BC’s booming shale gas sector has become a victim of its own success, but experts say investors will hang on for the long term.
According to a Ministry of Energy report published this month, industry investment in the province’s gas sector is expected to top out at $6.3 billion in 2010-11, and then decline 20% to $5 billion in 2011-12.
In fact, the ministry does not expect investment levels to recover until 2013-14 when annual investment in exploration and development is targeted to hit $6.4 billion.
The prediction comes amid a plethora of massive shale gas finds throughout North America, which have reduced prices in recent months.
At press time, natural gas was trading at US$3.89 per million BTUs, down from $4.73 a month ago.
On February 17, the provincial government put another $120 million on the table to “spark” investment in the sector via its royalty credit program.
Kevan Holroyd, executive director of Ernst & Young’s oil and gas practice, believes junior natural gas companies will look to be acquired or land significant investments this year to support their exploration programs.
“What we’re going to see is an increase of natural gas companies that have to transact in one shape or form to be able to keep their drilling programs going,” Holroyd said. “One way is for folks to come in and take them out by way of a transaction.”
Although prices remain low, Holroyd said the investment community views the Canadian gas sector as a long-term holding.
Earlier this month, gas giant Encana (TSX:ECA) inked a $5.5 billion agreement with PetroChina for 50% of the Calgary company’s Cutbank Ridge assets in B.C. and Alberta.
That deal followed a $50 million agreement on February 7 in which Vancouver’s Pacific Northern Gas (TSX:PNG) agreed to sell its 50% stake in the Pacific Trail Pipeline to Apache Canada and EOG Resources Canada.
The yet-to-be-built 463-kilometre pipeline would ferry gas from Summit Lake, B.C., to a planned liquefied natural gas terminal owned by Apache and EOG in Kitimat.
If built, the $1.3 billion terminal would give western Canadian producers a key outlet to the Asian market.
Holroyd said 25% of investment in Canada’s oil and gas sector last year originated in China, Korea and Thailand.
Andrew Potter, an analyst with CIBC World Markets, said although companies are spending less on developing their gas assets, thanks to current pricing, there’s more money being spent on unconventional plays than conventional plays.
That’s good news for Western Canada. The region’s new plays in the Horn River and Montney Basins are unconventional shale gas finds, which require complex horizontal fracturing techniques to extract.
“Shale gas spending [is] cannibalizing conventional spending,” Potter said. “Within the industry, spending overall is down, but spending on shale is flat to up even on a year-to-year basis, so that bodes well for B.C.”
Although highly prospective plays in the U.S. south and east are closer to consumers, Potter said the quality of B.C.’s gas resources and the province’s royalty and regulatory environment could offset low prices and continue to drive interest in the sector.
“Long story short: the Canadian plays are farther from the end market now, but the fact is the Montney and some of the deep basin plays are very, very competitive with the top U.S. plays.”
The Petroleum Services Association of Canada is also optimistic about the sector.
The organization has projected a 7% increase in the number of wells that will be drilled in B.C. this year, totalling roughly 700 new wells.
“I’m very confident that we’re going to be in for a robust transactions cycle,” Holroyd said.
“2009 was tough, 2010 was a good start and … we’re seeing for the first six weeks of this year a lot of optimism across all the sectors … all we need is for gas prices to get their act together.”