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Petroleum News: Shell downgrade gets downplayed

Oil Patch Insider
Week of November 12, 2006

The original headlines two years ago hollered about a “huge gas pool,” a “massive discovery,” and the “biggest find” in Alberta since 1986, one that was figured to be worth upwards of C$2 billion.

When Shell Canada let word out on Nov. 1 that the discovery contained far less gas than originally predicted and that an appraisal well was deemed to be non-commercial the news was largely ignored or relegated to inside pages.

Even company officials conceded they were disappointed with results from what was held out as the catalyst for opening up a new natural gas region in the Alberta Foothills of the Rockies.

Shell Canada now figures its Tay River find holds 220 billion cubic feet of raw gas, barely a quarter of the upper end of the initial estimate, although the discovery well is flowing at 90 million cubic feet per day and has yielded 35 bcf since mid-2005.

The downgrading followed the recent completion of an appraisal well that confirmed the presence of gas in the Leduc reef, but said the total pay thickness was insufficient for the well to be commercial.

Even worse, the company said it will not drill more wells in the immediate area, but plans to continue exploring for other Leduc reef opportunities in central Alberta, where it has assembled a strong land position.

Chief Executive Officer Clive Mather said that coming up short of the hoped-for gas thickness with its appraisal well “is the nature of our industry. No matter how smart we are around the seismic and the interpretation, we can still be caught out by Mother Nature.”

Results of another Tay area well might be available later this year; another well is expected to produce information within six months and a third is in the public consultation stage, proof, Shell Canada says, that it retains a bullish view of the region.

Masking some of its disappointment, the company announced on the same day that it has given formal approval to the expansion of its Athabasca oil sands project — a 100,000 barrel per day addition to the current 155,000 bpd that will cost as much as C$12.8 billion, or C$100,000-$128,000 per flowing barrel, setting a new high for the sector.

Mather said the company will make an all-out effort to beat the estimate.

He said the economics have been tested against various oil price scenarios, all of which give Shell Canada confidence it can turn a profit.

The company is 60 percent operator, with Chevron Canada and Western Oil Sands each holding 20 percent.

—Gary Park

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