A Parallel Universe in North America
Shale gas in Quebec holds clues for development in Europe
A service industry on the other side of a continent can seem a world away, when an exploration operation is dependent on equipment and teams that have to be shipped in. That’s what it’s like for one public oil and gas production company operating in Quebec.
Questerre Energy’s Michael Binnion, President and Chief Executive Officer, said his company’s operations in the Utica shale necessitated that infrastructure be shipped into the province from as far away as British Columbia. With that in mind, he offered his “Lessons for Europe.” “We’ve been successful in Quebec with shale gas,” Binnion told delegates at Shale Gas World 2010 in Warsaw, Poland.
“ Our first well was drilled in 2005, and core was taken in 2006.
“There was no real experience there with O&G development,” he explained of Quebec. “There is drilling history the but local population not familiar with the industry.”
There were many similarities with Poland, he said.
Binnion said there had been amendments to the Mining act, and that there was no local service sector (similar to Poland), which he explained came from 3,000 kilometers away in Alberta.
There was also a desire for energy independence in Quebec, according to him, but positive sentiment was not always apparent for shale gas.
“We are fully into the politics. Once people understood that shale gas was going to happen, we’ve suddenly had a very vocal group of people: new media has allowed NGOs to get their voices out,” he said .“[Non-profit journalism organization] ProPublica has a budget of $10 million per year. They’re well organized.”
Binnion explained, “It’s not just the ‘true believers,’ the people who are against it are the ones who’ve been hurt: coal and subsidized energy. They got a coalition together very quickly.” “In Europe,” he added, “if shale gas becomes the kind of game changer you’ll see those people and Gazprom against it. “
He said that 5-10 new shales coming out at the same time had flooded the market with gas, so there were industries that had been hurt by that. But Binnion pointed out Europe had the advantage in that the political battle in America would be solved by the time it shale took off in Europe.
Speaking of the huge impact that natural gas had had in America, Binnion recalled, “In 2008 they thought that gas demand would be met by LNG.”
“How is shale different?” he queried. “It’s a ‘seal rock,’ we grew up thinking it was impermeable, keeping oil and gas trapped. It’s still seal rock, the parts we don’t fracture – but it’s more of an extraction business than a draining one.”
Binnion said that if one could maximize the recovery and minimize the cost of shale gas production they would have a successful business model.
“Were processing rock underground, leaving the tailings right where they are - much like mining does: We don’t have a ‘eureka’ moment, we have a tipping point.”
He said that a detailed study of the rock was necessary, and after that it was unsure how parties like Gazprom or Brussels (the EU) would react. It is also unsure, according to Binnion, what shale gas would do for Poland.
That mean proving the resource was vital.
“After making the first assessments, the next step is analyzing live core, focusing on things like TOCs. In Quebec we had low TOCs, but gas in place was good.”
Binnion continued, “Then you have to prove that you can frack that rock, which means you must complete an investigation of rock properties. There isn’t perfect correlation with vertical wells. You want to know that you can at least break that rock before you go to horizontals.”
He said it was about demonstrating the rock’s commercial parameters.
“You need wells on 2-3 years to know your EURs,” he explained. “I think you’ll have that step in Poland for sure. With no local service sector you need to commit to a certain amount of wells to achieve an economy of scale. It’s an ‘all in’ decision to reach those capital efficiencies.”
Binnion mentioned a 30-60 well program to optimize costs and recoveries and for the first stage of commercial development. He said this necessitated something in the range of half a billion dollars.
The overall strategy, he said, was to innovate at every phase.
“It’s easy to say ‘but wells at the horizontal cost of EUR10 million,’ but it’s tough to be innovative when you drop EUR 10-15 million. It’s tough to find those completion engineers with the mindsets of exploration geologists.”
Moreover the challenge, he said, was to create a culture that encourages innovation.
“There’s no shortcut on the learning curve, you have to put the science up front. The hundreds of millions of dollars you’re putting in upfront ends up being a very low cost per well even though it’s a lot of money.”
Binnion also delved into the question of infrastructure for shale gas: “We’re close to existing infrastructure, but if you’re looking for economies of scale you need to have control of your infrastructure to produce a minimum amount of gas.”
For Questerre, he said shale gas was one of its ‘longer life assets,’ as natural gas prices were terrible in Quebec. “It doesn’t matter for you now because production is down the road,” he explained.
“You must manage investor expectations for those who have oil & gas mindsets, particularly if they’re thinking ‘conventional.’ This is what has led to hyperbole. Southwestern kept its investors expectations realistic,” said Binnion. “It takes time but it’s tough to convince investors of that.”
He spoke of his ‘stakeholder relations strategy’ in terms of Questerre’s shale gas development.
“I’ve met a goal to meet every mayor on the South Shore,” he explained of legislators in Quebec. “Local people have the local impacts, which are mostly positive. They are aware of the risks from Gasland and ProPublica, who can say what they want.”
Binnion said, “We’re starting to get some support from state regulators saying ‘the things you saw in Gasland are not true in our state.’”
In terms of Questerre’s costs per frack, he said drillers had to have persistence as long as the results didn’t condemn a play.
Financing the learning curve was another topic mentioned. “Now we’re drilling test wells: it’s more expensive, but less risky - you know you’ve got a shale play and can get gas out. If we can build an economy of scale, can you cut costs by 50%? We’re working on that.”
Figuring out average EURs was important to Binnion who overed a case study at the Besa River shale, 20,000 acres in northeastern British Columbia
“We did series of five wells,” he recalled, “bypassed all the expensive geotechnical work, and of those we had no info to be able talk about repeatability and scalability. We were back to ‘oops, we have to go back.'
He suggested the drafting of a “report card” to manage investor expectations.
“For Europe, local stakeholders have a vital role to play – it’s not too early to engage. You’ll be shaping the debate, not reacting to it,” said Binnion.
“It’s very early here,” he concluded. “There’s a lot to do, a lot of that early euphoria. I wouldn’t underestimate that. Creating the local service industry is tough but it will generate a lot of benefits.”
Binnion added, “It’s a self-fulfilling prophecy. We can’t keep depending on equipment and technicians from British Columbia.”
“You might have lower gas flow but it’s a question of innovating.”