Really Stranded Gas

Up Here Business June 2008

The morning sunbeams splashing into this bright corner office on the eighth floor of the University of Calgary’s MacKimmie Library are a perfect fit for the zeal that emanates from Benoit Beauchamp. Surrounded by Arctic art, images and journals, the affable executive director of the Arctic Institute of North America gushes about the environment where he spent 20 years as a geologist with the Geological Survey of Canada.

“The North is addictive – you go there and either love it or hate it,” he says. “I’ve seen people go there and they wouldn’t go back. But when you let it sink in it’s a fabulous place. Not just the landscape but the people, the whole attitude. I still can’t believe I get paid to go up there.”

But when it comes to oil and gas in Nunavut, it seems of late that few companies share Beauchamp’s enthusiasm. On February 6th this year, the annual Call for Nominations in the Arctic Islands of Nunavut by Indian and Northern Affairs Canada closed with no nominations received – a repeat of every year since the first call was issued in December 2000.

Why the inattention? It’s not for lack of potential. A 1984 paper by the Geological Survey of Canada estimated the total discovered and undiscovered resources in the Arctic Islands alone at 4.3 billion barrels of oil and 79.8 tcf of gas. The Arctic islands region can boast numerous untested plays, most of which would be the object of intense exploration were they south of the 60th parallel. Nunavut’s potential has only just been touched upon. “In the Western Canadian Sedimentary Basin over half a million wells have been drilled,” Beauchamp says. “In all of the North there have been about 1,500 – 120 of those in the Arctic Islands/Sverdrup Basin. Of those 120, about 75 were true wildcat wells, in untested structures. And out of those 75 they found 17 oil and gas fields.”

Beachamp figures that is one of the planet’s best batting averages and there has to be a whole lot more. “To think you’ve nailed everything with 75 wells would be ludicrous,” he says. “It would be bizarre if that basin would have yielded so much on so few wells and then yield absolutely nothing in the ‘post-Meneley era’.”

At the 2007 Arctic Energy Summit Technology Conference in Anchorage, Alaska geologist Robert Meneley caused a bit of a stir with a paper he presented based on his decades of experience in the North including several years as vice- president of exploration for Panarctic Oils Limited during the years of the big finds like Drake and Hecla on Melville Island. Meneley threw a wet blanket on any talk of the region’s petroleum promise.

He stated that pronouncements of large undiscovered hydrocarbon resources in the Canadian Arctic are not supported by exploration history to date. “We never got any good surprises. In spite of conducting a well-directed and comprehensive exploration program only limited success was achieved,” he stated. Meneley claims that the gas discoveries were small by world standards. “Seismic of the day readily found the large structures, [but] modern seismic will reveal the structural complexity of those features without finding the large structures that are required to house large fields.”

Moreover, Meneley states that all the productive wells have been permanently abandoned, Panarctic’s infrastructure of bases and airstrips has been dismantled and the men and women with Arctic experience have largely died or retired. “New explorers will have to start over again,” he states. “New exploration concepts will be required, and such new plays will have inherently high risk attached to them.”

Part of that risk lies in the geology. Even for the known plays, getting fields like Drake to market will demand new looks at it. “I think the geology of the High Arctic is more complex than is our understanding of it is at this time,” says Gordon MacKay, director of minerals and petroleum resources for the Government of Nunavut. “You can see that in the cross sections of the significant discovery licenses. Some of the discoveries are based on a single drill hole and so the cross sections of those discoveries show no structure whatsoever. The ones that have two drill holes there’s either a fault or a fold added in; and the ones that have three drill holes it becomes increasingly complex.”

And the North has changed. “Thirty years ago the white man could go up there and do their thing and come back,” Beauchamp says. “Environmental assessments were basically lip service; aboriginal concerns were of no concern.”

Then there are issues of sovereignty, and climate change. What appears to be a consensus about the advantages of an imminent opening of the Northwest Passage perhaps shouldn’t be so positive. “A question is, if the passage does open up will it just make space for the multi-year ice to come down from the Arctic Ocean and essentially make conditions worse? Multi-year ice is very thick and strengthened, a different ball game as opposed to annual ice. The other question is placing infrastructure on melting permafrost.”

He says on Melville Island last summer it looked like a war zone because of the melting permafrost – enormous slumps and exposed ice wedges. “Trying to build things in that environment is just a nightmare.”

