An increased focus on long-life plays by major producers eventually should moderate production declines in Canada, but they will not be enough to fully offset continuing declines, Lehman Brothers said in a report issued Tuesday. Analysts also warned that recent sales announcements could be a prelude to more divestitures from the maturing Western Canadian Sedimentary Basin (WCSB).
As a result of the declines, analysts Thomas R. Driscoll and Philip R. Skolnick forecast average total Canadian gas production — western and offshore East Coast — will fall 2-3% in 2004, 1.5-2% in 2005 and 0.5–1.5% annually between 2006-2008. By comparison, Canada’s National Energy Board (NEB) recently forecast year-end natural gas deliverability in Western Canada to decline 0.5% in 2003, 0.4% in 2004 and 2.3% in 2005 (see Daily GPI, Dec. 9).
“Higher gas prices should support the drilling of small pools and unconventional resources,” said the Lehman analysts. “The NEB believes there is an abundance of small pools and unconventional resources around the WCSB,” and they noted that the country “is already seeing this shift toward unconventional resources with companies such as Burlington Resources, Canadian Natural Resources, Devon Energy and EnCana Corp. targeting long-life, tight natural gas resource plays.”
Those producers and others also are “enthusiastically engaging in coalbed methane (CBM) pilots, in hopes of developing an estimated 146 Tcf to 3,000 Tcf of long-life reserve potential in Canada.” Driscoll and Skolnick said that CBM could comprise 1.3% of total Canadian gas production in 2005, compared with 0.2% this year. Because CBM is still “new,” said the analysts, the NEB has noted that activities to date have not yet resulted in a “clear consensus” on the “ultimate commercial viability of CBM in Western Canada.”
In a related note, the analysts said that ChevronTexaco and Murphy Oil’s recent announcements to sell western Canadian properties is “at least partially the result of the Canadian Royalty Trust sector’s continued willingness to pay premium valuations.” The sales, they said, “could be a prelude to additional divestitures of assets in Canada as the WCSB is maturing.”
ChevronTexaco announced earlier this month that it would sell 35 Mboe/d of its western properties, which are mostly light oil as part of an effort to dispose of 700 non-core North American assets (see Daily GPI, Dec. 10). Murphy also announced this month that it would sell about 20 Mboe/d of production and 40 MMboe of reserves (see Daily GPI, Dec. 9).
“The asset sales could provide acquisition opportunities for Canadian E&P’s looking to achieve economies of scale through consolidation of properties that include associated midstream assets,” said the Lehman analysts. “However, we believe the environment favors Canadian Royalty Trusts, which trade at a 60+% premium to conventional E&Ps” on a cash flow basis.
“Canadian Royalty Trusts rely on the acquisition of mature properties to grow reserves, production, and cash distributions. We feel only a handful of trusts, such as ARC, Enerplus, and Pengrowth have the size and financial wherewithal” to make acquisitions of the size that ChevronTexaco’s and Murphy’s are, and “even a US$1 billion acquisition could be tough for these three. As a result, we believe the assets will probably be split up into separate packages in an attempt to increase the amount of potential buyers and potential proceeds.”
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