New well techniques have unlocked a potentially huge natural gas play that borders the Canadian provinces of British Columbia and Alberta, with various third-party estimates putting original gas in place (OGIP) in a wide range of between 50 Tcf and 700 Tcf.
The Montney tight gas sands play "may surpass the Barnett Shale in resource potential," wrote Raymond James & Associates Inc. energy analysts J. Marshall Adkins, Pavel Molchanov and Andrew Bradford. "Any way you slice it, this could be big."
The BC government has estimated 30 Tcf for the Upper Montney and 50 Tcf for the Lower Montney formations, according to the analysts. "This total of 80 Tcf is only based on the BC portion of the play -- i.e., it does not include Alberta. Assuming a 25% recovery factor, this implies at least 20 Tcf of recoverable gas."
The Barnett Shale in Texas, which currently is the largest gas resource play in the United States measured by proved reserves and production, has estimated ultimate recovery of about 30 Tcf (assuming 25% recovery on 120 Tcf of OGIP), noted the analysts. The recent Barnett "lookalikes," such as the Fayetteville and Woodford shales, generally have lower resource estimates, although they are still in the multi-Tcf range. The Montney play is also sizable compared to proved gas reserves. The most recent data from the U.S. Energy Information Administration at year-end 2006 estimated proved reserves of 211 Tcf in the United States and 58 Tcf in Canada.
"Against this backdrop, adding in 20+ Tcf of recoverable gas -- and possibly much more -- is no trifling matter," said the Raymond James team. However, commercialization of the Montney play is expected to take "many years (if not decades) to develop. The first big year for the Montney was 2007, with 40-50 wells drilled, and we are expecting double that in 2008. This is a fraction of the number of Barnett wells now being drilled."
The Raymond James report on the Montney preceded news last week by Chesapeake Energy Corp. concerning the tremendous potential of yet another North American gas play near Shreveport, LA -- the Haynesville Shale (see related story).
Producers now exploring the Montney play include BP plc, EnCana Corp. and ARC Energy Trust (see NGI, Jan. 28).
As in Barnett exploration, the application of horizontal well techniques has been an important key to unlocking the economic potential of the Montney resource. "Prior to this, the Montney was developed using vertical wells, which yielded only average economic returns. The current focus is the Upper Montney, which is being developed by drilling horizontal wells with multi-stage fracture stimulations (fracs), which are common in U.S. shale plays," said the analysts. So far there has been a "two-fold increase in production for a horizontal well with a three-stage frac as compared to a vertical well with a two-stage frac."
Using vertical wells, the Montney resulted in average internal rates of return (IRR) of about 10% at US$6.00/Mcf gas (approximately equal to the cost of capital). With horizontal wells, IRRs nearly tripled to about 27% at $6.00/Mcf gas. Currently, horizontal wells in the Montney have a typical drilling and completion cost of C$5 million (down from C$7+ million one to two years ago) and reserve recovery of 3 Bcf, according to the analysts. "Relative to the Barnett, Montney's IRRs are still considerably lower. This is mainly due to the Barnett's faster completion times and therefore lower well costs, a function of the much longer industry track record in the Barnett."
Some caveats are associated with developing the Montney, noted the analysts.
"Like the Barnett in 2000 and the Fayetteville in 2005, the Montney is an early-stage resource play, with limited drilling activity currently (we are projecting 80-100 new horizontal wells in 2008)," the analysts noted. "Accordingly, it would be a stretch to argue that the Montney alone will turn around the decline in Canadian gas production. Facility constraints and limited takeaway capacity have curtailed production to date. While the dramatically improved economics of horizontal wells will likely motivate companies to invest in pipeline and compression facilities to accommodate increased production, do not look for the Montney to become a major contributor to Canadian gas production until 2010 at the earliest."
In addition, the heavy forest cover of the Montney acreage creates operational challenges that are not found in many U.S. resource plays. The Barnett is a notable exception given that some of its best acreage requires urban drilling in Fort Worth, TX. And like most areas in Western Canada, the Montney area is subject to seasonally restricted access. Activity is at its peak during the winter months, drops to low levels during the spring breakup period, and returns to about 80% of winter capacity from July through December.
"Assuming first-year production of 2.5 MMcf/d for a Montney well, drilling 100 wells per year would add production of 250 MMcf/d once the midstream bottlenecks are removed," said the analysts. "For context, Canada is currently producing about 18.5 Bcf/d, so this would move the needle by 1.4% (everything else held constant, of course). In reality, Canada's conventional gas production is likely to trend lower over time, so if anything, the Montney would probably serve mainly to offset declines elsewhere. But there is no question that as the Montney gets increasingly developed, on the margin it will serve as a growth driver for Canadian gas production and hence gas exports to the U.S."
The Montney's geographic features may prevent it from ever attaining the scale of a Barnett or a Fayetteville play in terms of actual production, but "it is an excellent example of a natural gas play that previously had marginal economics but has firmly reached commerciality due to sophisticated drilling techniques," wrote the Raymond James team. "As investors will recall, significant production growth from U.S. unconventional resource plays is the single biggest factor behind our cautious stance on North American gas prices. The emergence of the Montney suggests that a similar trend is under way in Canada, and while this of course will provide opportunities for companies...directly involved in the play, it underscores industrywide growth in gas supply."
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