ANALYSIS-Quebec shale gas play defies industry M&A trend
* Utica shale to generate Marcellus-like interest
* But holders unlikely to sell their positions
* Pipeline quality gas will sell at a premium
* Utica could put Quebec on path to energy sufficiency
By Aftab Ahmed
BANGALORE, Dec 7 (Reuters) - While leading energy firms scramble to buy a slice of the Marcellus shale in the United States, a potentially much richer shale gas deposit in Canada is drawing few buyers, and even fewer sellers.
Low gas prices have encouraged a wave of acquisitions in the Marcellus shale, with bigger players such as Chevron betting prices will rise from current lows.
The Utica shale gas deposit, which lies beneath Quebec and north of New York state, has huge production potential, high-quality gas and proximity to a ready market and the companies dug in there don't want to sell.
Those firms include Questerre Energy , Canadian Quantum Energy , Talisman Energy , Forest Oil and Gastem .
Utica's potential was highlighted in a 2007 survey by Encana as covering over 1 million acres with estimated reserves of 163 trillion cubic feet (Tcf) of gas, or 88 billion cubic feet per square mile.
"You are literally talking trillions of cubic feet of production potential, worth billions of dollars," Industrial Alliance analyst Adam Marchionni said.
Analysts said it was too early to talk about potential deals in Utica as production is still a few years away, and noted that if there were offers for acreage there, most existing holders would be reluctant to get out now.
"A lot of the companies are not interested in selling," Marchionni said.
Companies like Forest Oil, with about $250 million in cash and equivalent, and Questerre, with more than $150 million in working capital, have enough cash to last until production can begin, probably in 2013 or early 2014.
Some smaller players, such as Junex , may be ready to sell, though their acreage is far less significant than Questerre's.
Quebec, including the city of Montreal, ranks among Canada's three largest energy markets, and consumes more than a fifth of the total energy produced in the country, according to Statistics Canada.
The French-speaking province, which currently depends heavily on imports, hopes Utica will help make it energy self-sufficient, though the provincial government has launched an environmental study and public hearings into shale gas drilling.
With its easy access to the populous northeast United States, Quebec sees a ready export market once production at Utica outstrips local demand.
Natural gas produced in Quebec sells at a premium of 50-60 cents per mmcf to the NYMEX because of this proximity.
Quebec's largest natural gas distributor Gaz Metro, which draws most of its supplies from western Canada, stands to gain.
"You don't have to pay pipeline transportation costs," said Marchionni said. "You can literally build a small hook-up to the distribution grid."
QUALITY GAS
Earlier this year, Questerre achieved initial rates of 12 million cubic feet (mmcf) per day at a horizontal well in Utica, averaging 5.7 mmcf/d over 30 days and 1.4 mmcf/d after 134 days -- well above the average conventional natural gas well drilled and put into production in 2007 with initial flow rates of 0.2 mmcf/d, Marchionni said, citing National Energy Board of Canada data.
And it's not just the amount of gas, but also its quality.
"The gas is primarily dry gas, and there are very few natural gas shales like that," said David Howard, vice president for engineering at Ross Smith Energy, an independent research firm.
Investors in those companies already in Utica have been frustrated by exploration delays due to cost and pending hydrocarbon legislation, though analysts say production will more than compensate in the longer term.
The BP oil spill in the Gulf of Mexico, which cast a pall over all energy drilling, has heightened environmental concerns, and some have linked shale drilling to groundwater contamination.
Politics may also be a drag on development.
Last week, the province's Liberal government narrowly survived a vote of confidence, but political observers say an election is likely before long.
"The greatest advantage that the gas companies have is that energy sovereignty is a non-partisan issue in Quebec," said Howard, a chemical engineer, who formerly worked with Talisman Energy Inc .
