Copyright of the Daily Oil Bulletin 2018
Horn River And Liard Resources Likely To Remain Stranded For The Foreseeable Future
Even if a proposed LNG project like LNG Canada eventually goes ahead, muted activity in what was not too long ago an industry bright-spot in the Horn River and Liard basins is not likely to see an appreciable uptick in activity any time soon.
In fact, it could take numerous LNG projects, or many decades as growing Montney and Duvernay output eventually dwindles, before the massive, yet stranded, resource of the two basins in northeastern British Columbia finds its way to market on an appreciable, economic scale.
And the reasons are many, according to experts contacted by the Bulletin.
Brad Hayes, president of Petrel Robertson Consulting Ltd., said that although the Horn River and Liard basins have world-class gas resources, activity ground to a halt a few years ago after North American gas prices collapsed.
The economics in the plays are further handicapped by a remote location and lack of infrastructure, the fact the gas doesn’t have natural gas liquids, which would boost returns, and the fact that it has a high CO2 cut, at least in some areas, which increases processing costs and isn’t exactly a plus in a carbon-constrained world.
“There’s no doubt that the Horn River story is just not getting played and there’s very little actual drilling and development taking place because of the gas being very dry and there’s not liquids,” Hayes told the Bulletin.
“[Producers] have to pay more to transport their product to market because they’re right up the end of the chain there and they’ve got a huge amount of Montney gas sitting in between them and the marketplace. And there’s more than enough operators happy to continue to put Montney gas onto production,” he added.
“So something else is needed to get Horn River going again. There’s absolutely no doubt there’s huge production potential left there, the same as the Liard Basin.”
Ed Kallio, principal at Eau Claire Energy Advisory, Inc., agreed that companies with Horn River and Liard assets continue to face numerous challenges and stay in the shadow of the Montney.
“Right now without LNG, the reason why activity in the Horn River and Liard has fallen off is because they are higher cost basins than the liquids-rich Montney. So you’ve got producers drilling up that liquids-rich fairway and they can bring on liquids and the gas is just kind of carried out and they’ve got to do something with the gas and they accept prices at AECO, which are very low,” Kallio said.
“But you can’t drill in the Horn River and Liard basins and accept that kind of price and cover your costs. So that’s the issue.”
According to the BC Oil and Gas Commission (OGC), industry activity in the Horn River has declined since late 2012. The Horn River Basin accounted for only eight per cent of total drilling activity in B.C. in 2013; the majority of drilling took place in the Montney. Drilling activity has continued to taper off since.
Still, there were 376 wells (298 horizontal, 78 vertical) drilled in the basin by 2013, according to OGC figures. Between 2012 and 2013, a typical horizontal well in the HRB had initial production of 5.6 mmcf/d.
The OGC says the Horn River is an unconventional shale play with dry gas from mid-Devonian over-pressured shales, including the organic rich Muskwa-Otter Park and Evie formations. The play is in the northeast corner of B.C., hemmed in along the west by the Bovie Lake Fault Zone and to the east and south by the Devonian Carbonate Barrier Complex.
“The actual gas shales in the Horn River Basin and Liard Basin are very, very high quality reservoirs and a variety of companies — Encana [Corporation], Apache [Canada Ltd.]. Chevron [Corporation] and the Woodside [Petroleum Ltd.] partnership — have all done work they need to do to establish the sort of technical criteria the reservoirs have,” Hayes said.
“They’ve ticked the boxes and then the companies have gone in and actually drilled the wells and spent the money perfecting the techniques in terms of lateral lengths and the number of fracks and all the other parameters. So they end up with very, very productive wells that flow at high rates and will yield long-term, very positive results,” he added.
“But even with all those good things going on, the two big negatives for both of the basins is the distance to market and the fact they come with very little associated liquids.”
According to the OGC, production from the Horn River Basin was 280 mmcf/d in December 2016, down five per cent from the previous year (December 2015). Operators continued to shut-in wells no longer economic to produce (27 and seven wells were shut in throughout 2015 and 2016, respectively).
No new wells were completed in 2016 as activity slowed in the area. Continued production without new drilling resulted in a decrease in remaining recoverable reserves from the previous year.
Many of the main players in the Horn River have exited or put on the brakes in terms of development.
For example, last year, Apache Corporation announced it was exiting Canada and sold its Canadian subsidiary to Paramount Resources Ltd. (DOB, July 7, 2017). In its annual report released in April of this year, Exxon Mobil Corporation noted that it is no longer pursuing Horn River development (DOB, April 4, 2018).
