Highlights:

• Calima has undertaken a strategic review of current and near-term investments in gas pipeline capacity relevant to the Montney Formation in Western Canada.
• The review has identified more than C$70 billion (~A$72 billion) of proposed infrastructure investments potentially adding more than 8 bcf per day of new gas pipeline capacity which would more than double the export capacity of the basin.
• The productivity of the basin has run ahead of its pipeline capacity which means producers have to compete for access to markets in eastern Canada and the US and, as a consequence, gas from the Montney is currently selling at a significant discount to US benchmark prices.
• The introduction of new infrastructure will ease pressures on producers as well as introducing access to international markets for the first time via LNG.
• A forecast for increasing gas prices combined with growing demand for condensate should have a positive impact upon Montney producers and demand for acreage.

Australian oil and gas company Calima Energy Limited has undertaken a review of current and near-term investments in gas pipeline capacity relevant to its position in the Montney Formation where it Operates 72,014 acres of drilling rights.

Based on the Company’s detailed review, infrastructure developments either underway or in advanced stages of planning will increase demand and/or export capacity in the region by an estimated 8.4 bcf/d. This represents an investment of C$70 billion (A$72 billion) which will more than double the export capacity of the basin.

The Montney Formation currently produces 7 bcf/d of gas, which is 40% of Canada’s total production. Due to the highly productive nature of the Montney, the rate of gas production has recently been increasing by more than 20% year-on-year and as a result production has run ahead of the capacity of the pipeline infrastructure, which exports the gas to markets in eastern Canada and the US.

This has meant producers are having to compete for access to pipeline capacity, resulting in lower gas prices. The benchmark gas pricing hub in Western Canada, AECO, has been trading at a significant (60%) discount to the US benchmark Henry Hub gas price. This is a common feature of the larger resource plays in North America and in common with these other plays, it is expected that the price discount will be significantly reduced as new export infrastructure is introduced.

In the short term (over the next 2-3 years) investments of C$7 billion (~A$7.2 billion) in upgrades of existing pipeline and new pipelines will add 3.8-4.3 bcf/d of capacity.

In addition to increased access to US and Canadian gas markets through expanded pipeline capacity, the construction of LNG terminals on Canada’s west coast will allow Montney gas to reach international markets for the first time. Shell and partners are scheduled to reach FID on a C$40 billion (A$41 billion), 13-26mtpa LNG project in October 2018. This project alone will consume an additional 2.5 bcf/d when operational with the capacity to expand up to 5 bcf/d.

The Calima Lands lie within the liquids-rich zone of the Montney Formation. For producers in this part of the Montney, economics are underpinned by strong condensate prices. Condensate is required as a diluent, or thinner, in the transportation of the heavy oil produced from the oil sands and consistently trades at a premium to the WTI benchmark oil price. Production of heavy oil has been increasing year-on-year and the demand for condensate (Figure 3) consistently outstrips the supply available from the Montney.

The Trans-Mountain pipeline, which has been taking heavy oil to the west coast of Canada since the 1950s, is scheduled to be upgraded from 300,000 bbl/d to 890,000 bbl/d. This increase in production will create further demand for condensate but given that gas is used to generate heat as part of the oil recovery process it also adds 0.6 bcf/d to forecast gas demand.

Based on the Company’s review of current and planned near-term investments, the gas export infrastructure available to Montney producers is expected to double in capacity to approximately 15 bcf/d over the next 5-6 years.

This increase in export capacity plus the introduction of new markets should reduce the discount applying to Montney gas prices. This anticipated improvement in gas prices combined with growing demand for condensate should result in increasing demand for acreage positions in the liquids-rich parts of the Montney Play.

Calima Energy Managing Director Alan Stein said:
“Calima is fast approaching the point where it will be drilling its first wells on the Calima Lands and it was therefore considered prudent to review the factors affecting the market both in terms of price and ease of access to infrastructure.

The analysis confirms our belief that the introduction of new pipeline capacity and new markets should have a positive impact on regional gas prices and the increased demand for diluant by the heavy oil producers should result in premium pricing for Montney condensate being maintained in the future.

With a positive outlook on infrastructure and its flow-on effect on pricing, this is an exciting time to be bringing the Calima Lands towards production.”