Petronas' Progress Energy one of the busiest oil drillers in Canada

Although Malaysia's Petronas won't decide until the end of this year whether to export LNG from Canada, the company is already pumping billions of dollars into the Canadian economy.

Petronas LNG ship

Although Malaysia's Petronas won't decide until the end of this year whether to export LNG from Canada, the company is already pumping billions of dollars into the Canadian economy.

Last year, its wholly owned Canadian subsidiary, Progress Energy Canada Ltd., drilled 608,391 metres of hole, the sixth-highest total in the country, just ahead of Royal Dutch Shell plc, Daily Oil Bulletin records show.

During the past winter, Progress operated about 28 rigs, making it one of the busiest drillers in the country and a big reason why British Columbia's oilpatch has been busy so far in 2014.

Progress typically ran two rigs in Alberta and 25 or 26 on its North Montney project in northeast B.C. through the past winter. Even though the number of rigs the company was running dropped to 12 due to spring breakup, it is still the third-busiest driller in the country, the latest Daily Oil Bulletin statistics show.

In an interview with the Bulletin, Progress CEO Mike Culbert discussed why he believes Petronas' proposed West Coast LNG project has an edge over more than a dozen competing projects. He also talked about what has to happen for the project to proceed and what that would mean in spending and activity through the decade and beyond.

Just this year alone Progress plans capital spending of $2 billion, Culbert said. That doesn't include acquisitions such as the $1.5 billion purchase of Talisman Energy Inc.'s interest in two North Montney partnerships in the Farrell Creek and Cypress areas of northeast B.C. That purchase closed last month.

Progress isn't scouting for acquisitions, but "we'll look at opportunities that come up that are priced right and fit with our operational expertise and strategy at the time," Culbert said. "The Talisman assets were in very close proximity to where we operate in the North Montney, and, you know, the price was right."

On track for Q4 LNG decision

Progress is currently in appraisal mode, drilling to establish 15 trillion cubic feet (tcf) of proved plus probable reserves by year-end 2014 when Petronas will decide whether to proceed with an LNG project. Fifteen tcf would provide an LNG liquefaction plant with two billion cubic feet (bcf) a day of natural gas feedstock for 20 years.

The North Montney lands will feed the first two trains of the proposed LNG project, called Pacific NorthWest LNG. Progress is already more than half way toward its 15-tcf goal. In 2013, the company tripled the proved plus probable reserves at its North Montney project to more than eight tcf.

Petronas – which is short for Petroliam Nasional Berhad – is an integrated global energy giant owned by the Malaysian government. It had average 2013 production of 2.13 million barrels of oil equivalent (boe) a day and is an established global LNG player.

After completing its acquisition of Progress in December 2012, Petronas quickly ramped up activity in Western Canada.

Progress now has about 235 full-time employees and contractors in Calgary, up from about 100 before it was acquired by Petronas. In the field it has about 125 full-time employees and contractors working directly for Progress, up from about 80.

But Progress's own workers just represent the tip of the employment iceberg. A rule of thumb is that every rig operating creates 125 direct and indirect jobs. With 28 rigs running, that would amount to 3,500 people working for drilling contractors and other service providers.

Culbert said all the gas that is being drilled is being brought on production, involving a huge midstream investment by Progress and third parties.

He said 850 kilometres of gathering lines are to be built this year. Numerous compressor stations are to be built or expanded. A new gas plant is currently being commissioned in the Caribou area with initial capacity of 100 million cubic feet (mmcf) a day.

In the third quarter of 2012, its last full quarter as an independent company, Progress reported average production of 43,045 boe a day. Culbert said the company is now managing output of about 100,000 boe a day, including production owned by minority interest holders in its North Montney project.

"That includes about 12,000 boe a day from Alberta. And [it includes] the Talisman acquisition, which was about 12,000 boe a day. The rest is coming out of the North Montney," he said.

The transportation and processing agreements Progress has in place, combined with capacity the company is building itself, will meet short- and medium-term needs.

"But sooner or later – sometime during 2015 – we'll maximize the available current capacity," Culbert said. To handle longer-term growth, Progress has secured agreement from TransCanada Corporation to both extend its NOVA Gas Transmission system into the North Montney region, and also to build an 850- to 900-kilometre pipeline to deliver North Montney gas to the Prince Rupert area on the coast. This obviously depends on Petronas' LNG plans proceeding.

