 Bcf/d sometime in 2013. On the other hand, Enbridge and its partners announced in October 2012 plans to defer both phases of its proposed 800 MMcf/d Cabin Gas Plant indefinitely.
Relatively Poor Economics - Despite the fact that royalty rates in British Columbia are quite low by industry standards, in February 2013, the National Energy Board estimated that supply costs in the Horn River averaged C$3.50/Mcf (U.S. dollar at par), well above competing gas plays in the United States. Much of that cost is no doubt the result of high transportation costs spread over lower volume. A lack of infrastructure always creates something of a chicken and the egg problem. High drilling costs prevent producers from drilling, which in turn makes them less likely to underwrite gathering and pipeline projects. On the other hand, if producers had enough infrastructure in place, they could ramp up production, and lower unit costs.
But even after prolific drilling and anticipated efficiency improvements improve economies of scale, Horn River expenses are still projected to average C$2.20/Mcf in time, the NEB concluded. Moreover, producers must contend with weak basis differentials, and Horn River production is dry gas, so they do not receive an economic uplift from NGL sales.
Competing Supply - Gas volumes flowing east on TransCanada’s mainline have decreased in recent years, in no small part because of they must now compete with growing volumes from the Marcellus Shale. Moreover, if the Ohio Utica/Pt. Pleasant Shale formation and maybe even the Upper Devonian Shale reach full development mode, that may compete directly with gas from TransCanada into the Midwest. Horn River gas also has to contend with other emerging Western Canadian plays, such as the Duvernay, Montney, and possibly even the Bakken Shale if more gas infrastructure is built there. Western Canada will no doubt need growing production from unconventional sources to help counter natural declines in its legacy production. However, given these other emerging areas, Horn River production may not be necessary to achieve that.
Several operators have said their future drilling plans in the Horn River will depend on both future natural gas prices, and the development of the proposed Kitimat LNG export terminal off the west coast of British Columbia, which in turn may depend on the ability to achieve oil based prices for exported LNG. As of February 2013, Apache and Chevron were 50-50 partners in the Kitimat project. Chevron’s involvement is no guarantee that Kitimat will ever be built, but the company does have significant experience in the world LNG market. As of July 2013, Kitimat had received all significant environmental approvals and a 20-year export license from the Canadian federal government, but the project sponsors had yet to reach a final investment decision.
Two other potential catalysts for Horn River production could be the continued growth of Canadian Oilsands production, which requires a significant amount of natural gas, as well as any gas-to-liquids (GTL) projects that may be planned in the future. However, the latter option may not be imminent, especially since Sasol has already shelved a proposal to build a GTL project in the Montney Shale.