National roots entangle Quebec’s shale gas ambitions
Opposition is more "nationalistic" than environmental, former association head says
Andre Caillé had had enough. At a public meeting on the outskirts of Saint-Hyacinthe, Quebec, east of Montreal, the former chief executive of Hydro-Quebec was midway through an unpopular sales pitch when he decided to call it quits. It was September, 2010, at the end of a whistle stop tour of the St. Lawrence Valley arranged by the brand new Quebec Oil and Gas Association (QOGA). In town halls and community centers, in a region more accustomed to producing fine cheese and fresh vegetables than oil and natural gas, Caillé had tried in vain to convince locals that shale gas was not a harbinger of environmental doom. “Nobody was listening,” he says.
Within a year, he had left his post as president of the fledgling industry association for a less public role as a strategic advisor to Junex Inc., one of several junior operators to have quietly accumulated significant land holdings in an Appalachian basin called the Utica shale. The unenviable task of selling fossil fuels to a hydro-rich province now rests with former Parti Québécois premier Lucien Bouchard. “He’s a charismatic leader as a politician, so the people will listen to him,” Caillé believes.
But charisma alone did not win Bouchard his latest job. In Quebec, objections to shale gas are only partly driven by a fear of the unknown. Less acknowledged, Caillé says, is an old rift about the role of government in the development of the province’s natural resources, a tension that traces its roots to the wave of nationalization that created Hydro-Quebec and the so-called Quiet Revolution of the 1960s under the Liberal government of Jean Lesage. “It’s a frustration relative to who’s going to get access to that value,” Caillé says, describing shale gas as “very, very significant” for the province. “It’s much more of a nationalistic point of view than an environmental point of view. That has not been said up to this date.”
It is a measure of how politically sensitive natural gas has become in Quebec that Michael Binnion is learning to speak French. “It turns out to be harder than you think,” the president and chief executive of Questerre Energy Corp. says, describing the language classes. “It’s actually gone pretty well. I can carry on a basic conversation.”
These days, the Calgary shale gas developer is busy communicating a new business strategy to wary investors. With the exception of Talisman Energy Inc., shares of the few companies actively working to tap the Utica – estimated to contain anywhere from nine to 41 trillion cubic feet of natural gas – have been battered since the province slapped a de facto moratorium on hydraulic fracturing operations last spring. “I think that changed expectations and punished our stock price quite a lot,” Binnion says.
The pain was swift and deliberate. On March 9, as Quebec’s environment minister announced the province would take at least two years to study the effects of shale gas operations on the environment, Questerre shares fell 25 per cent to $1.20 on volume of 2.9 million, or more than eight times the volume of trades conducted one day earlier. By September, the company’s market capitalization had shriveled to $192.6 million, and its shares were trading at just 83 cents a unit, despite a year of aggressive buybacks.
Binnion and Questerre have not stood still. The firm has since redirected the bulk of its capital program to focus on a “tight” oil property in southern Saskatchewan called Antler, targeting production of between 1,500 and 2,000 barrels per day by 2013. After spending an additional $13.2 million on undeveloped land in the region and simultaneously divesting from a prospective gas project in northeastern British Columbia, Questerre is actively looking to expand its reach to shale oil properties elsewhere in North America. “Oil from shale is emerging and we think there’s going to be a lot of development in that area,” Binnion says.
In the meantime, the company has recruited former Parti Québécois leader Andre Boisclair as a strategic advisor while it works to brand itself as more than a pure-play Quebec story, a strategy Binnion concedes has been “disappointing” in the short term. He’s confident the current antipathy toward shale gas will subside, despite market sentiment and the bruising Questerre stock has taken in recent months. “The valuations are implicitly looking like the market is giving somewhere close to a zero per cent chance of success in Quebec, and that seems way out of whack,” he says. “It’s more likely than not that we will be successful in Quebec. We just don’t have a guarantee.”
Shale gas is only the latest flashpoint in Andre Caillé’s career. Years earlier, before hydraulic fracturing entered the Quebec lexicon, he championed a losing bid to build a natural gas-fired power plant in Montreal. As president and CEO of Hydro-Quebec, he was the public face of a push to deregulate Quebec’s electricity markets. Both causes made him a poor shale gas advocate, says Pierre-Olivier Pineau, an associate professor at HEC Montreal that specializes in energy policy. “He mostly failed in his attempts to raise the profile of natural gas,” the professor says. Caillé has “an extremely bad public image, because he was totally incapable of having any kind of discussion with anyone. He has been damaging his own industry, at least for shale gas.”
Ironically, Caillé helped create the agency that sidelined the industry last year. In 1978, three years before he joined Gaz Métro – where he eventually became CEO in 1987 – the chemist and graduate of the Université de Montréal helped build the Bureau d’audiences publiques sur l’environnement (BAPE) as a deputy minister for the environment in the government of René Lévesque. The agency recommended last year that all drilling except for research purposes be halted pending the completion of a strategic environmental assessment.
