A triple hunting license — to increase delivery capacity, cast for customers and accelerate drilling — has been granted to the leaders of the next growth planned for natural gas production offshore of Nova Scotia, Maritimes & Northeast Pipeline (M&NP) and EnCana Corp.

The National Energy Board (NEB) said it meant to encourage development of Canada’s newest gas-supply region with its ruling Dec. 5 to approve an 80% expansion of M&NP’s capacity by 400 MMcf/d to nearly 1 Bcf/d for C$191 million (US$122 million) (see Daily GPI, Dec.6). The decision included a condition intended to give all concerned flexibility to change the project depending on market developments. M&NP and EnCana were given until July 31, 2003, to determine the extent of capacity required to the boundary with the United States.

The ruling enables EnCana to exercise a “step-down option” that entitles it to reduce by as much as half, to 200 MMcf/d, its initial commitment to use all the new capacity for exports. Use of the option will depend on negotiations, now under way, with prospective Canadian gas users in Nova Scotia, New Brunswick and Prince Edward Island.

The NEB’s action also gives EnCana, and possibly other producers, extra time to extend the offshore drilling play driving the project. So far, EnCana stands out as the sole subscriber for all the M&NP expansion capacity by dedicating all the production planned from its C$1.1-billion (US$700-million) Deep Panuke project. EnCana has postponed production for up to a year past its original target of late 2005 as a result of a regulatory logjam created by environmental and aboriginal interventions in a federal-provincial panel’s review of Deep Panuke.

The NEB noted that EnCana is far from the only producer exploring for added discoveries in largely virgin geological formations, including entirely new deep-water areas. Evidence in the M&NP case showed that producers have made work commitments to secure drilling leases that add up to an industry-wide exploration budget for offshore Nova Scotia of C$1.6 billion (US$1 billion) over the next five years. There were forecasts that the region will attract C$8 billion (US$5 billion) in exploration over the next 25 years.

Projections of reserves awaiting discovery offshore of Nova Scotia range from a conservative 18 Tcf to an optimistic 88.7 Tcf. The NEB agreed with the industry that while too little exploration has been done and too few results of new drilling plays have been disclosed to nail down figures with precision, there is ample evidence to show that the geologists believe they are onto something big.

The board pointed to an EnCana transportation contract commitment to pay C$734 million (US$470 million) to hold all the new firm capacity on M&NP for 10 years despite limitations on the Deep Panuke discovery so far. The producer’s engineers calculate the reserves with a 90% certainty rate so far at about 800 Bcf. The maximum output being forecast with confidence is 950 Bcf.

Barring more drilling successes, with an exploration campaign EnCana and an array of other producers are in the process of mounting, Deep Panuke production is projected to decline by more than 80% by year 10. All concerned have described the find, scored with a handful of wells, as just the start on an exploration play known as the Abenaki Reef.

The NEB turned down a request by the New Brunswick government to withhold approval of the M&NP expansion until the outlook becomes clearer. The board said it recognizes “the uncertainty associated with supply is higher in the early stages of basin exploration and development than in the more mature stages…the timely availability of pipeline infrastructure can be a factor in industry’s plans to continue exploration.”

The NEB said “one of the primary benefits of the proposed facilities is the ability to develop incremental supplies of Scotian gas.” Besides ensuring that new delivery capacity will be available quickly, the project is forecast to cut tolls by 29% to C$0.51/MMBtu (US$0.32) from C$0.72 (US$0.46) by spreading costs of three-year-old M&NP thinner over increased delivery volumes.

The board also repeated a promise to keep a close eye on the fledgling domestic market for offshore gas that it made in a decision earlier this year rejecting a New Brunswick appeal for special export restrictions to reserve supplies for Canadians. The NEB said it expects producers to negotiate in good faith with potential Canadian consumers.

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