Are Montney & Duvernay Competitive with the Marcellus?

Canadian gas volumes are being steadily displaced from the U.S. markets and are looking for new buyers, but that doesn’t mean producers are slowing down, as highlighted in our recent Upstream Outlook that now includes Canada. Even in a low price environment, a few of the shale and tight sand formations of Eastern British Columbia and Western Alberta offer competitive economics. Enter the gas and condensate plays of the Montney and Duvernay. Let’s take a closer look at what makes these regions so attractive as well as the infrastructure and demand constraints being faced.

The Montney and Duvernay look really good on paper. The formations are large, multi-layered, highly pressurized, and brittle allowing for more successful fracking results. Initial production (IP) rates have been high and  drilling and completion efficiencies have significantly brought down the well costs. Add in the high value condensate volumes from the wet gas regions and these plays begin to look every bit as good as the U.S. Marcellus. However, like all formations, location is important and some producers are more advantaged than others.

Slide1

Here we see the max IP rates on a well by well basis for a selected set of the top active operators. It’s clear that Encana, Seven Generations, and Progress Energy currently hold some of the best acreage and are reporting max IP rates of 6000 Mcf and above for a majority of their wells. With IP rates this high, and D&C costs of around $7 million, many of the larger producers like Encana are consolidating a significant portion of their portfolio into the Montney. Smaller producers are also seeing impressive growth in this environment and are focusing on buying up acreage to expand their future production. IP rates are only part of the equation though, so how do the type curves look for the same set of operators?

Slide2

Again, we see Encana and Seven Generations are leading the pack and displaying very favorable production curves. However, for all selected producers the first year declines are very flat, adding to the economic value of drilling in the Montney. Even with low gas and oil prices, producers are realizing the value of the Montney & Duvernay in providing a low cost, high production play for gas and condensates. Improving play economics of the play are not the only drivers for an uptick an investment in the Montney and Duvernay, as currency exchange uplift is also benefiting producers.

Slide3

Producers in Western Canada sell gas at AECO, which is priced in US Dollars, but pay for services in Canadian dollars.  Historically, this relationship has been nearly at parity and gave Canadian producers little advantage but since the start of the commodity crash, has become an increasingly important part of the investment decisions for producers like Encana with both US and Canadian assets. As highlighted in the chart above, Canadian producers, adjusted for currency exchange, are receiving prices equivalent and even recently above Henry Hub pricing.

Favorable pricing dynamics and improved well productivity have led to several recent midstream infrastructure announcements to support growth in these plays. Meritage Midstream began construction of a 75 MMcf/d gas and 10,000 b/d crude pipeline in May. This line will connect to the TransCanada Pipeline among others, and should be in service by April 2016. The North Montney mainline project has received approval and set an ISD for 2016/2017 for 2.4 Bcf/d of gas capacity to help service emerging LNG facilities. Additionally, the Prince Rupert Gas Transmission Project has started construction and is scheduled to be completed in the next 4 years. Even if  infrastructure keeps up with production, Canadian gas still needs to find new markets as supply from the Marcellus & Utica crashes into the Midcontinent the traditional home for Canadian producers. The Alberta Oil Sands are growing and will help the demand side of the equation as gas is used to generate steam for In Situ operations. However, the build out of LNG facilities and overseas’ demand will remain crucial for the Canadian gas industry.

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Anthony (Tony) Scott has built an in depth understanding of the North American energy market by providing investment advisory services and leading teams of analysts focused on the North American energy complex. Mr. Scott has conducted hundreds of consulting engagements assisting producers, marketers, midstream, refiners and private equity understand how rapidly changing natural gas, natural gas liquids, and crude oil markets in North America would impact their assets.

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