Natural Resources Committee on Nov. 23rd, 2010

[The Chair, Conservative, Leon Benoit]

Good morning, everyone. Welcome to our meeting once again, where we continue, under Standing Order 108(2), a study of energy security in Canada.

We have two panels of witnesses today. Normally I take the witnesses in the order they are on the agenda, but today we're trying to sort out some technical things, so we will start with a presentation of up to seven minutes from Talisman Energy. We have James Fraser, senior vice-president, shale division, North American operations; and Reg Manhas, vice-president, corporate affairs.

Welcome.

If you could go ahead with the presentation, then we'll go to Mr. Heffernan. Hopefully, the technical things will be sorted out by then.

Go ahead, please.

[Reg Manhas, Vice-President, Corporate Affairs, Talisman Energy Inc.]

Great. Thank you, Mr. Chairman.

Thank you to you and all committee members for this kind invitation and the opportunity to speak with you today. We very much welcome the chance to share the Talisman Energy success story and answer your questions on the energy sector in general.

My name is Reg Manhas. I'm vice-president of corporate affairs for Talisman Energy. I'm based in Calgary, Canada. My colleague today, Jim Fraser, is the senior vice-president for North American shale.

Before we go any further, I just want to let you know I won't be going through the advisories on our presentation this morning, so that's for all your reading pleasure at a later point.

Before I turn it over to Jim to address the specifics of shale gas, I'd like to just say a couple of things about Talisman's global footprint and our commitment to corporate social responsibility. Talisman Energy is a Canadian company headquartered in Calgary, with exploration activities in North America, Latin America, Asia, the Middle East, and Europe. We take great pride in being a Canadian company operating on the global stage.

Talisman is committed to the highest levels of corporate, ethical, and social responsibility. We have been recognized as a national and global leader in the area of corporate social responsibility. I personally was very proud to serve on the national advisory group during the Government of Canada round tables on corporate social responsibility a couple of years ago.

Talisman is a developer of oil and gas around the world, but I note that we are not involved in the oil sands projects. In fact, over the past few years, Talisman has made a strategic decision to focus its North American business on natural gas.

I'm now going to turn it over to Jim Fraser to speak specifically to our shale operations in Canada. Thank you.

[James Fraser, Senior Vice-President, Shale Division, North American Operations (NAO), Talisman Energy Inc.]

Thanks, Reg.

Once again, it's my pleasure to be here as well.

I would refer you to the global map on the second page of your handout. As we've mentioned before, Talisman is a worldwide independent oil and gas producer. We have operations in the North Sea, Southeast Asia, and North America. That's where the focus of the rest of my prepared comments will be, on our North America portfolio.

In the last several years, we have transitioned from a conventional gas and oil player to a predominantly shale gas player due to its significant long-term growth potential and low-cost structure. We have four shale plays in North America, each at different stages in their evolution. I'll talk about those specifically in a moment.

The fourth part of our portfolio is our exploration that handles exploration worldwide.

Referring to the next page, Talisman has approximately 1.8 million net acres of leases of shale gas portfolio in North America that consists of the four plays. Within that acreage position, we have original gas in place of 238 trillion cubic feet of gas. Referring to the pie diagram on the right part of the page, our contingent resource is estimated at 57 trillion cubic feet of gas. To put that in context, Canada consumes about 3.5 tcf, or trillion cubic feet, of gas every year, so this contingent resource from Talisman alone has the potential to fuel the country for 16 years.

As I mentioned earlier, we have four plays. The first and most mature is the Marcellus shale in Pennsylvania. We've grown that resource from basically zero production to over 270 million cubic feet of gas production in the last two years. It is one of the best returning shale plays in North America.

Second most mature is in northeast British Columbia, the Montney shale. This is a play that's distinguished by the thickness of the shale. It's up to 1,400 feet of gas-charged shale, as compared with 250 feet in the Marcellus. The project in B.C. is about 12 to 18 months behind the Marcellus, but results to date have been encouraging. To date, we've only drilled about 35 wells, and that's the major key in unlocking this play. It's to getting our costs down.

Our most recent entry is the Eagle Ford play in south Texas, because of the liquids content of the shale.

The fourth part of our portfolio is in the Utica formation in Quebec, where we have a very large acreage position of about 760,000 net acres. But I must stress, it's very early days in Quebec exploration, as there has only been a handful of wells drilled in Quebec.

You might ask, why shale gas?

The next slide actually has seven points I'd like to address.

First, shale gas provides a sustainable, long-life resource base to North America. These wells will have lives as long as 50 years.

