Nova Scotia looks to revive its offshore fortunes
A new resource analysis could end years of neglect
Sandy MacMullin was preparing his pitch. He was some 20 stories up in a high-rise building located in Beijing’s crowded business district, sitting in a boardroom with eight company representatives. He queued up his PowerPoint presentation. He had come to Beijing to convince one of the world’s largest energy firms that it should invest in Nova Scotia’s offshore – not an easy assignment considering there hadn’t been a single new well drilled in the Atlantic province’s Scotia basin since 2004.
“You got the sense that their bellies weren’t at the table,” MacMullin recalls. The other 24 companies he had met with, in 10 different countries between May and July of 2011, had similar reactions. But MacMullin, who is the director of the Nova Scotia government’s Petroleum Resources Division, says the companies gradually became more receptive as the meetings wore on. By the second hour, the representatives started scribbling down notes and asking questions. By the third hour, the pitch had become a full-on discussion.
Somewhere along the line the message hit home. On January 20, the Canada-Nova Scotia Offshore Petroleum Board (CNSOPB) announced that Shell Canada Limited had committed to spending $970 million to explore Nova Scotia’s offshore. Starting in 2013, Shell will start 3-D seismic testing on four deepwater parcels some 250 kilometers southwest of Halifax, and it plans to drill its first test well in early 2014. The province is touting Shell’s investment as a major turning point for Nova Scotia, with Premier Darrell Dexter calling it an “important milestone” for the industry.
So what did MacMullin have to offer the oil and gas industry this time after years of industry disinterest? In short, a new story to tell. In an effort to revive its oil and gas fortunes, the Nova Scotia government embarked on a multimillion-dollar gamble to re-examine its offshore geology and find out what might have been missed. That work resulted in a big jump in the estimated oil and gas reserves that might lie off Nova Scotia’s shores. Armed with the new numbers and an aggressive marketing campaign, MacMullin and the Nova Scotia government hope Shell’s spending spree is just the beginning of a new wave of investment – all aimed at finding big petroleum fields in the north Atlantic.
This is not the first time Nova Scotia seemed to be on the cusp of something big. When MacMullin first started working for the energy department, the province was poised to enjoy an offshore drilling boom. That was in 1998, about one year before the Sable Offshore Energy Project (SOEP) went online.
The $3-billion project, an ExxonMobil Canada Ltd.-led development located near Sable Island, is about 225 kilometers off the east coast of Nova Scotia. In 2010, it produced 100 million cubic feet of natural gas per day, all of it shipped by subsea pipeline to a processing plant in Goldboro, Nova Scotia. The gas is then shipped on the Maritimes & Northeast Pipeline where it ends up in Nova Scotia, New Brunswick and New England markets. The SOEP has contributed $1.3 billion in royalties to the province over a 10-year period.
But how much longer the SOEP will be producing gas is up for debate. Production has dropped faster than was originally forecasted. The project’s six gas fields were expected to produce for 25 years. Now the figure is closer to 16 years, with a shut-in date expected sometime between 2014 and 2019.
To make matters worse, the only other project in development is Encana Corp.’s Deep Panuke. Discovered in 2000 by Encana predecessor PanCanadian, the $960 million project, another natural gas field west of Sable Island, is expected to produce first gas in the second quarter of 2012, about 18 months behind the original start date.
When Deep Panuke starts up, it will provide the province with a boost in royalties, but there is nothing else in the cue. The first offshore discovery was made by Shell in 1969. A few others followed in the 1970s and 80s. But outside of the Deep Panuke find there’s been nothing new to catch industry’s attention.
And because only exploration leads to discoveries, which then leads to more exploration, more investment and more discoveries, the Nova Scotia government decided it needed to take a chance and rebrand its offshore if it hoped to revive its petroleum fortunes.
The rebranding started when Nova Scotia’s Department of Energy spent $15 million to conduct a Play Fairway Analysis to re-evaluate its potential offshore oil and gas reserves. When the analysis was completed, the province had the new story it was looking for. The CNOPB had estimated the remaining resource potential of Nova Scotia’s offshore was between 12 and 39 trillion cubic feet (tcf) of natural gas and 1.3 and 4.5 billion barrels of oil. The updated analysis for six offshore zones upped those estimates to 122 tcf of gas and 8.1 billion barrels of oil in place.
The Nova Scotia government also spent another $500,000 shuttling MacMullin and two other colleagues around the world to market the new geological findings to producers, including all the supermajors. In three short months they traveled to China, South Korea, England, Scotland, Norway, France, Denmark, Italy and the U.S.
It was a relatively large investment for the small Atlantic province. In 2009 the energy department spent next to nothing on marketing its call for exploration bids – one that went unanswered by industry. But its new efforts have paid off with Shell’s bid, by far the largest-ever investment in oil and gas exploration Nova Scotia has ever seen. The next-highest expenditure came in 2002, when a total of $527 million was bid on 10 parcels.
MacMullin attributes the Shell bids almost entirely to the geological findings of the analysis. “[Companies] actually said to us, ‘without the Play Fairway Analysis we wouldn’t really be looking at offshore Nova Scotia today.’”
