Seeking Alpha

The Half Full Montney

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Includes: EBGUF, ENB, FCGYF, TRP
by: Alerian

By Maria Halmo

The Montney shale is rarely given much time in the U.S. media [1], and yet it is a major natural gas and liquids shale play in North America. Although, if you want to be technical about it, it’s not a shale at all—it’s siltstone. Which is good news: siltstone is easier to frac. Other good news: by some estimates, the energy equivalent of one million cubic feet ((mcf)) of gas is necessary to process the bitumen in every barrel of oil sands crude produced. The oil sands are directly south of the Montney and as they grow, the Montney will grow too.

Far to the North, the Montney Should Not Be Forgottenmap_720

Source: NEB

Why Is It Important?

  1. It’s big. In acreage, it’s about equivalent to the Marcellus, but it’s much thicker. As one comparison: it’s as thick as the Eiffel Tower is tall. In 2013, the Canadian National Energy Board (NEB), roughly equivalent to the EIA in the US, said that between British Columbia and Alberta, there’s about 450 Tcf of marketable natural gas [2]. The Montney is currently producing about five bcf/day.
  2. As it’s located near the West Coast of Canada, there’s a potential for Montney production to be liquefied and exported. This would avoid the need for it to compete with Marcellus gas and also avoid Henry Hub pricing.
  3. It’s still new. In terms of technology, it’s about a year behind the Marcellus. However, the Montney will eventually benefit from the lessons learned by operators in its southern cousins: Montney wells are likely to be longer, more fracked, and have better placed horizontals.

Why Don’t We Hear More About It?

  1. With the new Canadian federal government, the regulatory situation remains uncertain. While Alberta royalty questions may have been answered and some federal LNG export licenses may have been issued [3], existing British Columbia regulations impact production [4]. This fall, the federal and provincial governments will meet to harmonize regulations.
  2. Land ownership is still very fragmented. Following a land grab in 2009-2012, there are over 40 operators. Anyone who wants to get into the Montney is buying land from someone already there. At the EnerCom conference a few weeks ago, it was noted that this year operators will likely engage in M&A designed to create economies of scale. It’s like the second stage in a Monopoly game, where all the properties are owned, but now all the players wheel and deal and trade properties trying to get the strongest monopoly.
  3. It will be constrained by pipeline takeaway capacity. Current production has fallen due to the commodity price environment, so at the moment, there is some spare capacity (giving it a temporary competitive advantage over the Marcellus). However, like the Marcellus, Montney gas was not previously produced, so operators have few choices (noted below) for takeaway capacity. If production increases, new pipelines will need to be built; however, they will potentially need to deal with an uncertain or restrictive regulatory environment.

What Energy Infrastructure Companies Are Involved?

There are three basic ways producers can get production out of the Montney:

  1. To the West. Spectra Energy (NYSE:SE) owns and operates the BC Pipeline, which moves gas down to Vancouver and across the border to Washington state. Primarily, the gas moved on that pipeline satisfies residential demand; however, demand is growing.
  2. To the East. TransCanada (NYSE:TRP) owns and operates the Canadian Mainline System, which moves gas from eastern Alberta to Ontario. There are also options for producers to move gas to the south and to the oil sands.
  3. To Chicago. The Alliance Pipeline, owned by Enbridge Income Fund Holdings (OTC:EBGUF) and Veresen (OTC:FCGYF), runs to Chicago at top speeds. Producers have the advantage of Chicago pricing for their gas, but the toll is more expensive than other options.

No one knows how the regulatory situation in the Montney or for Canadian LNG will resolve, but the opportunity (and a starter set of infrastructure) is already there.

Footnotes:

[1] Maybe it is in Canada, but unlike Canadians, I tend to only follow the news outlets based in my own country.

[2] Since the EIA and NEB are different organizations with different definitions, it’s hard to make a direct comparison. However, the EIA estimated in 2014 that the Marcellus shale had 84.5 Tcf of recoverable, proved natural gas reserves.

[3] Most export facilities require both federal and provincial permits, as well as environment assessments. To date, no Canadian export facilities are under construction.

[4] Primarily, the industry must protect water resources during production and submit a list of fracking chemicals. The regulatory body also can suspend water use rights when necessary to protect environmental values.

Disclosure: © Alerian 2016. All rights reserved. This material is reproduced with the prior consent of Alerian. It is provided as general information only and should not be taken as investment advice. Employees of Alerian are prohibited from owning individual MLPs. For more information on Alerian and to see our full disclaimer, visit http://www.alerian.com/disclaimers.

Maria Halmo is the Director of Research at Alerian, which equips investors to make informed decisions about Master Limited Partnerships (MLPs) and energy infrastructure. Ms. Halmo leads the firm's research efforts, which include examining MLP regulatory filings, monitoring legislative activity, and investigating industry developments. She also oversees Alerian's public communications strategy through investor and media outreach. Ms. Halmo is a former Associate at SteelPath Capital Management LLC, a Dallas-based MLP investment manager, where she conducted valuation analyses of petroleum transportation partnerships and researched macro-level energy issues. Ms. Halmo graduated with a Bachelor of Arts in Astrophysics from Barnard College at Columbia University. She is also a contributing author to Midstream Business, a monthly publication addressing the need for business market intelligence on North American energy infrastructure.