Analysts Question Economics of Natural Gas Reserves

The first comprehensive attempt to measure reserves of natural gas made available through fracking doubles previous estimates, but its value is questionable without guaranteed access to markets

B.C.’s existing natural gas reserves have doubled, thanks to advances in hydraulic fracturing technology, according to a report published by the federal, B.C. and Alberta governments.

The report estimates the marketable unconventional petroleum resources in the Montney Formation, located in northeastern B.C. The new data establishes the Montney as one of the largest gas formations in the world, according to the press release announcing the report’s publication.

However, not all analysts agree on the importance of the report. One energy analyst for a major Canadian bank, who asked not to be identified because of company policy, believes the report is a sign that Montney is on the cusp of bringing greater investment to the province.

“Once global investors and especially potential LNG investors realize that this resource is bigger than the U.S. natural gas plays, and that they have three proven LNG players—Chevron, Shell, and Petronas—you’re going to start seeing more LNG companies participating in the projects, and you’re going to see more projects get approved.”

Mike Dunn, vice-president of Institutional Research at FirstEnergy Capital, says that although he believes the report is good news, current prices for natural gas mean that many of B.C.’s natural gas projects still have questionable economics.

In North America, natural gas ranges in price from $3 per thousand cubic feet (mcf) to $4/mcf. In Europe and Asia, the same natural gas sells for $10/mcf to $14/mcf. With little existing pipeline capacity and no LNG port facilities to carry the Montney Formation natural gas to international markets, B.C.’s producers are faced with a dilemma: If they invest before infrastructure is permitted and developed, they have no guarantees their projects will survive long term, unless domestic prices jump.

Dunn says, “If a producer wants to supply their own LNG facility to export it, they need to drill several years in advance. They don’t want to be in a position where they have to invest billions of dollars to grow their gas production and lose money on that gas. You’re killing the economics of your overall project because you have to waste money just to build up the production.”

In order to offset development costs, Dunn says producers depend on quantities of natural gas liquids and crude oil as a part of their Montney Formation reserves, because they fetch much higher market prices.

According th the provincial government, the value of the expanded resource estimate is not in immediate economic activity, but in increased security for those contemplating investment in the area. “With a greater supply of natural gas available than previously believed, it is hoped this will alleviate any concerns around long term availability of the resource and as such industry will heighten their concentration in the area knowing their time and money will create economic gains,” said a spokesperson for the Ministry of Natural Gas Development. “This report will increase interest in the Montney Formation and hopefully lead to new tenure sales to acquire rights for exploration and development in the formation.”