The tests revealed that Jurassic source rock – known to be rich with oil deposits – was far more pervasive in the deepwater regions than expected. And with oil prices riding high, the allure of a potential find was enough to bring Shell onboard, says company spokesperson Stephen Doolan. “We believe it’s a really a good opportunity in a new basin. This opportunity is consistent with what Shell’s [global] strategy has been.”
The energy department had the analysis conducted by the Halifax-based Offshore Energy Technical Research Association (OETR), which spent two years gathering the data. On top of the 3-D seismic testing, it assessed satellite images, took 4,000 line kilometers of 2-D tests and re-evaluated old wells. “We essentially rebooted our knowledge of the offshore geology based on the current information that we have,” MacMullin says. “We went right back to scratch.”
Still, companies approached the findings with some hesitancy. That led to open debate over “why we made some of the fundamental assumptions we did for certain key areas,” MacMullin says. Details of the geological finds are complex, and depend heavily on extrapolated data. So how did MacMullin and his team convince Shell that Nova Scotia’s offshore had more to offer?
Stephen Dempsey, OETR’s executive director, says the marketing side of the campaign was as important as the analysis. It required the analysts to condense the information into an atlas that could be easily observed by oil and gas representatives. “You’ve got to make it easier for industry to spend the time they need to look at it,” he says. “Time is the scarcest resource.”
That meant having a small team of experts tag along with MacMullin to answer any questions that arose during the meetings. MacMullin brought with him Hamish Wilson and Matt Luheshi, two bright members of the OETR, to answer those questions. “Our strategy all along was to go in and make sure we had the right people representing Nova Scotia.”
Bidding Companies: Hunt Oil Company; Chevron Canada Resources Limited; Mobil Oil Canada Properties; PanCanadian Petroleum Limited; Shell Canada; Imperial Oil Resources Limited; MariCo Oil & Gas Corporation
Total: $93 million
Bidding Companies: Norsk Hydro Canada Oil& Gas Inc.; Murphy Oil Company Ltd.; PanCanadian Petroleum Limited; Shell Canada; Mobil Oil Canada Properties
Total: $4.4 million
Bidding Companies: PanCanadian PetroleumLimited; Marathon Canada Limited; Petro-Canada; Murphy Oil Company Ltd.; Richland Minerals, Inc.; Canadian 88 Resources Corp.
Total: $61.2 million
Bidding Companies: Canadian Superior Energy Inc.; Richland Minerals, Inc.; Kerr-McGee Offshore Canada Ltd.; BP Canada Energy Company; Anadarko Canada Corporation
Total: $192 million
Bidding Companies: BEPCo. Canada Company; Shell Canada; Canadian Superior Energy Inc.; PanCanadian Petroleum Limited; Marathon Canada Limited; Petro-Canada; Murphy Oil Company Ltd.; Norsk Hydro Canada Oil & Gas Inc.; Richland Minerals, Inc.
Total: $527.1 million
Bidding Company: Canadian FrontierEnergy Corp.
Total: $14.1 million
Bidding Companies: Ammonite Corporation; Catheart Energy, Inc.
Total: $216.8 million
Bidding Companies: BEPCo. Canada Company; 1164214 Alberta Ltd.; Shin Han F&P Inc.
Total: $149.5 million
|2009||No bids received|
Bidding Company: Shell Canada
Total $970 million:
Another major challenge for MacMullin was reversing the long-standing notion that Nova Scotia is strictly a gas play. With production concentrated around the SOEP and Deep Panuke developments, few companies have bothered venturing out to other untapped basins. “Generally, offshore Nova Scotia was seen to be perhaps fairly lean outside of the Sable Island area,” MacMullin says. That could change if Shell – and other companies – happens to find significant oil reserves. The gas potential is promising as well. But with gas prices foundering, producers will be reluctant to tap them.
Some industry watchers are critical of the Nova Scotia government’s zeal to have an offshore drilling boom. Richard Grant, a former productions and facilities engineer for the CNSOPB from 1997-2002, says the board doesn’t do a good job vetting offshore drilling programs. “During my experience at the board I saw issues – profound issues – where certifying authorities were overlooking things or approving things that were not fit for purpose.”
Since leaving the CNSOPB in 2002, Grant has been a vocal advocate for an independent safety regulator in the province. He says that regulators are too slow to learn from offshore accidents that have occurred around the world, like the 2010 Deepwater Horizon oil spill in the Gulf of Mexico. “Essentially the development of regulations is at a glacial pace,” he says.
But the issue goes beyond safety and environment on offshore platforms. Grant says the Nova Scotia government could market its offshore better to investors if its monitoring regulations were updated. “If we have an efficient, effective and competent regulatory regime, it’s going to help everybody,” he says. “It’s going to help promote the offshore because it’s going to be perceived as a reasonable regime to work in.”
MacMullin, however, is confident in Nova Scotia’s ability to attract new activity as things stand. He says producers are primarily concerned with the potential reserves in the region, rather than the boards that lord over development of them. “This is no epiphany. Shell’s investment in offshore Nova Scotia is a huge vote of confidence.”
That remains to be seen. The Shell bid could be like other industry forays in Nova Scotia’s offshore over the last 40-plus years – fleeting. But armed with its new data and a new sense of purpose, MacMullin hopes the Nova Scotia government has laid the groundwork for a boom in a province that could sorely use one.