The Province of British Columbia and “Big Oil” appear to be cooperating towards the development of several potential liquefied natural gas (LNG) projects on the West Coast. As part of this process, the Oil & Gas industry needs to prove that natural gas resources in northeast BC can support long-term contracts with potential buyers! BC is banking on the potential of LNG exports to transform the economy and has committed to the development of three LNG facilities by 2020.

In order to “prove up” resources to the reserves category, huge drilling programs will have to be undertaken prior and during the development and construction of pipeline infrastructure, liquefaction facilities, tanker terminals and purpose built LNG tanker fleets. A major problem facing companies for rapid expansion in drilling & fracking operations, is that there is no immediate market for sales of gas found today.

The US is competing with Canada in both domestic production growth and the potential for its own export LNG projects, with the result that US and Canadian gas prices are depressed and supply is already growing faster than demand. If the oil industry has to spend billions on drilling and facility construction before the first LNG tanker ships a single cargo, the capital investment required over the next five years will not begin to be offset by cash flow until years following. However, this is not the case for drilling and pressure pumping companies who are paid simply to drill.

Recent indications point to growing drilling-related activity in BC’s gas patch. Applications to drill wells are up and authorizations for wells have increased 53% in the first six months of 2013. To the end of June, the BC Commission granted authorization for 469 new wells, up from 307 over the same period 2012. It is certain that much of the increase is attributable to LNG players trying to establish resources for their planned projects. Future customers need certainty that there is enough gas to back a typical 5 million tonne per year LNG contract for 15 to 20 years.

Kitimat LKG, owned by Apache, EOG Resources Inc. and Calgary-based Encana, received NEB approval in October to export up to 10 million tonnes a year of LNG for 20 years. Although it was initially slated to come online in 2016, startup was recently delayed until 2017 as the company looks to sew up contracts with Asian buyers. There are at least four LNG projects in the planning stages in BC, led by the major companies noted above and also Royal Dutch Shell and Malaysia’s Petronas. Three are planned for Kitimat, while the fourth is off the coast of Prince Rupert. Although two of the projects have received regulatory approval, none has reached a point where construction has commenced on these multibillion-dollar LNG proposals. An example of the drilling metrics involved, can be taken from the Shell, Korea Gas Corp., Mitsubishi Corp. and PetroChina partnership in LNG Canada – a proposed plant capable of liquefying and exporting 12 million tonnes per year of LNG, or approximately 1.7 Bcf per day of natural gas production.

Just how much gas is 1.7 Bcf per day? Since the shale gas revolution has emerged as a global game changer, historical data on production trends is only now beginning to be validated through a decade of results. According to the USGS, whereas some of the best wells were initially expected to produce more than 10 Bcf of gas over their lifetimes, recent analysis suggests that the average well, even in the better plays, will produce approximately 3 Bcf of gas. Of course, multiple stage fracking, together with the re-fracking of older wells can offset decline rates, but this drilling treadmill will come at a significant cost. Based on the data in the chart following, average gas production for a typical shale gas well over 10 years, is approximately 10 million cubic feet per month, or about 330 thousand cubic feet per day.

Since initial production rates decline by about 60% over the first three years, approximately 700 wells per year will have to be drilled over the first five years, with another 350 per year thereafter to maintain production. Thus, a total of approximately 5,500 wells would be needed to produce 1.7 Bcf per day and maintain that level for 10 years.

Typical Average Shale Gas Well Production

(source: CWC School for Energy)

Extrapolating these numbers for several of the proposed LNG projects on the BC Coast, could see at least a doubling or tripling of the above well numbers. Petronas recently announced that it is committed to developing LNG exports from BC to Asia at a cost of $36 billion over 30 years. Of this total, some $9 billion is expected to be spent on natural gas well drilling and gas processing facilities over the next 20 years.

If BC is anxious to move ahead on the proposed projects, time is of the essence, as projects around the world, either under current construction or in the planning stages, will be securing contracts with buyers and thus moving in front of Canada to supply the marginal tonne of LNG into the Asian export market. With the prospect of thousands of shale gas wells having to be drilled each year, and the need for the Major Oil companies to spend tens of billions of dollars each for the next five years, it might be prudent to assume that the drilling boom will more positively affect the drilling and fracking services sector in the near term.

As support for this view, it should be noted that Trinidad Drilling (TSX: TDG) recently announced that it is contracted to build one of Canada’s largest and most technically advanced land rigs to drill for natural gas in the Liard Basin. The Liard area is being developed to supply gas for the LNG plants in BC. The new rig will be 3,000 horsepower, with a depth capacity of 8,000 meters (26,250 feet) and is expected to cost about $30 million to build. The rig will operate on a five-year, take-or-pay contract, with a minimum of 350 days per year and is expected to be delivered for operations in the second half of 2014.

As soon as the LNG projects get full government approval the BC drilling bonanza will commence in earnest, and we should expect the drilling demand to push day rates up as well as result in high rig utilization rates. Look for drilling and pressure pumping companies to be singing “2014 and on were very good years.”