Energy Issues

 Vol. 233 No. 7

It’s late June and, as I type here in Houston, the heat index outside is headed to 110°F. And it is just the beginning of summer. How I wish I was up North, where the mid-day temperatures hover in the mid-60s. Somewhere like St. John’s, Newfoundland, where I was a week earlier, would be perfect. I didn’t go there for the weather however, but, rather, to attend the 2012 Newfoundland Oil and Gas Industries Association (NOIA) annual conference and exhibition. It is a conference I have attended fairly regularly since 1998. The place was abuzz with excitement, due in large part to ExxonMobil’s announcement of the development of the Hebron field in the Jeanne d’Arc basin and Statoil’s announcement that the Mizzen field in the Flemish Pass basin, discovered in 2009, might contain up to 200 million bbl of oil. Statoil will assess the development potential of the field with two new “wildcats” in the area next year. Additional wells may be drilled through 2014. Together, the two fields could contain a billion bbl of oil or more.

Canadian Arctic potential. But that figure pales compared to the estimates of potential reserves in the Canadian Arctic. And, there was plenty of buzz about that also. Who wouldn’t be excited by projections that range up to 26 billion bbl of ultimate oil in place (very conservatively – some estimates run several times that amount) and some 230 Tcf of gas (again, very conservatively) awaiting development in the region? Actually, a lot of folks would not have been that excited five or ten years ago. Developing reserves in the Arctic is technically and environmentally challenging, and costly. But things are changing, due in large part to the melting of vast areas of sheet ice in Arctic Canada*, which will lessen some technical challenges while allowing increased access to areas of potential development and enhanced export potential through the Northwest Passage that runs across the top of Canada. Combine that with emerging Arctic technologies under development in the province,  and you have a recipe for substantial development, assuming that you can keep costs down, have a decent price for oil and gas, and markets that are viable. These last three variables may prove to be problematic, however, resulting in a slowdown in development of these resources.

Arctic-to-market viability. Here is the problem in a nutshell, and it has to do with markets and prices. Canada exports approximately two-thirds of its oil and gas production. There is not room to accommodate substantial additional production in its internal markets. Almost all of that exported oil and gas goes to the U.S. But the U.S. is an export market that is drying up rapidly. Due to shale oil production increases of more than 1.1 million bopd in the U.S. in the last two years (and 6% since October of last year), primarily from the Eagle Ford and Bakken plays, oil prices have fallen by 23% since 2010, to the $82-$83/bbl range for WTI Cushing. That flood of oil will continue, with some speculating that the U.S. could become self-sufficient in oil in a decade or so. Given the long development times of Canadian Arctic oil, and its high cost, the U.S. market is not likely to be very attractive. The international market will probably not be much more attractive in the short-to-medium term either, with high Saudi production, mostly recovered Iraqi production and falling demand, due to the Euro crisis and slowing economic growth (though still vital) in Asia. So, it looks as though substantial development of Canada’s Arctic oil reserves will lag in the short-to-medium term.

Gas outlook differs. That does not look to be the case for the country’s Arctic gas reserves. The traditional U.S. market for gas is in free fall. With an increase in production of nearly 10 Bcfd over the last three years, the U.S. is awash in natural gas. Prices have fallen from over $14/Mcf four years ago to less than $2.50 today. Prices are so bad, that operators are shutting in producing gas wells. A decade or so ago, there were more than 60 LNG import terminals being planned or permitted in the U.S. Today there are none, but significant LNG export capability is being planned and some is being built. In short, not only is the U.S. not a viable market for Canada’s Arctic gas, it will almost certainly compete with it in the international market in the next few years. But that international market offers great potential. While natural gas prices hover around $2.50/Mcf in the U.S., prices in Europe are in the $11/Mcf range, and in Asia the price has approached $18/Mcf.

If Asia and Europe are viable markets for Canada’s Arctic gas, delivery will most certainly be via LNG. Look for no less than two LNG liquefaction plants to be constructed in Atlantic Canada in the next few years. From there, Europe is a fairly straight shot for LNG vessels. But, how does Canada tap the more lucrative Asian market? It is here that Mother Nature’s intervention (or mankind’s, if global warming is to be believed) lends a hand to Canada. The Northwest Passage is the key. In the last year, a dozen or so ships have made the transit across northern Arctic waters. With continued contraction of Arctic sheet ice, the route becomes an obvious, cost-effective route to Asia, eliminating the need for a near-circumnavigation of the North American continent to deliver LNG to Asia. That should make Canadian Arctic gas a commercial reality.

Until this summer is over, however, I would be happier to see our friends up North open an ice export route to Houston.   

*Editor’s note: A new study by the U.S. Geological Survey shows that since 1990, sea levels have gone up globally about 2 inches due to increased melting of the Arctic and Antarctica ice caps.