Natural gas is back: British Columbia drilling surge is behind $5+ billion in 2017 investment

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In the midst of a particularly frosty winter, signs of spring for an industry that thousands of families depend on.

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There is a certain statistic that people in the energy field talk about the way that realtors obsess about interest rates: the number of wells anticipated to be drilled. It is a figure that drives an entire industry.

Last week the Petroleum Services Association of Canada (PSAC) revised its well-drilling forecast for 2017. Approximately 31 percent more natural gas wells are now expected to be drilled in British Columbia, with PSAC’s revised forecast now at 367 wells, up from 280.

The Dawson Creek Mirror reported another signal in this report relating that in a single sale of drilling rights last month, BC’s petroleum and natural gas rights auction raised more money than every auction in the last two years combined.

And over the past year, there has been a steady stream of announcements in new plants and pipelines.

Taken together, these three trends herald more than just a return to vitality in a region hard hit by the global petroleum price collapse of 2014. There is a growing realization that the north east is pivoting off its number one talking point of recent years, that being the move toward LNG exports to combat structural market changes.

If the surge in investment was, say, flowing into Metro Vancouver tourism instead, here's an image. The 2017 spending plans for BC natural gas would equate to a Vegas-style casino-plex a la the Wynn/Encore with 5,000 rooms, along with a SkyTrain extension to get there. We know what kind of news that would be. Unfortunately for toilers in the energy field, natural gas is generally a story that causes reporters to run away from, not toward, the assignment desk. 

Liquefied natural gas is still a thing, but much of the new investment right now is aimed at an emerging natural gas opportunity known as liquid-rich gas or light tight oil (the terms are interchangeable). North eastern British Columbia is increasingly recognized as the location of a world-class resource that is transforming the provincial economy.

It seems like the natural gas industry may finally be coming out of the trough, which is good news for not just that sector but also for consumers and those who depend on government services like schools and health care. 

367 wells at $9 million apiece equals $3.3 billion in investment value injected straight into western Canada's economy, plus there is the cost of new supporting plants and pipelines.

British Columbia's natural gas industry contributed $10 billion in royalties in the decade to 2013, but that level of benefit has been down significantly.

Over the next few months, as a provincial election campaign is waged, we can expect to hear competing versions of what the natural gas future could or should look like. There may be those saying it's not worth bothering about; a dreaded curse that must be ignored at all costs; or an opportunity that every other jurisdiction in the world would be developing were it so lucky as to be sitting on top of the incredibly rich and diverse Montney shale formation.

The somewhat justified perception that BC's LNG opportunity was oversold by the current government is a vulnerability for those seeing the current fact set emerge. It's definitely the case that LNG is grinding away on a slower-than-anticipated timescale, but here's the thing: the move into liquids is a transformation that could be on the scale of LNG. Liquids are valued for manufacturing, like plastics, as well as for fuel.

According to a presentation by Encana's Richard Dunn a recent resources forum in Prince George, liquids-rich unconventional gas plays are capturing the vast majority of North American energy investment. These plays will continue to deliver an essential part of the energy mix needed by the world. 

BC's liquids-driven uptick is especially timely because we are in a moment when the future of natural gas is questioned by those who are struggling to see how it fits into a vision for a clean, high-tech, prosperous future. That's an important discussion, but in the enthusiasm for emerging energy forms we shouldn't overlook the verified facts of today. The National Energy Board of Canada last year predicted that the nation will derive 44 per cent of its primary energy from natural gas by 2040, up from about one third today.

British Columbians can be proud to know their province produces the cleanest (lowest in sulphur and CO2) natural gas in North America. It's not just the sheer luck of being blessed with a certain kind of geology. Electrifying new gas plants in the north east, instead of powering them with fossil fuel, has also unlocked further big GHG reductions. 

Pictured below is the Encana Water Resources Hub south of Fort St. John that I visited last year. This kind of infrastructure is very costly to build, and it's one more factor showing the gas industry is making good on promises to protect the environment. It's also why, if you are a fully evolved environmentalist in British Columbia today, natural gas and LNG exports are right at the top of your list of desirable energy solutions.

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More than ever, natural gas is the linchpin in British Columbia’s goods and services resource economy, and it is already contributing positively to global GHG reduction by replacing sources of energy that produce more pollution. It has never been more important to recognize that this valuable natural product, together with forestry and mining, provides the foundation of the British Columbia economy.

A starting point for deeper understanding is the economic value of drilling those 367 natural gas wells expected in 2017.

Just a single well calls for a wide array of services, due in part to the amount of technology required to drill accurately several kilometres below the surface and safely extract gas. The document below is a sample “completion estimate” shared by PSAC, showing all of the different inputs required to build a typical well, in this example one located in Alberta.

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This estimate pegs the cost of that well's construction at a shade under $15 million. This rings true for me because I've heard similar numbers quoted when I've asked various industry experts to estimate the impact of one well. 

However, since drilling costs are dropping through innovation, and the Montney shale has its own characteristics that affect drilling costs, I'm going to go with the much more conservative estimate of $9 million per BC well suggested by a senior petroleum engineer I consulted for this article.  

Last March, when natural gas people staged a day of action across northern British Columbia to call for LNG to move forward, a lot of them were driving heavy rigs of one kind or another, as seen in this video:

Natural gas supports numerous businesses and jobs, especially (but not only) in the north east; PSAC counts 17 industry subsections. This means thousands of people, and vast fleets of equipment, must be deployed in the drilling and completion of oil and gas wells, which because of their complexity require constant innovation and deepening specialization. 