Second, it's scalable. These are very large accumulations, some as large as 100 miles in length. Total shale production in North America in the year 2000 was essentially zero. It has ramped up to 10 billion cubic feet per day in 2010, or 15% of North America natural gas production. Analysts expect that shale gas will grow to over 25 bcf per day by 2015 and will supply as much as 50% of the total North America production by the year 2020.

Third, shale gas is developed using proven technologies of horizontal drilling and advanced fracture stimulation.

Fourth, these resources are very predictable. There is little variance in well-to-well performance.

Fifth, shale gas has a reduced carbon footprint relative to competing fuels. It emits 40% less greenhouse gases than coal, 30% less than fuel oil, and 22% less than conventional gas resources.

Sixth, it is low cost relative to other opportunities. This is because there is less geologic risk in drilling the wells, and the drilling and completion process is repeated potentially thousands of times, resulting in operational efficiencies.

The last point is the liquids potential. Recent successes in liquids-rich areas have resulted in a shift to developing liquids-rich areas to take advantage of higher commodity prices.

My last slide illustrates some of Talisman's best practices that we utilize in the development of this resource.

First is what we call our good neighbour program. This is where we proactively address impacts of shale development and set clear behaviours for our staff and contractors.

Second is our secondary containment and our environmental protection. We recycle 100% of the water we use in developed plays like the Marcellus. We proactively list on our website all the chemicals we use in fracture stimulation.

The last bullet point is actually probably the most important. We focus on safe operations. It's a cornerstone of our company philosophy.

In conclusion, there is a tremendous opportunity for Canada to develop its natural resources in a sustainable, responsible manner, which furthers our energy security and returns dividends to Canadians.

[The Chair, Conservative, Leon Benoit]

Thank you very much, Mr. Fraser and Mr. Manhas.

We'll go now to Mr. Heffernan for a presentation of up to seven minutes. I see you have a slide show presentation on the screen there. Go ahead, please.

[Kevin Heffernan, Vice-President, Canadian Society for Unconventional Gas]

Thank you, ladies and gentlemen. I appreciate the opportunity to be here today.

The Canadian Society for Unconventional Gas is a not-for-profit association, formed in 2002, with a focus on broadening the understanding of unconventional natural resources and the technology to develop those resources among industry, governments, regulators, and the public.

Canada is blessed with a vast natural gas resource. During the past decade our resource base has grown from 390 trillion cubic feet, or tcf—about 70 years of supply—to more than 700 trillion cubic feet.

These natural gas resources include gas in conventional reservoirs, primarily in western Canada; gas in Canada's far north and in the offshore; as well as in unconventional reservoirs: coal seams, tight sandstones, and shales. The primary change during the past 10 years has been the emergence of unconventional gas resources as a major part of Canada's natural gas resource portfolio.

While Canada's conventional natural gas resources are in decline and becoming increasingly costly to find and develop, technology has evolved and been adapted to unconventional reservoirs in response to declining conventional opportunities. With a resource base of 128 tcf to 343 tcf, Canada's shale resource will have an important role in our future natural gas supply mix.

While most currently identified shale gas resources are in western Canada, important and potentially very significant resources are being investigated in Ontario, Quebec, and the Maritimes. In addition, shale gas geological trends in many parts of Canada are currently poorly defined or understood, and we expect to see growth in the resource base in many parts of the country.

Technology has unlocked unconventional gas potential. We have experienced a dramatic evolution of horizontal drilling capability with the development of custom drilling rigs and supporting technologies, resulting in significant reductions in drilling costs. Multiple wells drilled from a single surface location can reduce cumulative surface disturbance by two-thirds or more compared to single well drilling approaches.

Hydraulic fracturing of reservoirs has been practised for 60 years. The evolution of those techniques to enable multi-stage fracturing in both vertical and horizontal wells has resulted in greatly enhanced production performance.

In addition, micro-seismic monitoring and other techniques have enabled an improved understanding of where fractures go and how they behave.

At this time, all shale gas evaluation and development activity is provincially regulated. There is no activity in areas of federal jurisdiction. Although regulations can vary somewhat from one province to another, the primary functions of health, safety, and environmental protection are always addressed.

In some places water management is a particular concern to many people. It is important to recognize that through various government departments in all jurisdictions, the use and disposal of water in natural gas development is regulated, including for shale gas development.

