PanCanadian Find Could Boost Sable Output

The next growth step for Atlantic Canada's fledgling natural gas industry has popped up on the horizon in the form of a discovery with potential to double offshore production and exports to New England. Offshore of Nova Scotia, PanCanadian Petroleum Ltd. expects to know by the end of this year the true size of a gas find in the Sable Island region that it has christened Deep Panuke.

The first two wells, drilled in 1998 and '99 to a depth of about 11,500 feet to a new geological zone underneath PanCanadian's Panuke oilfield as it began running dry, yielded spectacular production tests exceeding 50 MMcf/d each.

President David Tuer cautioned that the extent of the gas deposit is not yet known but added that two more wells this year will let PanCanadian "feel the edges" and put its engineers to work on development plans. In a briefing book used for an annual show-and-tell tour of the financial community, PanCanadian keeps its estimates conservative but also makes it plain that a major development is on the horizon. An illustrative example of Deep Panuke's potential describes a C$645-million (US$445-million) production development to tap 1 Tcf of reserves at a rate of 400 MMcf/d for 15 years starting in the fall of 2003. That flow would nearly double the output that the Sable Offshore Energy Project started exporting to New England via Maritimes & Northeast Pipeline this winter. PanCanadian's scenario describes the Panuke project as attractive at a gas price of US$2.50/Mcf, or a level well within the expectations of Canadian consensus on the outlook for gas exports.

Tuer said it is hard to imagine anything but a highly favorable story for Canadian gas for at least the next five years as a result of strong demand in the United States, the expanding international pipeline grid and encouraging drilling results from British Columbia to Nova Scotia.

The PanCanadian president, at a Calgary state-of-the-company briefing, disclosed that M&NE has made overtures to connect Deep Panuke. The pipeline is understood to be capable of about doubling its initial capacity into the 1Bcf/d range with additions of compressor power. But Tuer also indicated PanCanadian is keeping open its options for developing its own delivery scheme. "That is a strategic issue we're not ready to talk about yet," Tuer said. The PanCanadian president said "this discovery is potentially the most significant in the company's history. By the end of the year, we'll be able to confirm or refute that."

That is the kind of statement that is making believers out of industry interests such as the M&NE combination of Westcoast Energy Inc. (37.5%) Duke Energy (37.5%), Mobil Canada-ExxonMobil (12.5%), and NS Power Holdings Inc. (12.5%). PanCanadian already jockeys for top spot among Canadian gas producers by volume with BP Amoco Canada, Alberta Energy Co. and Shell Canada. PanCanadian expects its production to nudge 1 Bcf/d this year and in 2001 top that landmark, formerly the undisputed terrain of BP Amoco.

By the yardstick of low costs, PanCanadian claims top spot because of its stature as a Canadian counterpart to the Burlington and Union Pacific Resource empires in the United States. PanCanadian too is the heir to vast grants of land and mineral rights given to its parent, Canadian Pacific, to build a transcontinental railway in the 19th Century. In PanCanadian's case, the original parent has kept an 87% interest and has no intentions of selling until the stock exchanges get over their infatuation with the Internet.

PanCanadian reports its finding and developing costs run in a range of C37-80 cents (US26-55 cents) an Mcf. Deep Panuke will sit in the middle of the range, at C67 cents (US46 cents) if the marketable reserves turn out to be in the trillion-cubic-feet range and lower to the extent that the next wells find a bigger reservoir. Deep Panuke is only the beginning of PanCanadian's ambitions for gas offshore of Nova Scotia, where the company has ownership interests averaging 60% in more than four million acres (6,250 square miles) after expanding its holdings last year at the head of several prospect acquisition partnerships.

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