Another day at the office

One natural gas company coping with record low prices

Spending cuts. Lower gas output. Resigning executives. Partnerships with Japanese companies. Exploring new resource plays and new resource markets. All just another day at the office for a Canadian natural gas giant trying to cope with commodity prices falling to record low levels.

That is the story at Encana, a company well known for coal bed methane and dry gas exploration in the Horn River Basin of Northeast British Columbia, at a time when it doesn't really pay to be a company heavy on dry gas resources.

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Staying prosperous requires creative solutions to complex problems - just like a partnership with Japanese heavyweight Mitsubishi Corporation that has Encana exchanging a 40 per cent interest in their Cutbank Ridge assets in the Montney tight gas play of Northeast B.C. for $2.9 billion.

"It's founded on the fact that Encana has a tremendous amount of resource potential," said Encana's Vice President of Media Relations Alan Boras. "In other words, we have more opportunities than we are able to get to with our own funding sources. And as a result of that, we look for opportunities to recognize and bring forward the value from those assets that we are not able to get to with our cash flow and, certainly, in current circumstances, with those prices."

Encana tried to develop a joint venture partnership with PetroChina last year, but those negotiations fell through.

That deal would have also involved Cutbank Ridge.

"We've done a number of partnerships or joint ventures in different circumstances, but this is certainly a significant one," Boras continued.

That is partly because there isn't yet any production associated with the so far undeveloped land.

"We've spent a great deal of time building up the Montney over the past ten years," said Boras. "And the Cutbank Ridge, which has been a tremendous asset. And it continues to be a very, very strong asset in our portfolio, and in North America, and on a world class basis."

The agreement with Mitsubishi is the result of efforts to find a suitable partner for the play that began after the demise of the PetroChina deal.

"We have this very, very strong agreement with a world class partner now," said Boras. "And they have a strong interest, obviously, in developing resources and potentially taking them back to Japan for their use in Japan."

The circumstances surrounding the announcement of the deal suggest that it is not only important for Encana, but is also being seen as important for the Province of B.C., as that announcement involved Mitsubishi executives, Executive Vice President and Acting President of the Canadian Division with Encana Mike McCallister and Premier Christy Clark.

"Certainly, the province has been very, very supportive of attracting investment into B.C.," said Richard Dunn, Encana's Vice President of Regulatory and Government Relations, citing the recently released Natural Gas Strategy has evidence.

"Natural gas is a cornerstone of their [BC] Jobs Plan," he continued. "And a key focus of the Jobs Plan is attracting investment. So, the two definitely go hand-in-hand. And I think the Mitsubishi partnership is a great example of that."

Boras said that investment from foreign companies isn't necessitated by the current low gas price environment, but he noted that it does make it easier to endure the situation.

"We expect gas prices to rise," he said. "But we're in this... circumstance where gas prices are extremely low because we've been so successful, as [has] the rest of the industry, in bringing on additional supplies."

That is the North American glut of natural gas - and shale gas in particular - that is so often discussed by the industry.

"Over time, we would expect that this abundance - or this surplus - would be consumed by the normal course of consumption within North America," said Boras. "And other opportunities that are being developed, such as liquefied natural gas (LNG) a little bit on the horizon."

Other uses include natural gas power generation and transportation.

Actually, Encana just announced the opening of their first LNG fueling station in Louisiana to supply fuel for one of their suppliers, Heckmann Water Resources, which has been converting their heavy truck fleet to LNG.

"Numerous transportation initiatives that are taking place," said Boras. "For example, the City of Calgary is looking at purchasing 200 buses to run on compressed natural gas (CNG)."

"Certainly, in the power sector, gas is very attractive when compared to the other sources given what it costs to put up a gas plant and just the benefit of the lower emissions," he continued. "About half of coal. So, we see that over time these things will continue to expand the demand. And as the drilling goes down and supply comes down, we'll have an intersection point where we'll have a balance again."

"We'd be advocating for different uses of natural gas, whether it's in power generation or whether it's in transportation," added Dunn, emphasizing the value of LNG as a product to be exported to other markets.

"That opportunity that's created through LNG exports is just enormous," he said.

That is certainly one aspect of the Mitsubishi deal that is so intriguing to observers, as the most publicized market for LNG exports is Asia.

Obviously, that deal isn't the only partnership or joint venture on Canadian soil to involve foreign companies, let alone companies from Asia, but Encana isn't concerned that such foreign investment raises questions among the general public about Encana and their contemporaries being Canadian companies operating in a Canadian oil and gas industry.

"Canada has a long history of having investment come to develop its resources," said Boras. "This transaction and many others that have come before it are consistent with Canada as a major trading nation and a very, very strong trading nation. We've had investment across the country in a variety of industries. Certainly, resource industries. So, I think it just continues to fortify us as a good partner."

"It speaks very well to Canada's situation with respect to developing its resources in a manner that foreign investors can have great confidence in," he continued.

"The investment is subject to all regulations that govern existing development in Canada," added Dunn. "So, there's no compromising on the standards or regulations that are in place to ensure safety to both the public and the environment."

Dunn also noted that Encana continues to be the operator in the partnership.

"With this investment, the public will still be seeing the same face doing the development," he said.

However, one familiar face has recently left the Encana family. Mike Graham, former President of the Canadian Division, abruptly announced his resignation on February 7. In an interview with the Calgary Herald at the time of his departure from the company, Graham simply said that "it was just time for me to go."

"I'm just going to take it easy, do a little ropin' and ranchin'," he added.

According to that article, Graham didn't indicate that the strain of running the Canadian Division during such trying times played any role in his decision.

Boras wasn't sure if Graham's decision might reflect the feelings of other executives who have experienced the ups and downs of the industry in the past.

"I don't know that Mr. Graham's decision relates to others necessarily," he said. "He made his own personal decision. But the natural gas business, as we have known for quite some time, it has cycles. And there's opportunities where there's strong activity. And when that supply gets ahead of the demand, then you have some slowdowns, like we're experiencing now."

"But we build our projects for the long term," Boras continued. "We recognize that this is a long term business and a highly capital intensive business. And we know that natural gas is a very attractive and competitive fuel for the long term in a whole variety of uses in society. And we're trying to expand them. So, we are continuing to work on and plan for long term gain and long term returns by investing in the highest return projects."

That means that capital can shift from one project to another and spending can be cut overall. Encana is moving money away from dry gas plays, reducing capital allocated to those resources from the approximately $4.5 billion spent last year to just about $1.2 billion this year.

"It's quite evident that we need to slow down drilling as an industry and allow that consumption to catch up with where the production is," said Boras.

Capital is shifting to liquids-rich plays such as certain assets in the United States and the young and promising Duvernay field in Alberta.

"These are opportunities where you can drill liquids-rich reservoirs and bring forward additional barrels of natural gas liquids (NGLs)," Boras explained. "And they help your economics and make those projects sustainable. So, there's obviously a great differential between the gas price and the oil price now in what you're able to receive in revenue. And we're working to strike a greater balance in that commodity and revenue mix over time. And we'll do that by upping our investment in liquids properties, either oil or natural gas liquids prone reservoirs. So, our investment there for this year is going to be in the neighbourhood of $1.5 billion. And it's a number of exploration wells."

"The other side of the equation," he continued, "is we're stepping up our focus and working with other companies who are in the midstream business to invest in facilities that will extract more NGLs out of the natural gas stream that we already produce."

"That has a strong opportunity to grow from where we're at in the neighbourhood of 25,000 barrels a day up towards 80,000 [barrels a day]."

@ Copyright Pipeline News North


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