A Shell Canada Ltd. executive said last week he believes that Nova Scotia’s offshore oil and gas industry will decline after 2010 unless more discoveries are made in the near future.

Dave Collyer, vice president of Shell Canada, told attendees of the Canadian Energy Research Institute that production at the prolific Sable Island Offshore Energy Project (SOEP) is declining “sooner than we thought.” Sable began production in 2001 and total production is currently about 500 MMcf/d.

Collyer’s comments reflect two production downgrades by Shell Canada regarding Sable’s reserves in a year’s time. In January, Shell Canada announced it was reducing its Sable gas estimates to 700 Bcf from 790 Bcf (see NGI, Feb. 3). Shell Canada’s full-year production from SOEP in 2002 averaged 158 MMcf/d, up slightly from 2001.

The January downgrade came about one year after the company’s first revision of SOEP potential. In February 2002, it revised downward by 27% its estimated gas sale reserves there (see NGI, Feb. 4, 2002). Shell Canada owns 31.3% of SOEP; the other owner-operators are Exxon Mobil Canada (50.8%), Imperial Oil Ltd. (9%), Nova Scotia Resources (8.4%), and Mosbacher Operating Ltd. (0.5%). (Exxon Mobil is 70% owner of Imperial.) Only Shell has publicly revised its forecast.

“There’s a direct translation from reserves to production,” Collyer said. “You reduce reserves, you pull the production decline forward. We have reduced our reserve estimates and what that does is pull the point at which the field goes on decline back sooner.”

The Shell executive said that the “absence of significant exploration success” is signaling an expectation that total production from SOEP will remain around 500 MMcf/d “at least until 2010, 2012, period.” Collyer did not estimate how much he thought the decline would be.

Sable’s natural gas reservoirs are more difficult to tap than first thought, he said, detailing problems with sand and water at the Venture field site that will require more infill drilling. Venture also will require the producers to install more expensive compression equipment than originally estimated.

Taking “today’s costs” and Shell’s price outlook, Collyer said, “the overall project looks rather marginal.” New development wells cost between C$65 million and C$75 million each, which requires a “sizeable” investment by the partners.

However, Nova Scotia officials said that Shell Canada’s estimates are not necessarily shared by the other operators. The province will be collecting a royalty rate of 30% of net revenues over the 25-year life of SOEP, with the highest amount — C$100-310 million a year — expected between 2007 and 2011, according to the Nova Scotia Energy Department.

“Exxon, none of the other partners have made the move to downgrade,” noted a Nova Scotia official. “This is the prediction of one company, that is one partner.” However, Exxon Mobil has indicated it does not expect SOEP to be maintained for 25 years, she said. The government also has not set a time frame for how long SOEP can maintain its current level of production.

Of Shell’s production downgrades, Collyer said, “Shell has reduced, by a fair amount, our own estimate of natural gas reserves for Sable by about 40% going back to the original estimates that were made in 1997.” However, he added that the company will continue its search for more gas off the East Coast of Canada, and it plans to drill another exploration well in the next year. It suspended its C$90 million Onodaga well in the province last year when no gas was found. Also, Collyer said the results from the last four shallow wells off Nova Scotia’s coast have been disappointing.

“I think the deepwater potential offshore Nova Scotia is probably the best opportunity for significant production growth,” Collyer said. “But if we’re looking at new infrastructure, the West Coast, the North, the deepwater offshore of Nova Scotia, I think we’re pushing toward the end of the decade.”

Collyer said Shell was not “gun-shy” about East Coast production, but he added that the recent drilling developments has been underwhelming. “I wouldn’t be unduly pessimistic about the short-term results, but I think there’s also an element of realism that in the very short term we don’t expect to see significant production growth. It doesn’t mean that it can’t happen over the longer term or that we won’t get some surprises as we move forward, but certainly the exploration results that we’ve seen over the last couple of years have been disappointing.”

Key to East Coast success will be for companies to drill more wells, said Collyer. That is expected as exploration licenses expire over the next two years.

Although Shell has cut back its predictions for Nova Scotia, new gas reserves are more promising offshore the province than in any other frontier in Canada, according to CERI’s Paul Mortensen. He said another Nova Scotia natural gas project should be ramped up by the end of the decade. A Northern frontier project is expected to begin producing gas in 2012, while an offshore British Columbia project could have a commercially operating project online by 2010. The BC project, however, is under moratorium at the moment, he added.

Mortensen said some of Nova Scotia’s future production will depend on what EnCana Corp. decides. In February, EnCana announced it would delay its Deep Panuke project for at least a year; the National Energy Board has given its approval for the delay (see Daily GPI, Feb. 27 ). EnCana, said Mortensen, is “having trouble justifying the economics.” He added, “provided the other drillers have success, then I think it is viable.”

Major natural gas finds will be needed to meet the future’s demands, Mortensen said. “East Coast gas has kept us going for a couple of years, where the other resources were declining. I think it will contribute the biggest advantage in its proximity to Northeast markets.”

According to the province’s Energy Department, Nova Scotia now has nearly 60 exploration licenses, with commitments to spend C$1.5 billion between now and 2007. The deepwater holds the most potential, according to George Anderson, federal deputy minister of natural resources.

“We’ve got activity there now,” said Anderson of the offshore. “We’re looking forward to seeing what that’s going to produce. There are some people who are hopeful about that.”

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