Much of the innovation occurs in the field where service providers and energy producers solve problems on the spot leading to solutions that are adopted by others.

The technology behind the ever-increasing accuracy and real-time "downhole" data is based on seismic data, which is combined and processed by geologists and petroleum engineers through computer simulations that are enacted in the field.

Using big data this way keeps oil and gas companies on the forefront of innovation. Increasingly, they are using the "Internet of things" to organize data to enable cheap and efficient analysis that in turn leads to further insight and advances.

Visiting one hydraulic fracturing site, I was impressed at the sight of a solar panel powering a piece of equipment. I realized it was a fair reflection of how the gas industry operates these days: if a solution is cost effective and can be made to work, you can bet it is being adopted. 

Recently I visited a control room far from the field operations and saw simulations being run on five big screens. The theatre-style environment allowed specialists to witness three-dimensional and holographic imaging show exactly how hydraulic fracturing was unlocking the natural gas deposit. In other such centres, three-dimensional and holographic imaging is used that lets technicians don special gear that allows them to virtually walk through a customer's formation 3,000 metres below the surface of the earth and position the drilling tools for maximum production.

Other technology allows drill bits to be steered remotely by highly trained people skilled at directional drilling, a technology that continues to expand at a fast pace. The continuous buildup of computing power improving the use of directional tools, as well as the expansion of sensor packages, is allowing the industry to develop real-time pictures of what is going on deep below the surface. Newer technology for horizontal wells has lowered the environmental impact of natural gas development because it reduces surface disturbance.

All in all, modern unconventional energy development has been an employment bonanza. According to a 2015 presentation by Mark Egerton of the Center for Energy Studies at Rice University, a traditional vertical well created 33 jobs. Nowadays, a single wellhead with five horizontal wells employing the modern array of technology means 383 jobs. It's a staggering differential.

Calculating the value of the 2017 crop of wells is a pretty straightforward exercise: 367 wells at $9 million apiece equals $3.3 billion in investment value. Throw in the new plant and pipeline investments by companies like Encana and AltaGas to support the surge in Montney liquids, and 2017 easily tops $5 billion. 

To put that figure into more relatable terms, consider again the example of the Las Vegas Wynn hotel complex.

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The Wynn has 4,750 rooms over 215 acres and is one of the most expensive hotels ever built. The 2017 BC natural gas investments are akin to putting one of those in Vancouver, along with a SkyTrain extension like the 10-km Evergreen Line. 

Or to put it another way, new construction to support natural gas production is worth more than double the total value of all new building activity in the City of Vancouver during an average year. This chart is from the city's website:

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Capital will flow to where it achieves the highest returns. In British Columbia's case last year, for every $1 invested in tourism infrastructure (accommodation and food services) about $9.20 went toward natural resources, much of that to support gas. There could not be a stronger proof point for the argument that resources are a much, much stronger economic driver than tourism. (See page 76 of this report for relevant table.) While we can fantasize about Vegas hoteliers making gigantic investments in BC, for the moment other opportunities are more realistic.

Using the Rice University estimate, 367 wells for BC in 2017 could mean as many as 140,561 jobs. (Bear in mind that a well may be started and finished in the space of a couple of months and the workers will be headed to the next site, so the actual number of bodies is obviously going to be much lower on an annualized basis.) The Canadian gas industry uses the much more conservative figure of 135 jobs per well, which totals 49,545 jobs. The latter number reflects direct jobs close to the wellhead itself, while the Rice University figure is an expansive one showing how opportunities ripple through the economy thanks to the production of low-cost, clean, reliable fuel and industrial feedstock.

Put all of this together and it is no wonder the residents of north east BC rallied for their cause. They have a lot to lose if their industry is sidelined by unfriendly policy, such as the City of Vancouver's decision to eliminate natural gas that will penalize consumers while likely resulting in increased, rather than reduced, environmental effects.

Word needs to get out about how the natural gas industry has changed gears just in the last couple of years in the pivot to natural gas liquids and tight oil that abounds in the Montney shale play that is responsible for 70 per cent of BC natural gas. 

The impact of all this on the wider economy is also discernible. Royalties can be measured easily as can taxes paid on goods and services. Other impacts are more difficult to detect, and it's a constant challenge to impart to others how significant the investments in export-producing industries really are. Looking at two decades of data from the annual BC Financial and Economic Report, I found some interesting correlations between capital investments into resources, and a couple of familiar economic indicators: new business incorporations and housing starts. Check out the charts below.  

Resources and new businesses

Whether resource investment is going up or down, over 20 years we see that the number of BC business incorporations is fairly closely in step. During the period shown here, resources drew $100 billion into the province. 

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Resources and housing

Housing starts also appear to track resource investment. Maybe that's not too surprising, since natural gas and mining jobs pay the highest of any industry operating in the province. Such jobs are likelier to be full time and (despite the "boom and bust" myth we hear about resource jobs) actually result in stabler long-term employment than other fields.  

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More research is needed to properly understand these linkages. In the meantime, it seems reasonable to state that the return of growth in natural gas is likely to create business opportunities and give more families a chance to put down roots. 

All told, there is every reason in 2017 for responsible policy makers to remain focused on providing success conditions for natural gas.


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