CERI Commodity Report — Natural Gas
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June-July 2014 CERI Commodity Report — Natural Gas Hydrocarbon Gold under the Midnight Sun? exploration efforts will continue until 2018, with Jon Rozhon production potentially starting soon thereafter. For all practical intents and purposes, the Western Figure 1: Yukon’s Eight Hydrocarbons Basins Canadian Sedimentary Basin (WCSB) ends abruptly at the 60th parallel, along the border between British Columbia and the Yukon Territory. North of 60° there has been little exploration for oil and gas for over 30 years. South of 60°, especially in areas such as the Montney basin, oil and gas activity is now as busy as it has ever been. The difference is especially visible from the air: within Alberta and British Columbia you can see cut-lines crisscrossing the landscape; flying over the Yukon – the renowned Land of the Midnight Sun – the wilderness to this day still appears almost untouched. Of course, the geologic reality of the situation is that the WCSB extends further north, so there should be significant hydrocarbon resources within the Yukon. Governments know this, E&P companies know this, and so do stakeholders such as First Nations, land owners, and other local residents. Northern Cross Energy, an affiliate of the Chinese National Overseas Oil Corporation (CNOOC), is one company that has been doing much work in the Yukon’s Eagle Plain basin. In 2011, boosted with a cash infusion from CNOOC, the company was granted exploration permits from the Government of Yukon and dedicated a Sources: Government of Yukon, CERI total of $22 million in work commitments. Since then, Northern Cross has spent more than $100 million in What will Northern Cross do with any discovered oil and Eagle Plain, and though the company states results of its gas resources? Chinese State-Owned Enterprises such as work “are still being analyzed”, their continued and CNOOC are busy throughout the world diversifying their 1 resource holdings with a view to ensuring the country’s increasing funding indicates cause for optimism. 2 Northern Cross’ website shows that the company’s energy security; supplying China with hydrocarbons is the aim. The Yukon assets, though presently small, should be seen as contributing in their own modest way CERI Commodity Report – Natural Gas to China and CNOOC’s goal. Northern Cross asserts that Editor-in-Chief: Dinara Millington ([email protected]) over the medium- to long-term, oil produced in the Contents Featured Article ................................................................................. 1 Yukon will “be treated to render it safe for transport then Natural Gas Prices.............................................................................. 4 shipped to market.” Gas “is expected to be used to heat, Weather ............................................................................................ 6 provide power, and possibly be sold to viable regional Consumption and Production............................................................. 8 Transportation................................................................................... 10 markets if quantities are sufficient.” It appears, then, that Storage .............................................................................................. 12 Eagle Plain oil could reach Asia, though natural gas may Liquefied Natural Gas ........................................................................ 15 not make it quite that far. In any event, CNOOC will be Drilling Activity .................................................................................. 17 Relevant • Independent • Objective Page 2 well-positioned in the Yukon and should be able looking to develop that basin, will be facing all of the eventually to use its first-mover advantage within the above constraints. Full economic analysis can be found territory to expand beyond Eagle Plain. within the report, but below are some estimates of major natural gas development costs. Focusing on the gas side of the equation, the benefits could be significant for the Yukon if Northern Cross’ In order to transport 50 MMcf/d of Eagle Plain gas to Eagle Plain holdings can be developed to their potential. Stewart Crossing – the nearest settlement fully Even if there is ultimately no export of natural gas to connected to the Yukon Grid – a 500+ km pipeline would contribute to the territory’s coffers, the Yukon would need to be built at a cost approaching $550 million. At profit from employment and revenues created by Stewart Crossing, an LNG liquefaction plant could be construction and operation of the enormous amount of constructed to serve power needs of off-grid mine sites infrastructure required to get gas to its internal markets: (the LNG would