LOW PRICES PUSH DEVON BACK FROM CANADIAN NATURAL GAS
As industry and governments keep up the push to open new markets for Western Canadian natural gas, Devon Energy Corp. is throwing in the towel on the depressed Canadian business, providing a reminder that the road to a liquefied natural gas (LNG) industry from the West Coast remains long and uncertain.
The top American oil and gas independent, once a big believer in gas in Canada, has grown impatient with years of low prices and is putting on the block most its Canadian gas production.
The sale would cut nearly in half its Canadian output of 200,000 barrels of oil equivalent a day.
When the conventional assets are sold, at a price expected to fetch north of $3-billion based on similar sales, the Canadian unit of the Oklahoma-based producer will re-emerge as a heavy oil company with interests in two areas — the oil sands and cold- flow heavy oil. Both are based in Alberta and growing.
“When we look out a few years, we don’t see any major catalyst to move the price of natural gas substantially, and for us to be competitive that is what we need to see,” Christopher Seasons, president of Devon Canada, said in an interview.
“Rather than waiting three or five years until maybe LNG takes off in North America, and we see a change in the gas and liquids market, we think the time is right to move forward with what we do best today.”
Devon, which has overall production of nearly 700,000 boe/d (barrels of oil equivalent per day), has not decided what to do with its large land holdings in the Horn River shale gas play in Northern British Columbia. It also owns big oil and gas deposits in the Canadian Arctic.
The sell- off comes as British Columbia premier Christy Clark returned this week from another trip to Asia, leading a delegation of more than 120 companies, First Nations, labour and community representatives to promote LNG investment. In a news release, the province gushed: “British Columbia and its natural gas potential are the talk of Asia.”
But at Devon, the gas retreat will impact up to 900 out of 2,000 staff in Canada. Of these, 500 field workers are expected to be re-hired by asset buyers. Efforts will be made to re-deploy to the heavy oil business some of the Calgary- based office staff working on conventional plays.
The rest will be out of a job, joining staff at Encana Corp., Talisman Energy Inc., and others that are also out of work due to the protracted natural gas bust, even as the oil sands business is booming and short of hands.
Mr. Seasons said the Canadian subsidiary suggested exiting its gas business because it couldn’t compete for capital with Devon’s other prospects in the U.S., in both oil and gas, leading to declining production and low morale.
Devon has a dominant presence in giant shale gas fields like the Barnett in Texas that it could quickly ramp up if prices recover.
But now, the company is betting on America’s oil revival.
The company said last month it would purchase closely held GeoSouthern Energy Corp.’s Eagle Ford assets for US$ 6- billion to expand its oil shale business in one of the most prolific basins in the U.S.
Devon said it would help pay for the purchase by selling about 150,000 boe/d
We think the time is right to move forward with what we do best today
of production, including 90,000 boe/d in Canada.
“It’s a competitive world out there, and from our perspective, the light oil opportunities we have in the U.S. trump the opportunities that we have in Canada,” Mr. Seasons said.
“I would rather see these assets move into the hands of people who can apply capital to them and focus and develop them, rather than have a slow death.”
The assets are entering the market as the Western Canadian gas basin is saturated with ‘for sale’ signs. Encana, Canadian Natural Resources Ltd., Suncor Energy Inc., Penn West Petroleum Ltd. are among those looking for gas buyers.
Periods of major asset turnovers fuelled industry revivals in the past, as enterprising juniors raised capital and took them over.
Today, the business is more capital intensive and buyers tend to be foreign or private.
In a recent report, Peters & Co. analyst Dan Grager said Devon’s conventional business could be a good fit for a new entrant.
He said Devon owns significant gas processing infrastructure that could be attractive to midstream companies.
Mr. Seasons said the assets could be company builders for those with the capital to pursue tighter formation by using multi-stage fracking technology.
It’s those same fields in the Deep Basin, the Swan Hills and the Dunvegan that a dozen years ago brought Devon to Canada.
Meanwhile, the oil sands business, in its infancy at that time, is now front and centre.
Devon is building the third phase of its Jackfish project, an in- situ venture in the sweet spot of the Southern Athabasca region that has outperformed many.
When the last phase is completed, production from Jackfish will increase to more than 100,000 barrels a day.
Devon has also partnered with BP Plc. to develop the Pike project, another in-situ venture whose construction is slated to start in 2015 and produce 110,000 bpd.
Devon has kept costs in line by running projects internally, using the same workforce, providing top accommodation and avoiding taking on more than it can handle.
“From a business perspective, it’s absolutely the right thing to do and I am pleased we are going down that path,” said Mr. Seasons, the 53-yearold chemical engineer from Ottawa who steered the Canadian unit for the last decade. “From a personal perspective, it’s bitter sweet.
“We spent a lot of time building a great organization, so to change that substantially is a bit sad for me.”