The Junior Players in this “Unconventional” Natural Gas Formation
Large land prices for natural gas parcels in Alberta are continuing to drive higher – despite some of the lowest gas prices in the last seven years in western Canada.
Alberta has made over $2 billion on land sales so far in 2010, at an average price of $629.57/hectare, vs. a total of $280 million at the same time last year, at an average price of $189.91/ha. And at the most recent sale, where $151 million was raised, much of that was for natural gas.
While that may not make sense, the answer can be found in one word – Montney.
This formation is turning into exactly what producers in western Canada need to stay competitive in a time of low gas prices in North America – big, thick and rich in higher value add natural gas liquids, or NGLs.
“The Montney is becoming increasingly attractive because it is recognized as a thick, highly pressurized formation with a lot of recoverable reserves of natural gas and with a high “NGL” content,” says Malcolm Todd, President of Donnybrook Energy (DEI-TSXv), which has 34 gross sections in the Montney.
The Montney is a NW-SE trending, football shaped formation that straddles the border between British Columbia and Alberta. Much of the merger and acquisition activity in the upstream Canadian gas industry has been here – and at high valuations.
Buyouts this year included ARC Energy buying Storm Exploration for $69,000 per flowing barrel – which at the time was roughly the average valuation price for junior/intermediate oil producers. When Monterey Exploration was bought out by Pengrowth in July, they paid $200,000 per flowing barrel (but some other production behind pipe).
“Those were really strong sales, and it shows the long term money knows this is a good place to be,” says Ben Jones, CEO of Canada Energy (CE-TSXv), which has 42 sections in the Montney.
He added “our observation has been that critical mass and pipeline access drive the acquisition costs; i.e. large tracts bring higher prices than small, isolated tracts. That’s somewhat counterintuitive – whatever happened to ‘volume discounts’?”
Jones listed off a number of geological factors that are making the Montney an industry focus:
1. broad expanse-companies can assemble or buy a BIG land package
2. intermediate depth
3. sweet gas (vs Haynesville shale in Louisiana which has carbon dioxide)
4. very fracable rock (“brittleness”),
5. high amounts of natural gas liquids through much of the trend
6. flat declines relative to other shale plays (VERY important for valuations…)
7. The Barnett Shale appears to be the closest analogue in the US, although he says the Estimated Ultimate Recoveries (EUR) are higher in the Montney.
Donneybrook’s Todd adds that though the Montney is an “unconventional” play, it’s not a true shale play – it’s better. It’s more like a sandstone, which means it’s more porous than a shale, and so the fracks should move farther into the formation – making Point #7 – higher recoveries – come true.
Jones could have added “multiple zones” – there is the upper, middle and lower Montney, and two zones called the Doig Phosphate and Doig Siltstone. There is also the Duvernay zone at the very bottom of all the formations which has garnered a lot of attention recently – the Deep Basin it’s called.
Natural gas producers in the Montney have been getting 25-40 barrels of natural gas liquids per million cubic feet of dry gas produced, though sometimes higher. The basket of NGLs trade roughly at 80% of oil prices, which greatly increase the economics for these wells.
Several other factors are also in play – the Alberta government reduced royalty rates in April, and that sparked a renewed interest in gas in the province. Plus, there is a sense in the industry that gas prices will not stay low forever.
“Companies with the ability to fund land will continue to do so if they think it is quality,” says Doug Bartole, President of Vero Energy (VRO-TSX), a gas-weighted producer in Calgary. “They don’t think in short term gas prices – and new crown land has long tenure. They will run their economics accordingly. Current and near term price forecasts are not sustainable.”
There are several junior Montney gas players, including – in alphabetical order – Advantage Energy, Birchcliff Energy, Canada Energy, Celtic Exploration, Cequence Energy, Cinch Energy, Crew Energy, Crocotta Energy, Delphi Energy, Donnybrook Energy, Insignia Energy, Orleans Energy, Painted Pony Explorations, Progress Energy, Rock Energy, Seaview Energy and Terra Energy and Trilogy and Yoho Resources.
PS – A good map to the British Columbia Montney land sales in 2010 is here – http://www.empr.gov.bc.ca/OG/oilandgas/petroleumgeology/UnconventionalOilAndGas/Documents/2010_August_Montney.pdf
Disclosure: author has positions in Donnybrook Energy and Vero Energy