John Molson, an assistant professor in the department of geology and geological engineering at Laval University, is among the members of an 11-person committee charged with completing the review. He says the committee, which in addition to government officials also includes a representative from Talisman Energy Inc. and a former provincial director for Greenpeace Canada, will take its cues from reports and information collected in other jurisdictions where similar studies have been completed or are under way.
The work will also draw on data accumulated through test wells that have already been drilled in the region. Particular attention will be paid to well construction, Molson says. The Utica itself is a very dry basin. “There’s not a lot of water in it, and what water is around is fairly salty, because it is a lot deeper than other places,” he says. “The industry won’t be contaminating a freshwater aquifer down there at that level, but the problem is getting down there with a well.” Even when the committee completes its work, Molson does not anticipate a great deal of development. “A lot of it will just be exploration for the next several years,” he predicts, “and I think it will go a little more slowly, because it is a new industry in Quebec, and there’s a lot of public opposition right now.”
A good deal of the antagonism is rooted in a perception that exploration rights were given to companies on the cheap. (Fees paid for a well license in Quebec top out at $100 and $50 for a well completion license, respectively, compared to $10,300 for a well license in British Columbia). Hoping to emulate the success of a revised mining royalty system that saw the government net $304-million in all of 2010, the National Assembly has indicated it will introduce a new natural gas royalty regime pegged to prevailing prices. A non-refundable royalty credit will also replace a long-standing tax credit used to encourage exploration.
Under the current royalty system, companies are required to pay a fixed rate of 10 per cent or 12.5 per cent of market value at the wellhead, depending on a well’s average daily production. The new royalty apparatus will mirror the sliding scale adopted in B.C. and Alberta, varying from five per cent when production is low to 35 per cent when well productivity and prices increase. The government anticipates revenues could total $275 million in six years and close to $400 million annually 15 years from now.
The windfall is one reason Caillé calls the current halt to development in the Utica “not very wise” for a province saddled with a projected $3.8-billion deficit for 2011-12. “It’s $2 billion a year that comes out of the Quebec economy,” he says, factoring in spinoff benefits in related businesses. The one-time chairman of the World Energy Council also rejects the idea that an affinity for hydropower is to blame for the shale gas uproar. “That’s only part of the explanation,” he says. “And I think it’s not the most important part.”
At HEC Montreal, Pineau likewise cautions against pigeonholing Quebeckers as uniformly opposed to all development. “They don’t like hydrocarbons in theory, although in practice they buy as much or almost as much as any other North American,” he says. Some are worried about environmental damages. Others would like to see the government, and not private companies, lead development. “But I wouldn’t say it’s clear in the minds of people why they’re opposed to the current situation and what they would prefer.”
The history of public versus private ownership of oil and gas exploration rights in Quebec is equally opaque. One year after Caillé became president and CEO of Gaz Métro in 1987, the firm became a subsidiary indirectly owned by the Caisse de dépôt, Quebec’s largest pension fund manager, and a little-known provincial agency called SOQUIP. Short for the Société Québécoise d’initiatives pétrolières, the agency was created by the Union Nationalé government in 1969 following the nationalization of the province’s electric utilities that six years earlier formed Hydro-Quebec.
SOQUIP took over responsibility for managing oil and gas exploration in the province from Hydro-Quebec. It faded from view in the mid-1990s, however, at about the same time that Caillé took the reins at Hydro-Quebec, which subsequently bought – and later resold – shares in Gaz Métro. Amid the shuffling of responsibilities, production was limited, in no small part because hydraulic fracturing was a relatively unknown technology. “We knew that the shale did contain a lot of natural gas,” Caillé recalls, “but we didn’t know how to produce it.”
For a time, Hydro-Quebec had an oil and gas division, but for the most part rights to exploration and seismic data languished in relative obscurity until a handful of private firms began sniffing around in the late 1990s. One of them was led by a petroleum engineer named Jean-Yves Lavoie, who began quietly snapping up leases at bargain-basement prices. Today, Junex Inc. has yet to produce a single barrel of oil or gas equivalent, but it holds rights to some five million acres of land throughout Quebec, including properties in the Utica basin and prospective oil plays on the Gaspé Peninsula. “I think our situation is not bad right now,” Lavoie says, looking past the current market funk to brighter days. “The potential is still there,” the company president and CEO insists. “The political climate, it’s at zero, and that’s the problem.”
Few expect commercial production from the basin before 2015. By then, at least, the political winds may have shifted in favor of shale gas. Caillé is not giving up. He allows that the sector’s prospects appear dim today, but notes that public sentiment in Quebec – especially as it relates to politics – can be fickle. “I’m staying involved, because yes, it may appear to be very negative at this time, but let’s not forget that things change very fast in Quebec.”