BC's Northeast Montney Shale Coming Into Its Own

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British Columbia's (BC) gas-rich northeast Montney Shale scored another huge vote of confidence this month as Tourmaline Oil struck its third major acquisition in the play this year alone. Tourmaline has good reason to expand in the Montney, positioned as it is between Enbridge's Westcoast Transmission System that supplies BC and the US Pacific Northwest and the Nova Gas Transmission Ltd. (NGTL) system that courses through Alberta with its burgeoning demand centers and export options. "In terms of gas focus in the WCSB [Western Canadian Sedimentary Basin], there really is no other place to go but the Montney," RBN analyst Martin King told Energy Intelligence. Greig Sproule with the Canadian Association of Petroleum Producers (Capp) agreed, noting that the northeast Montney has become "the area to develop for the Western Canadian Sedimentary Basin. ... It is no longer seen as just a source to supply LNG. It's the elephant gas supply into the WCSB that is going to continue keeping gas running through the NGTL system and serving oil sands demand and [TC Energy] mainline demand." Expectations that LNG could be sailing by now from a bevy of projects on Canada's west coast -- including Kitimat LNG and Pacific NorthWest LNG -- was an "original accelerator for investment," Sproule, Capp's vice president for tolls and tariffs, told Energy Intelligence. All those projects, many seemingly solid at the time, have fallen to the wayside. But the Royal Dutch Shell-led LNG Canada export project at Kitimat, BC, hasn't. It will begin shipping as much as 1.9 billion cubic feet of gas per day to Asian markets by 2025-26 -- gas mainly sourced from the northeast Montney via the Coastal GasLink Pipeline now under construction. The project partners are mulling doubling project capacity in a second phase. Sproule noted that quite a bit of pipeline construction is being done to build interconnections between Coastal GasLink and the Westcoast and NGTL systems, putting the BC Montney dead center of WCSB gas demand. "British Columbia used to be pretty small in terms of volume, but it's gone up considerably," he said. Montney production approaching 5 Bcf/d is still half the gas produced in Alberta. However, its output is expected to rise substantially over the next several years, sources say, eventually eclipsing Alberta, where output is expected to remain relatively flat. M&A Activity Revving Up E&Ps like Calgary-based Tourmaline, Canada's largest gas producer, should ensure that the play grows as expected. Tourmaline recently acquired privately held Black Swan Energy for around C$1.1 billion (US$909 million) in stock and the assumption of C$350 million in debt. The deal will add 230,000 net acres to Tourmaline's Montney holdings and current production of 50,000 barrels of oil equivalent, or roughly 265 million cubic feet of gas equivalent per day. With the acquisition, Tourmaline’s North Montney production could rise to 920 MMcfe/d next year. Tourmaline is aiming to raise its total gas production to more than 2.25 Bcf/d by mid-2022. The deal, set to close in July, includes a 50% stake in two new gas-processing plants with a combined capacity of 265 MMcf/d. In May, the company paid C$250 million in cash for a 50% stake in northeast Montney assets owned by private player Saguaro Resources, which Tourmaline now operates under a joint venture agreement. That transaction was critical as the Saguaro assets provide a bridge to bolt on Black Swan’s larger assets, And Tourmaline is not the only Canadian gas giant making moves in the play. In Feburary, Montney pure-plays Arc Resources and Seven Generations Energy announced an C$8.1 billion (US$6.4 billion) merger that created Canada’s third-largest gas producer and sixth-largest upstream energy company. That deal followed a wave of mergers and acquisitions in the Montney over the last year or so, including additional deals involving Tourmaline and by heavyweights like ConocoPhillips and Canadian Natural Resources (NGW Aug.17'20). Royal Bank of Canada analyst Michael Harvey said Tourmaline's latest move is consistent with a strategy to build out its north Montney position with future LNG exports in mind, but "whether Tourmaline will ultimately directly supply a project or simply produce into the market remains unclear -- but the broader strategy is to operate in regions where pricing can be optimized." Yet, the Montney has also heated up for reasons apart from future LNG exports, RBN's King said. "First, as a general driver, Aeco prices are the best they have been in five years, both cash and forwards (NGW Jun.14'21). This has all the gas-focused players finally looking at some decent returns and cash flows," he explained. "Second, the Montney still has some of the lowest finding costs of any gas-focused play in North America. Third, the BC side of the Montney has the large reserve sizes per well and the high productivity that generate the returns (and low finding costs) that the producers want to see." Tom Haywood, Houston

Gas Demand, Gas Pipelines, Shale, M&A
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