Centrica Energy’s Wes Morningstar has an enviable problem: how to best develop $1 billion worth of primarily conventional natural gas assets it and partner Qatar Petroleum International acquired from Suncor Energy Inc. earlier this year.
“While some of it (the asset package) is truly a conventional asset, there are other pieces of the portfolio where we think we can use additional or enhanced methods to recover additional hydrocarbons,” the company’s Calgary-based senior vice-president, exploration and production, said in a recent interview.
When Suncor decided to focus on its oilsands assets, Centrica jumped at the chance to pick up about 41,000 boe per day of production (90 per cent natural gas) and associated infrastructure mainly in central and southern Alberta. The deal also included more than one million acres of undeveloped land in Western Canada.
“This was a great deal for both companies,” said Morningstar. “It’s a deal where they got what they wanted out of it and we think we got what we wanted.”
Although the acquisition was announced in April (DOB, April 15, 2013), Centrica has actually had access to the assets since late September when the deal closed.
“Part of the last two months has been coming up to speed on the current operations that are ongoing because we find ourselves in the middle of a number of interesting prospects right now,” said Morningstar. “We are finding there is a reasonable amount of activity on that undeveloped land.”
For example, at Hanlon/Robb and Lovett-Basing River, Centrica is partnered with operator Tourmaline Oil Corp. in the Wilrich liquids-rich gas play and found itself in the middle of that play within those undeveloped lands.
Centrica has been fielding independent operations notices from companies who are active in some of these areas offering it a chance to participate in drilling a well, he said. “We are trying to look at the technical merits of the opportunities and in most cases we are saying we are interested.”
For the most part -- and for now -- Centrica doesn’t mind being in a non-operated position, said Morningstar. However, over the longer-term, it will look to drive more of the technical work and the drilling itself as it comes up to speed on the projects.
With the recent acquisition, 220 former Suncor employees (70 in the office and 150 in the field) moved over to Centrica.
Strong technical team
The company has assembled a strong technical team that includes two geophysicists and 12 geologists with strong experience in these types of assets as well as engineers and production engineers, said Brian Keller, development director for Centrica Energy in Canada.
As a geologist, Morningstar said he’s amazed with the progress of new play types such as the Wilrich, Fahler or Notikewin over the past two to three years, noting that there have been some great well results in a number of those different horizons thanks to fracturing and long-reach horizontal drilling.
Capital plans for 2014
Centrica anticipates spending $237 million in 2014 on its organic program with most of that spent on drilling and completions with plans for 75 (60 net) wells. “We are looking for oil or liquids-rich gas,” he said. “Where we can drill and develop opportunities within our own infrastructure, clearly that adds more value.”
The three focus areas will be the former Suncor assets at Hanlon/Robb in the Deep Basin and Ferrier in west-central Alberta along with Centrica’s legacy Carrot Creek property, also in the Deep Basin.
The Hanlon/Robb area has been primarily a Mississippian prospect producing sour gas from the deep Turner Valley formation, which has held the rights for the company, said Morningstar. The company, he said, sees a big contingent resource within the Turner Valley that could be developed at some point in the future.
Centrica is now beginning to turn its attention to the uphole Cretaceous in the area.
Infrastructure advantage
A major advantage is the infrastructure, including the Hanlon/Robb gas plant that gives the company the capacity to process its production through its own infrastructure, he said. Centrica owns 50 per cent of the 380 mmcf per day of sour capacity and holds roughly a 45 per cent interest in 45 mmcf per day of sweet capacity that could be expanded. With the plant pretty much full, it is thinking about an expansion.
At Ferrier, where Centrica acquired the 80 mmcf per day sweet gas plant from Suncor, the company will be chasing the liquids-rich Glauconite play in the Gilby area as well as some Cardium oil at Ferrier where it owns the Ferrier Cardium unit, a big oil pool. Centrica extracts C3+ (propane and butane) at the Ferrier gas plant, hauling out its own condensate and making its own fracturing fluid, said Morningstar. “It allows us to extract additional value from the liquids.”
The company has a good set-up at Ferrier in terms of being able to extract the liquids and have them marketed through its other facilities. Two Centrica-owned pipelines for propane and butane transport the products to a rail terminal.
Centrica currently is drilling three wells at Carrot Creek with another five wells in the first quarter and 10 to follow throughout the year, said Keller. The target will be the liquids-rich Gething, Notikewin and Rock Creek formations. As Suncor had not really developed its lands with horizontal technology, “we feel we have got a lot of high working interest acreage that is, quite frankly, undeveloped,” he added.
The greatest area of overlap between Suncor and Centrica assets is southeastern Alberta shallow gas development rights around the city of Medicine Hat and to the west at Alderson. The company has about 25 mmcf per day of legacy production in addition to 55 mmcf per day acquired from Suncor.
However, Morningstar doesn’t believe that Centrica will be doing a lot of drilling at Medicine Hat, at least in the short-term, given the current low gas prices. “We are not in a rush to blow that shallow gas out the door,” he said. “We are not necessarily a company that is driving for volume at all costs; we are trying to extract value.”
Focus on costs
One way of doing that is focusing on the cost side of the business. “We feel that if we can be a low-cost natural gas producer, that will keep us in the game through the low natural gas prices,” said Morningstar. “If you look at our all-in cash costs we are sub-$2 [per mcf] on a cash-cost basis.”
To reduce its per unit costs, Centrica looks at all the major cost drivers -- labour, power, fuel, workovers and maintenance -- in addition to working to optimize production, which is a critical measure, he said. The company also tends to focus on netbacks and its recycle ratio.
Over the next year, Centrica will decide where it should consolidate and consider focusing its investment dollars. There is always the possibility of selling off some assets but the company also is aware there are a lot of assets on the market right now, said Morningstar.
Current production is about 66,000 boe per day, but “if we have to go back a little bit on volume over the next year or two in order to make our organization better and more focused, then we will do that,” he said. “We are not going to grow to 80,000 boe a day at any cost,” Morningstar emphasized. “We are an earnings-driven company and we have to make sure there is value there for drilling the molecules.”
While Centrica’s current focus is on the integration of its new properties and has its plate full with that, it is always comparing the cost of drilling versus the cost of acquisitions and will continue to do so, he said.
In addition, the company is always on the lookout for new opportunities that could augment its portfolio. “We are aware of the stuff that is for sale; we have aspirations to continue to grow and we’ve got a couple of companies, Centrica and Qatar Petroleum International, that are cash-rich and have enough dollars to invest,” said Morningstar.
Critical to Centrica’s success is its “very engaged” 40 per cent partner, QPI, the global arm and wholly owned subsidiary of Qatar Petroleum, Qatar’s state-owned oil company, he said. “We have a very good relationship with them and clearly would like to do more with them and the relationship is key there.”
Direct Energy Upstream Gas has operated in Alberta since 2000 when British utility Centrica plc acquired Direct Energy in North America. In the second quarter of this year, the Canadian operations were rolled into the overall Centrica exploration and production portfolio.
Centrica E&P’s major operating areas are the United Kingdom continental shelf and the Netherlands, Norway and Canada. Total current production is about 220,000 boe per day (mainly natural gas) with the goal to increase that to 275,000 boe a day within the next three to five years, said Morningstar.
The Suncor acquisition was made through CQ Energy Canada Partnership, a newly formed Canadian partnership owned by Direct Energy Resources Partnership (60 per cent), a wholly owned subsidiary of Centrica plc, and QPI Energy Canada Ltd. (40 per cent), a Canadian corporate entity wholly owned by QPI.