be transported by truck to the mines namely, the Yukon’s mines and electricity generation where it would power small, on-site generators), and a facilities. The environment would benefit, too. combined-cycle natural gas power generator could be Presently, much of the territory’s mining power needs installed to serve the increasing power needs of the are met by diesel imported from Alberta, but natural gas Yukon grid. These projects, when built, would each would present a low-cost, low-emission option to mine consume 12.5 MMcf/d of natural gas; the capital costs operators. Even now, before any wells have been drilled would be $35 million for the liquefaction plant and $65 or pipelines built in the Yukon, mines are looking to million for the electricity generation facility. The switch from diesel to natural gas. The largest mine remaining natural gas, 25 MMcf/d, could be transported development in the history of the Yukon, the Casino 125 km via a new lateral pipeline to serve the Mine, plans to run all of its operations on natural gas that requirements of the Casino Mine. The capital cost of this it plans to import as trucked LNG from British Columbia. pipeline would be in the order of $125 million. If domestic Yukon gas were to become available at a competitive price to the LNG, and it could be shipped by Well construction costs for the Eagle Plain would be pipeline directly to the Casino site, there could be an highest early on in order to drill enough wells to sustain assured market for the gas over the 20+ year lifetime of daily production of 50 MMcf from 2017 onwards. the mine. Figures 2 and 3 estimate yearly well requirements and costs, based on an average well cost of $3.6 million Tax and royalty revenues would be welcomed by the (calculated on a proxy vertical well located in Government of Yukon as two means to decrease reliance northeastern British Columbia). on Ottawa for funding. The Yukon was built on federal funding and is maintained through federal funding. Figure 2: Estimated Eagle Plain Well Requirements for Though it is difficult ever to envision a complete stop, it 50 MMcf/d Natural Gas Production is entirely possible funding could be adjusted downward at some point in the future. Likewise, there are First Nations within the territory that could benefit from oil and gas development on or nearby their lands, strengthening their financial position and becoming more self-reliant. Building an oil and gas industry in the Yukon will be costly: there is no avoiding it. Infrastructure projects in northern Canada are usually expensive because of the harsh weather conditions, difficult terrain, high labour costs, and long or non-existent supply lines. Distance to markets for the final product is also a problem. The Source: CERI forthcoming CERI study “Economic Impacts of Natural Gas Development Within the Yukon Territory” investigates Eagle Plain natural gas development and finds that Northern Cross, or any other companies Relevant • Independent • Objective Page 3 Figure 3: Estimated Yearly Eagle Plain Well Drill, One more hurdle that will need to be surmounted is land Case, and Completion Costs access for resource development. The Government of Total Costs Yukon designates lands as available, unavailable, or Year ($CDN 2014 millions) encumbered (unavailable for a period of time, not in 2017 183.6 perpetuity); this land status changes frequently. There are various reasons why some portions of Yukon’s 2018 32.4 hydrocarbon basins many be unavailable or encumbered, 2019 28.8 including regulatory restrictions, First Nations Treaty 2020 28.8 issues, national park land restrictions, and territorial park 2021 32.4 land restrictions. Any corporation looking to develop oil 2022 28.8 or gas in the Yukon must be on top of land access issues 2023 32.4 in order to mitigate project risk. Eagle Plain is right now 2024 28.8 one of the more open basins for development since 73 2025 32.4 percent of the area is available. Compare this to another 2026 28.8 hydrocarbons-rich basin, Liard, which in 2014 has less than 3 percent of its land open for development. 2027 28.8 2028 32.4 There are many reasons why the Yukon has seen so little 2029 50.4 hydrocarbon development over its history, and many 2030 36 reasons why the oil and gas industry does not today 2031 32.4 jump in with both feet. None of these facts appear to be 2032 32.4 dissuading Northern Cross from taking a long, hard look, 2033 36 though. In the end, if hydrocarbon development in 2034 32.4 general – and natural gas development in particular – is 2035 36 to go ahead north of 60° in the Land of the Midnight Sun, it will be based on the cooperation of local stakeholders, Source: CERI accessed resources of more than one basin, and the efforts of more than one company. The above are estimates and could vary. The