Canadian oil sand projects will strain North A merica natural gas supply

Devon president urges end to Arctic pipeline delay
Tue Feb 8, 2005 06:03 PM ET
By Jeffrey Jones
CALGARY, Alberta, Feb 8 (Reuters) – A C$7 billion ($5.6 billion) pipeline from Canada’s Arctic needs to be fast-tracked with numerous Alberta oil sands projects, which use huge volumes of natural gas, starting up over the next decade, Devon Energy Corp.’s (DVN.N: Quote, Profile, Research) president said on Tuesday.

More delays in the Mackenzie Valley pipeline will mean the oil sands developments will strain already-tight North American gas supplies, causing upward pressure on prices, Devon’s John Richels said.

Devon, the largest U.S. independent oil company, is developing its own oil sands project in northern Alberta called Jackfish. It is one of several in which steam is injected into the ground to loosen the tar-like crude and allow it to be pumped to the surface in wells.

“The projects are being built and when they’re built they’re going to require gas, and that gas is going to come out of the system somewhere,” Richels told reporters after giving a speech in Calgary, headquarters of Devon’s Canadian operations.

“It will put additional pressure on the gas markets if we’re not delivering gas from the Mackenzie or some other areas.”

The Canadian oil industry has projected companies could be producing as much as one million barrels a day of the crude within a decade using the process, called steam-assisted gravity drainage.

“That will probably require somewhere between 500 million cubic feet and a (billion cubic feet) a day, so that’s why we need to get that gas to market,” he said.

A consortium led by Imperial Oil Ltd. (IMO.TO: Quote, Profile, Research) has filed applications for the pipeline, which could carry up to 1.9 billion cubic feet of gas a day to Canadian and U.S. markets from fields in the Mackenzie Delta on the Beaufort Sea coast.

The proponents have said the 1,350 km (840 mile) pipeline could be in service by the end of the decade, tapping reserves discovered in the 1970s, but several hurdles remain.

They include a challenge by the Deh Cho Indian nation in the Northwest Territories, which wants outstanding land claims resolved by Ottawa before allowing the line to cross its lands.

Also, media reports over the past week have said regulators have halted the environmental review process and asked Imperial and its partners to provide information on such issues as the impact of construction on communities, and plans to lessen it.

“I think we really need to move that project forward. We’ve been talking about it for a long time. We need that gas that’s already been discovered,” Richels said.

Devon plans to drill a C$50 million-C$60 million well in the Beaufort Sea next winter — the region’s first offshore drilling since the late 1980s — and the pipeline will be needed to move any future production to market.

For oil sands developers, gas prices are one of several factors that influence the profitability of their projects. Others include crude prices, the price spread between light and heavy crude and transportation costs.

Devon plans to spend about C$525 million at Jackfish, located near Fort McMurray, Alberta, to produce 35,000 barrels a day starting in 2008.

It also has a 13 percent interest in the Surmont oil sands project operated by ConocoPhillips (COP.N: Quote, Profile, Research) , but has that stake on the auction block as part of a plan to sell $1.5 billion of North American assets.

Shares in Oklahoma City-based Devon rose 14 cents to $40.35 on the New York Stock Exchange on Tuesday.

($1=$1.25 Canadian)
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