Optimism and caution for HRBPG: Spring 2012 activity update

By Kathy Smith

One of several medium-sized natural gas processing plants in the Horn River Basin.  Photo by Kathy Smith.

One of several medium-sized natural gas processing plants in the Horn River Basin. Photo by Kathy Smith.

With the persistent downturn in the price of natural gas, northeast B.C.’s Horn River Basin is seeing slightly less activity tempered with optimism in anticipation of an eventual gas price correction.

The Horn River Basin Producers Group (HRBPG) consists of nine members: Apache, Conoco Phillips, Devon, Encana, EOG Resources, Esso Imperial/ExxonMobil, Nexen, Quicksilver Resources, and Stone Mountain Resources. Their holdings represent approximately 97 per cent of the land in the area.

“There are all sorts of different levels of activity amongst producers in the Basin, and always have been,” says HRBPG chair Rob Spitzer. “For this year, the more active players will likely be Nexen, KOGAS drilling with Encana, and maybe a few others – it’s a real range and it averages out to slightly less activity when compared to 2011.”

Spitzer, who’s also the vice-president of Exploration for Apache Canada Ltd., expects there will be a little less drilling, seismic and lease construction this year.

“2012 will likely result in slightly fewer wells than 2011, which is true of horizontal and vertical wells. The producers group planned to drill 84 wells in 2011 and came in at 53 as of December 1st, so it could be 56 in total. This year, the plan is for 79, and we’ll have to see what the actual is going to be.

“Generally, the forecast for the upcoming year tends to be a little higher than the actual because after companies plan their budgets, conditions change, particularly in a lower-price environment, and they usually do a little less than they planned,” Spitzer adds.

Development in the basin is in its early stages and some larger projects, such as the Cabin Gas Plant, are in the process of completion.

“Even though natural gas prices are extremely low, work on the plant continues. Employment and activity will continue for the next year or two in spite of low gas prices,” says Spitzer. “Once all the pre-planned activity is complete, if prices are still low, you’ll see a greater reduction in activity. It’s contingent on where the gas price is going – if it stays the same, activity will drop through time.”

Chair of the Horn River Basin Producer's Group Rob Spitzer spoke at  a public meeting and to conference attendees during the 2011 BC Oil and Gas Conference held in Fort Nelson.  Photo by Kathy Smith.

Chair of the Horn River Basin Producer’s Group Rob Spitzer spoke at a public meeting and to conference attendees during the 2011 BC Oil and Gas Conference held in Fort Nelson. Photo by Kathy Smith.

He adds, “Like every other field in North America, everybody’s looking at the two dollar gas price, and everyone’s got to make their own decision as to what that means in terms of continued activity.  It can change – it’s very volatile and always has been. If you look at gas prices through time you’ll see peaks and valleys.”

Spitzer mentions that each company will determine its own threshold and will continue to produce or shut it in.

“We’ve seen companies do both, and Horn is no different – it’s happened before and I would not be surprised if a company or two does that if gas prices continue to slide. That’s not to say there won’t be production with gas going through the pipes, because at the end of the day these wells have long lives. The wells that are coming on have reasonably steep declines but then they flatten out, so you’ll still get gas going through the plants.”

There are advantages and disadvantages to working in the Horn, explains Spitzer.

“One good thing is the wells are pretty prolific, and one bad thing is there’s a premium to be paid for geography. From a pipelining standpoint we’re far from market and that means additional costs.”

Since the HRBPG began activity in the Basin, Spitzer has talked about how low gas prices can affect operations.

“I have really made this clear to people in Fort Nelson over the past few years, as recent as September at the B.C. Oil and Gas Conference.  I don’t want to scare anybody but there are some warning clouds on the horizon – I think we’re obligated to let them know what our thoughts are.”

After natural gas took a hit in 2008, he says it slowly began creeping back up as people learned more about its merits.  He feels the primary factor contributing to low gas prices is the large volume of gas available in North America, particularity in terms of the horizontal multi-well fracturing process, which is the main driver because there’s so much gas liberated through that technology.  Because of that, companies are drilling for liquid-rich gas.

On the upside, Spitzer believes there is truth to the idea that when the price of gas drops, it naturally corrects itself because as activity is curtailed, the demand for gas rises.

Some HRBPG members such as Nexen, Quicksilver, Esso Imperial/ExxonMobil, and Encana-KOGAS, are experiencing various levels of activity, and reported on their progress.

Key to producers is the creation of alternate markets.  In November 2011, Nexen announced it reached an agreement to create a strategic partnership with a consortium led by the INPEX Corporation of Japan regarding the development of shale gas lands in the Horn River, Cordova, and Liard basins.  The parties are also investigating the feasibility of a potential downstream project including LNG exports. Some basins are facing steeper decline rates than expected, but it’s believed the Horn is not prone to such decline due to its geological formation. Nexen has completed drilling an 18-well pad and another 10-well pad is planned for this summer.

Quicksilver is in the pre-application First Nation/Public Consultation phase for the proposed Fortune Creek Gas Plant, and they are working closely with the BC Environment Assessment Office and stakeholders.  It’s expected applications will be submitted this summer with potential construction by winter 2013. They completed drilling 10 new wells and are starting on another 10-well pad.  Eight wells are in the fracturing stage.  They are preparing for increased production.

Imperial Oil and ExxonMobil Canada share a 50/50 interest and hold 340,000 net acres in the basin.  In early 2012 they drilled 31 wells to evaluate shale gas resource distribution and quality, and collected 333 square-kilometres of 3-D seismic data.  Imperial is advancing work on a production pilot project including drilling the first multi-well horizontal production pad. With drilling complete, proposed production is late 2012 to assess productivity and improve development costs for long-term plans.

Encana holds approximately 1.6 million net acres of land in the Greater Sierra and has developed about 30 per cent of their production area.  In July, Encana expanded its Horn River farm-out agreement with the Canadian subsidiary of Korea Gas Corporation (KOGAS) at Kiwigana. KOGAS agreed to an incremental investment to earn into a 20,000 additional acres of the Horn River lands. Drilling in the Kiwigana area is complete, and natural gas production is expected in spring 2012.

Ten horizontal wells were drilled in Kiwigana and construction began on a second compressor station.  The compressor station will increase current capacity to over 110 million cubic-feet per day (MMcf/d).

Completions were accomplished at Two Island Lake on three pad sites in 2011. Encana recently closed the sale of their interest in the Cabin Gas Plant to Enbridge Inc.  Expecting reduced levels, they are curtailing production short to medium term.  Long term, Encana is optimistic about new export markets developing through west coast LNG projects and increased use of natural gas domestically.

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