Nevertheless, Beauchamp says companies are looking at Nunavut. “They’re not there yet but they are at the gate,” he says. “Every single big corporation has an Arctic program. In the Arctic Islands it’s not there yet but almost.”

To smooth the approach for those companies, MacKay thinks a few government rules may have to be changed. Long gone and likely never to return are the initiatives of the Pierre Trudeau era boom period like super-depletion allowances and Petroleum Incentive Program grants. But elimination of a few smaller bugbears might help – like INAC’s current nomination and bid process. “For companies to put the effort into doing all the work to define areas they want to nominate,” MacKay says, “and then have a public bidding process after they’ve done that work, there’s no assurance at all they would be the successful company on the bid.”

The other rule MacKay doesn’t like is the open-ended nature of SDLs in the North. “Certainly companies making the investments should be assured of having some kind of tenure over a period of time,” he says. “But right now there is no work requirement and no rental paid.” He thinks any tenure system that allows private enterprise to hold public resources without any cost is probably unique in the world. The infinite nature of SDLs has created an ownership nightmare too, it has been decades since most of them were granted. Panarctic operated on behalf of 67 different permit holders, many of which no longer exist as companies so all the successor corporations’ various ownership structures over the decades will need to be tracked before any new activity can happen.

And on top of these geological, technological and government hurdles come logistical and economic challenges. Some industry analysts don’t see a solid business case for Nunavut hydrocarbon production anywhere on the near horizon. Calgary-based Ziff Energy Group’s Bill Gwozd thinks any oil or gas production in Nunavut is distant. “Anything beyond the Mackenzie [pipeline] is pie in the sky, distant hope,” he says.

Gwozd says if he did a staking curve with low cost supply versus development, Nunavut gas would be at the bottom of the list. “If you can get liquefied natural gas for five or six bucks delivered from the Middle East, the population will say no to Nunavut gas resources. In our long term supply models these are not counted until 2025. They are there but we don’t have them in our supply models until post-2025,” Gwozd says. He figures once the Mackenzie Delta supplies that underpin the Mackenzie Gas Project are drained in six to 15 years or so then an incremental supply would be required to maintain pipe transport volumes.

But he doesn’t see supplies coming in from the Arctic Islands for that, even using an energy security argument. Gwozd acknowledges the vulnerability of depending on offshore LNG sources to supply North America but thinks Arctic Islands gas is just too expensive to bring on line. Conceptually he says it certainly could be used to feed an emptying Mackenzie pipeline but sees several challenges. “There’s no infrastructure in place, proven or unproven. Under arctic ice conditions, if you can’t move your tanker for six months, whose six months is hidden in the ground?” He feels that risk won’t be taken by financiers. “Additionally you have the issue of first proving the resource is there. And then you’ve got the high-cost labour issue, e.g. fly-in camps etc.” He figures all of these factors will dissuade further exploration for a long time.

Naturally, MacKay is more positive on the subject. “We sponsored a quick economic viability study of the natural gas on Melville Island – Drake and Hecla – and the economics of developing and shipping those,” he says. The study was done by the Canadian Energy Research Institute and proposed that there are two main options to move the gas: compress it and ship it to the proposed MGP pipeline head (compression is a relatively unproven technology but not thought to be difficult); or liquefying it into LNG and shipping it probably through Lancaster Sound and down the East Coast on icebreaker tankers.

But since a fleet of Class 7 icebreaker tankers would be prohibitively expensive to take gas all the way to the eastern seaboard for re-gasification, a transshipment facility could be built in an ice-free area like western Greenland. From there it would go by traditional tanker down to the East Coast, which would also open up the gas to the often more lucrative world spot markets. An non-contracted cargo can be sold to the highest international bidder and conveniently redirected.

“When it’s decided to look at the economics and sort out the ownership issue, then it’s just a matter of going through the regulatory process and starting production,” MacKay says. “If they were to make a decision to start that today it could probably be ready to go in seven years.” With respect to crude oil, “at $104 (U.S.) a barrel it’s starting to look attractive to sort out the ownership and get to work on development there too,” he says.

Where others see insurmountable challenges, the Arctic Institute’s Beauchamp sees possibilities. Like the sunshine in his corner office, Nunavut’s oil and gas will always be there to fuel his enthusiasm. “I’ve been there, I’ve tried it, we found just about everything of substance,” he says. “All it takes is one bid and others start to roll in. It will happen.”

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