EnCana on Wednesday withdrew its regulatory plan to develop the Scotian offshore Deep Panuke project, and said it will instead submit a new plan within six months after drilling two successful exploration wells at the natural gas play.

Among other things, EnCana suggested it may consider piping offshore natural gas from the nearby Sable Offshore Energy Project (SOEP).

Earlier this year, EnCana asked Canada’s National Energy Board (NEB) for a time-out on the Panuke regulatory process because the expected commercial production from Deep Panuke was deemed insufficient to support a long-term transportation agreement with Maritimes and Northeast Pipeline. EnCana then began a comprehensive project review (see Daily GPI, Feb. 18). COO Randy Eresman said Wednesday that because of the development changes, “it’s clear that the original development plan is no longer appropriate.”

Eresman said that when EnCana called for the regulatory time-out and began its comprehensive review, “our goal was to strengthen the risk-adjusted project economics.” He said EnCana had made “considerable progress” on its objectives, but added there was “still plenty of work to do.”

The Calgary-based super independent, now the largest North American producer, drilled two new wells near the Deep Panuke discovery: Margaree and MarCoh. Now, the company has begun an “extensive analysis” on production facilities to examine different gas transportation arrangements.

During a recent nine-day production test, EnCana’s Margaree well flowed gas at a rate of more than 53 MMcf/d, similar to older Panuke production tests. The well, located about seven kilometers northeast of the Panuke discovery well, has a gas-bearing pay zone of about 70 meters. And the MarCoh well, located four kilometers northeast, encountered approximately 100 meters of gas bearing reservoir, which provided sufficient reservoir information to define that portion of the reservoir and determine that a flow test was not required.

Eresman called the successful wells “positive news” for the project. “The well results have extended the geographic extent of the known gas-bearing reservoir and expanded our knowledge and understanding of the field. This has given us greater confidence in the economic potential of the Deep Panuke discovery.”

Based on tests from two initial exploration wells in 1998 and 1999 the Deep Panuke field had been estimated to hold 1 Tcf of gas, compared to the SOEP’s 3-4 Tcf. Deep Panuke also was expected to produce 400 MMcf/d.

In recent months, said Eresman, “we’ve assessed the most appropriate way to develop the field, including the potential of a smaller production facility that produces at lower plateau volumes for a longer period of time, thereby reducing the project’s capital cost. We’ve also held preliminary discussions with the SOEP group about the possibility of using existing infrastructure. In addition to these considerations, the mainline transportation picture will be impacted by the size and timing of the project.” EnCana would have to redo its environmental assessment if it decided to use the SOEP in its development plans.

Analyst Thomas Driscoll of Lehman Brothers said the results from the two wells “provide further confidence in EnCana’s ability to salvage” its heavy investment in the Panuke. However, he noted that the project still does not meet EnCana’s “economic threshold” as it currently stands, even with positive results from two wells.

“To meet economic thresholds, EnCana is looking at possibly building a smaller production facility that produces at lower plateau volumes for a longer period of time or hooking into the Sable Offshore Energy Project (SOEP),” said Driscoll. “There may be an opportunity to work a deal with the SOEP group as EnCana’s partners in the MarCoh well, Exxon Mobil and Shell Canada, hold dominant positions in SOEP, which has been suffering from large production declines (down roughly 155 MMcf/d or 25% from peak volumes).” EnCana owns 100% of the Margaree and 24.5% of MarCoh. The MarCoh is 51% owned by Exxon Mobil Corp. and 24.5% owned by Shell Canada.

Driscoll noted that EnCana expects to have a development plan ready by the end of the second quarter of 2004. “Even if the company finds a way to salvage the project, there is risk that the regulatory process delays development of the discovery. Management is hopeful that the federal and provincial authorities will look to streamline the regulatory review process.”

Brian Prokop, an analyst with Calgary-based Peters & Co., had expected EnCana to change course on the Panuke after the two wells showed positive results. However, he remains unsure how fast the producer will go forward. EnCana had until Dec. 10 to meet with the Canada-Nova Scotia Offshore Petroleum Board and the National Energy Board for a status report following its approved time out.

Prokop said the results from the two new wells indicates a “comfortable level of threshold volumes.”

Although the new well results are encouraging, Eresman added that the Panuke development “will move forward provided it can achieve risk-adjusted returns that are competitive with other projects in the company’s portfolio of investment opportunities.” Eresman said the project would “not be sanctioned before all new design elements are complete and regulatory approval is received.” However, he added that EnCana was committed to “bring this project to reality in Atlantic Canada.”

EnCana filed its original plans with the NEB and the Canada-Nova Scotia Offshore Petroleum Board in March 2002. Going forward, Eresman said “EnCana will continue to work on developing the optimal plan for Deep Panuke development. The company is hopeful that, during the interim period, federal and provincial authorities will re-examine the regulatory process and look for ways to streamline the review process.”

Some are suggesting that EnCana’s move to withdraw the original Panuke plan will put pressure on provincial authorities to speed up a streamlining process. This week, Canadian government officials from Nova Scotia, Newfoundland and the Canadian government are meeting in Halifax to work on the regulatory process for its East Coast offshore energy sector. The working group wants a solution to ongoing complaints from the energy sector that offshore regulators for different jurisdictions often duplicate each other’s work, loading down companies with red tape. And EnCana CEO Gwyn Morgan has been one of the biggest advocates of streamlining.

Charles Lester, director of policy and strategic planning for the energy branch of the Newfoundland and Labrador Department of Mines and Energy, said he is optimistic “meaningful progress” is being made, and added he expects an interim report within three to six months. The report could lead to a meeting of the provinces’ energy ministers.

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