The project has already received export approval from the National Energy Board and the federal government.

To get the best cost estimates and design recommendations for the LNG project, Petronas hired three different engineering companies or joint ventures to do three competing front-end engineering and design (FEED) studies. That will be followed, in late summer or fall, by the selection process for the engineering, procurement and construction contractor.

Pacific NorthWest is currently going through an environmental assessment with the federal and B.C. governments for the proposed LNG facilities.

So as Progress proves up the reserves, TransCanada is going through its engineering and environmental process and Pacific Northwest LNG is doing its regulatory and engineering studies. All are to be finished in the fourth quarter in time for a year-end final investment decision.

73% sold

Petronas wants to reduce its stake in the whole project to about 50%. It is roughly half way there after securing three partners to take a total of 23%. As reported, Japan Petroleum Exploration Company Limited (JAPEX) of Japan and Indian Oil Corporation of India will each take a 10% stake and PetroleumBRUNEI of Brunei, which borders Malaysia, agreed to take 3%.

Those three partners bought into the North Montney assets (but not Progress) and Pacific NorthWest LNG.

"So they're actually taking title to the land and production facilities, etc. … And then on the LNG project they're coming in as shareholders or limited partners of Pacific NorthWest LNG," Culbert explained. "And then each one will take their pro rata share of LNG to their own markets. So not only are we creating partners for the investment, but we're also creating partners on the marketing side."

In other words, Petronas will take 50% of the LNG shipped from the Prince Rupert area, the three partners will take 23% and PETRONAS is seeking partners for the remaining 27%.

"So we're kind of in that 73%-sold mode at this point in time – which puts us well advanced of the other projects that are still looking for market," said Culbert, who believes this wellhead-to-burner-tip integration gives the project a strategic advantage.

"That, in my opinion, gives us greater certainty for a positive [final investment] decision," he said, "because of the fact that ... we've got all aspects of it covered. We've got the resource, we've got the pipeline, we've got the LNG expertise and we've got the market."

The Progress president is confident additional partners will be secured as the year progresses. "We've got active discussions underway as we speak," he said.

Full throttle for next five years

So will the pace slacken once Progress has proved up 15 tcf of proved plus probable reserves by year-end 2014?

Not at all, said Culbert. "We really see ourselves, once a positive final investment decision is made, maintaining this pace … from 2015 throughout 2019, even 2020, to increase our production up to two bcf a day."

That would mean running roughly 28 rigs pretty much year-round, with the exception of spring breakup, for about the next five years. Matching the drilling intensity would be the pace of midstream construction as the company ramps up its capacity to process and transport two bcf a day.

Once the LNG facility is operating and the first shipments are exported, facility construction will be significantly reduced, but Progress will still drill about half as many wells each year just to offset natural declines, Culbert said.

"So when you look at this in the scope of a 25-year project – five years ramping up and then 20 years maintaining – it's a very large capital commitment."

If the LNG project goes ahead, Progress expects to spend an average of $2 billion to $2.5 billion a year for the next five years until LNG shipments begin. First exports are slated for late 2018 or early 2019.

The LNG facilities – including the liquefaction, storage and offloading – are expected to cost between $9 billion and $11 billion. Culbert said TransCanada would spend about $5 billion on its pipeline connecting the North Montney to the West Coast and another $1.5 billion to extend its NOVA gas transmission system.

Direct spending – excluding the massive economic spinoff – is expected to total $36 billion. That includes Petronas' acquisition of Progress, the LNG facilities, pipelines and drilling until LNG exports begin, Culbert said.

But he cautioned that within any organization there is competition for capital and many things have to come together for a positive final investment decision to be made. Petronas needs full clarity on matters such as the cost, construction and manufacturing, labour constraints and obviously the fiscal regime, which includes everything from royalties to carbon taxes to the B.C. government's proposed LNG tax.

"There's no doubt that all this information is required before we can make that final investment decision. So we're working hard as we go through the engineering and the regulatory side of things to make sure we have the best understanding available," Culbert said. "And … I give credit to the B.C government that they know the timeline and they know that ... proponents of these projects have a window of opportunity, so time is of the essence."

Daily Oil Bulletin