((Additional reporting by Adveith Nair in BANGALORE and Jeffrey Jones and Scott Haggett in CALGARY; Editing by Roshni Menon and Ian Geoghegan) (aftab.ahmed@thomsonreuters.com; within U.S. +1 646 223 8780; outside U.S. +91 80 4135 5800; Reuters Messaging: aftab.ahmed.reuters.com@reuters.net))
Questerre Energy
* Utica shale to generate Marcellus-like interest
* But holders unlikely to sell their positions
* Pipeline quality gas will sell at a premium
* Utica could put Quebec on path to energy sufficiency
By Aftab Ahmed
BANGALORE, Dec 7 (Reuters) - While leading energy firms scramble to buy a slice of the Marcellus shale in the United States, a potentially much richer shale gas deposit in Canada is drawing few buyers, and even fewer sellers.
Low gas prices have encouraged a wave of acquisitions in the Marcellus shale, with bigger players such as Chevron betting prices will rise from current lows.
The Utica shale gas deposit, which lies beneath Quebec and north of New York state, has huge production potential, high-quality gas and proximity to a ready market and the companies dug in there don't want to sell.
Those firms include Questerre Energy , Canadian Quantum Energy , Talisman Energy , Forest Oil and Gastem .
Utica's potential was highlighted in a 2007 survey by Encana as covering over 1 million acres with estimated reserves of 163 trillion cubic feet (Tcf) of gas, or 88 billion cubic feet per square mile.
"You are literally talking trillions of cubic feet of production potential, worth billions of dollars," Industrial Alliance analyst Adam Marchionni said.
Analysts said it was too early to talk about potential deals in Utica as production is still a few years away, and noted that if there were offers for acreage there, most existing holders would be reluctant to get out now.
"A lot of the companies are not interested in selling," Marchionni said.
Companies like Forest Oil, with about $250 million in cash and equivalent, and Questerre, with more than $150 million in working capital, have enough cash to last until production can begin, probably in 2013 or early 2014.
Some smaller players, such as Junex , may be ready to sell, though their acreage is far less significant than Questerre's.
Quebec, including the city of Montreal, ranks among Canada's three largest energy markets, and consumes more than a fifth of the total energy produced in the country, according to Statistics Canada.
The French-speaking province, which currently depends heavily on imports, hopes Utica will help make it energy self-sufficient, though the provincial government has launched an environmental study and public hearings into shale gas drilling.
With its easy access to the populous northeast United States, Quebec sees a ready export market once production at Utica outstrips local demand.
Natural gas produced in Quebec sells at a premium of 50-60 cents per mmcf to the NYMEX because of this proximity.
Quebec's largest natural gas distributor Gaz Metro, which draws most of its supplies from western Canada, stands to gain.
"You don't have to pay pipeline transportation costs," said Marchionni said. "You can literally build a small hook-up to the distribution grid."
QUALITY GAS
Earlier this year, Questerre achieved initial rates of 12 million cubic feet (mmcf) per day at a horizontal well in Utica, averaging 5.7 mmcf/d over 30 days and 1.4 mmcf/d after 134 days -- well above the average conventional natural gas well drilled and put into production in 2007 with initial flow rates of 0.2 mmcf/d, Marchionni said, citing National Energy Board of Canada data.
And it's not just the amount of gas, but also its quality.
"The gas is primarily dry gas, and there are very few natural gas shales like that," said David Howard, vice president for engineering at Ross Smith Energy, an independent research firm.
Investors in those companies already in Utica have been frustrated by exploration delays due to cost and pending hydrocarbon legislation, though analysts say production will more than compensate in the longer term.
The BP oil spill in the Gulf of Mexico, which cast a pall over all energy drilling, has heightened environmental concerns, and some have linked shale drilling to groundwater contamination.
Politics may also be a drag on development.
Last week, the province's Liberal government narrowly survived a vote of confidence, but political observers say an election is likely before long.
"The greatest advantage that the gas companies have is that energy sovereignty is a non-partisan issue in Quebec," said Howard, a chemical engineer, who formerly worked with Talisman Energy Inc .
((Additional reporting by Adveith Nair in BANGALORE and Jeffrey Jones and Scott Haggett in CALGARY; Editing by Roshni Menon and Ian Geoghegan) (aftab.ahmed@thomsonreuters.com; within U.S. +1 646 223 8780; outside U.S. +91 80 4135 5800; Reuters Messaging: aftab.ahmed.reuters.com@reuters.net))
Questerre Energy
