Mushing the Huskies To the Grand Banks

With prices still at record highs by Canadian standards, interest is heating up among producers in accelerating natural gas development in the East Coast offshore, including remote prospects on the Grand Banks of Newfoundland.

The enthusiasm showed in an asset acquisition offshore of Nova Scotia and disclosures of a second proposal for a pipeline to connect gas finds made as a byproduct of oil exploration offshore of Newfoundland. In the transaction, buyers stepped forward for a provincial Crown corporation that its government founders repeatedly tried unsuccessfully to sell during its 20-year history. Pengrowth Energy Trust, PanCanadian Petroleum Ltd. and Emera Inc. made a deal to buy the assets of Nova Scotia Resources Ltd. for a total of C$420 million (US$290 million). The package includes an 8.4% interest in the Sable Offshore Energy Project, with Pengrowth buying the gas reserves while Emera purchases production facilities and PanCanadian picks up other assets in the nearby Cohasset-Panuke field.

The deal was structured to leave the Nova Scotia government with C$799 million (US$550 million) in debts owed by the provincial resource corporation. Founded in 1981, the enterprise had no equity and wound up borrowing to pay for all acquisitions and industrial ventures. It was left out on a limb by 1980s collapses in energy prices and offshore industry activity. Now a bidding contest is possible. Closure of the sale has been put off until April because SOEP's senior partners, Mobil Canada and Shell Canada, have a right of first refusal on the provincial company's interests and are reviewing the matter. Pengrowth president James Kinnear described SOEP as "one of the most exciting energy plays in the world," with potential to expand in two or three years well beyond its current production of 450 MMcf/d.

Offshore of Newfoundland, Husky Energy is no less enthusiastic about gas prospects on the Grand Banks - but more patient, by necessity. At a conference in St. John's, chief operating officer James Blair disclosed that Husky has developed a pipeline concept with help from specialists in the field. It is a different variation on a theme unveiled about four years ago by the Tatham Offshore organization, which continues to work on plans for a subsea network reaching from New England to Newfoundland.

Husky's scheme is an 875-mile pipeline that would start at its White Rose oil and gas discovery. The route, selected to stay in water deeper than the scouring bottoms of icebergs that annually drift through the region, runs in an S-shape. It follows the curved northern edge of the Grand Banks, crosses the island of Newfoundland at its narrowest point, then veers south and west across the Gulf of St. Lawrence to the starting point of Maritimes & Northeast Pipeline in Nova Scotia at Country Harbor.

The idea calls for initial deliveries of 900 MMcf/d from White Rose, with pipe capable of operating at pressures of up to 3,375 pounds per square inch because it has to have thick walls in deep water. The result is a "dense phase system" that the engineers say "minimizes potential operating problems." Costs are estimated at C$3.5 billion (US$2.3 billion).

Blair described the idea as "a substantial, but technically viable project." At the same time, he pointed out that the fledgling industry offshore of Newfoundland --- which only began producing oil in late 1997 --- still has a long way to go to move into gas. The Husky studies concluded the project would take five years to build after a decision to go ahead, and that commitment in turn still depends on whether enough gas is found. The cost estimate "leads us to conclude that reserves in the range of seven to 10 Tcf need to be proven before such a project can be considered." While Husky geologists and engineers calculate that the Grand Banks region harbors a gas endowment of 26 Tcf, four-fifths of it remains a projection of "undiscovered potential." Discoveries to date add up to 4.8 Tcf.

Husky maintains that it has at least proved Newfoundland can be in the running for frontier gas development. "Based on this substantial potential resource and the significant volumes discovered to date, we conclude that the Grand Banks region has the potential to be competitive with other frontier regions such as the Sable-Abenaki region (offshore Nova Scotia) and the Mackenzie Delta-Beaufort Sea region." Blair added that "while this is a very promising statement, it is also a reality check: Resources have to be competitive with other frontier regions if they are going to get to market."

Gordon Jaremko, Calgary

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