LNG Canada not likely to benefit Horn River producers
The Royal Dutch Shell plc-led LNG Canada project appears close to becoming Canada’s first major LNG export plant under construction, although a final investment decision has yet to be made. But even if the project gets the green light, Horn River and Liard assets aren’t likely to reap any of the rewards.
“The major players on LNG Canada have acreage in the Montney. So it kind of makes sense for them. They’ll have lower cost gas. But that doesn’t mean the Horn River players that are involved in LNG wouldn’t sanction a project if the market in Asia comes up to the point where they can cover their costs,” Kallio said.
“Those [Horn River and Liard] basins aren’t dead if [the Chevron proposed] Kitimat LNG project goes ahead. But without LNG, because you’ve got so much potential in the Montney, and especially the liquids-rich fairway, they’re just going to remain stranded.”
Despite its many challenges, Hayes said Horn River gas is well-suited to be feedstock for a large-scale LNG development.
“LNG is more focused on transporting actual methane — the dry gas. I’m not quite sure how the liquids picture goes with LNG, but really it’s focused on the methane. So LNG is potentially a very good market for that dry gas that comes out of those basins,” he said.
“And clearly if there’s a pipeline that gets that gas to the coast, wherever the LNG terminal happens to be, they could certainly tie the Horn and Liard into that,” Hayes added.
“I guess that it becomes a competition between how much actual capacity is there with the LNG and then how the pie is going to be divided between the Montney … versus the Horn River and Liard people.”
So are the Horn River and Liard Basins likely to remain stranded?
“I think so, certainly until there’s multiple LNG plants coming on would be my guess. Really it’s another sad, and kind of modern day, version of the Mackenzie Delta story,” Hayes said.
“For what I can see happening here is that one LNG project is going to be great and will help the Montney producers and will get our market going a little bit. But really we’re going to need a bunch more to significantly impact the entire marketplace to the point you could bring on the stranded stuff in the Horn and Liard.”
What if …
Industry veteran Bill Gwozd, senior vice-president of Natural Gas Consulting, said that while activity in the Horn River and Liard has dwindled, the Horn River could be considered the “Eveready battery” of western Canadian natural gas plays. In other words, its prospects might not be great in the short-term but its long-term future is solid.
“The Horn River is a parked basin. It’s going to sit. But the Horn River and Liard have deep roots. It’s the Eveready battery for Western Canada. It will tick forever,” he said.
While home to a huge resource, the ability of the Horn River and Liard to become part of the global LNG supply chain comes with many variables, Gwozd said.
“The issue is timing and markets. If the market for LNG today quadrupled — went from say 35 to 140 bcf/d overnight—then all the these stranded resources would be attacked right away … Unfortunately, LNG just doesn’t tick-up by a factor of four,” he said.
“From the market perspective, if Japan shut down its nuclear plants, if China and Indonesia stopped burning coal and started using gas for example, then Horn River would be one of the many stranded basins that would be attacked right away. But that’s not going to happen overnight. You’re not going to see China stop using coal. You’re not going to see Japan stop using nuclear,” Gwozd added.
“So if the markets don’t grow, let’s say 30 or 40 years from now when the Montney and Duvernay are on their last legs, Horn River would be the next in line. So in one scenario, Horn River could start in a year if markets just quadrupled. If nothing happens, Horn River would flow naturally on its own accord in 30 or 40 years.”
Gwozd painted another scenario where Nexen Energy ULC (a wholly-owned subsidiary of CNOOC Limited) could advance LNG prospects for the Horn River.
“If a [country] like China has board members on CNOOC, for example, and they want to bring in gas from different parts of the world to diversify their portfolio, CNOOC may be directed to harvest gas from the Horn River because they bought that asset,” Gwozd said.
“And it’s not so much the price and the cost of Horn River gas … those two numbers are actually irrelevant. The number that is relevant is the price they get in China when they deliver that gas. So if someone in China, for example one of the utilities, said, ‘We’ll pay $12 for Horn River gas,’ the people in Canada in CNOOC could evaluate and say, ‘We can get it there for $12.’
“Then they would harvest Horn River. Not tomorrow, but the day after tomorrow. So Horn River will be a harvested basin. It’s a timing matter. And the timing can be dictated either by the market forces, government forces or economic forces.”