Standard practices for well construction are designed to protect groundwater. At shallow depths, where drinking water is found in aquifers, the first stage of well construction includes the installation of steel casing and pumping cement between that steel casing and the rock to isolate the aquifers before drilling deeper. Once the well has been drilled into the shale, a second steel liner or casing is installed, and again cement is pumped between the liner and the rock, this time isolating the producing shale from all overlying formations or rock units. This approach, isolating both aquifers and the producing zone, is a standard production practice in wells around the world.

When this construction stage is complete, hydraulic fracturing operations commence. It's important to recognize that the fracturing operation is not permitted to compromise the integrity of the well construction.

Hydraulic fracturing is a process of inducing fractures in reservoirs by pumping a fluid, often containing sand or a similar proppant, down a well and into a rock formation at a predetermined location. The fluid creates cracks or fractures, or opens existing fractures, and the proppant holds the fractures open. With multi-stage fracturing, the process is repeated a number of times in a single well. For horizontal shale wells, the process is repeated at various locations in the horizontal part of the well.

Many kinds of fluids can be used. Although some use no water, water-based fracs are common. For shales today we refer to these as slick-water fracs.

There is a widespread recognition within industry that the hydraulic fracturing process is water intensive, and producers and the service sector are working aggressively to reduce water use, employing strategies such as recycling and the use of non-potable or non-drinkable water.

Because hydraulic fracturing requires moving water and sand at high pressure, kilometres underground and into the shale, some compounds are often added to increase the capacity of the fluid to carry sand, to reduce the interaction of water with clay minerals, to improve flow characteristics, and to eliminate bacteria. These additives are regulated, primarily through federal programs and regulations, including worker training and certification requirements. We have identified several of those acts and programs and regulations for you.

There is no question that shale gas activity and development activities create concern, especially in areas that have little or no prior experience with oil and gas development. This is understandable. Shale gas evaluation and development, like any industrial activity, can be disruptive. Activity levels are high during drilling and fracturing operations but much lower once production is under way.

Shale gas development also brings economic activity and growth. In a July 2009 report, the Canadian Energy Research Institute estimated that every dollar of oil and gas expenditure generated $3 of impact on Canadian GDP. Most of that impact occurs in the jurisdiction of activity. Through economic development, employment, property sales, and income taxes, all levels of government benefit, from municipalities to the federal government.

In closing, shale gas will be an important part of Canada's future supply mix, and there are opportunities for development of the resource in many parts of the country. Shale gas development occurs within a comprehensive regulatory environment. Health, safety, and the environment, including the protection of surface and groundwater, are primary concerns. Although development can require large volumes of water, industry is working aggressively to address this concern.

Lastly, it's important to recognize that the benefits of shale gas development, including regional economic development and employment, will accrue to all levels of government.

Thank you.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Heffernan, for your presentation.

We will go now to questions. I'd like to ask members of the committee to make sure they indicate whether they would like to ask questions. It will be much easier for the chair and the clerk if you do this so we don't have to chase you down.

We'll start with Mr. Tonks for up to seven minutes.

[Alan Tonks, Liberal, York South—Weston, ON]

Thank you, Mr. Chairman. And thank you, gentlemen, for being here.

Generally, the concerns that have been raised have been around the safe fracturing technologies. You've mentioned the impact on aquifers and water tables. You mentioned that when the industry goes into a community, in the initial geological surveying and community contact, the concerns raised are often inordinately higher than those directed at other technologies having to do with liquid natural gas, natural gas, and so on.

Could you outline what that level of activity is and the concerns that communities have expressed? I'm sure you give them the overview you've given us, which explains your research on the safety of fracturing. How have communities responded?

[James Fraser]

The question is, how do communities respond to the impact we have when we bring industry into their area? First off, we recognize that this is an impact on the everyday lives of the citizens in an area. So what we try to do, and have done many times, is visit with the communities and tell them exactly what is going to happen. This is an industrial process. We bring in, via heavy trucks, drilling rigs and other industrial equipment.

We sit down and have community town halls, and we address any concerns the citizens have. In some cases, we've had tours in which we show them what an actual drilling rig works like, taking some of the mystery out of the process.

The oil and gas business has been drilling wells in North America for 150 years. Yes, it is an industrial process, and yes, there are risks. But through that long history, we feel we have identified those risks and mitigated them with best practices. What we share with the communities is exactly what we do, why we do it, and how we do it.

[Alan Tonks, Liberal, York South—Weston, ON]

Thank you for that answer.

In one of the profiles you used you showed the steel and cement casing process as the horizontal fracturing takes place. It occurred to me that the whole process of drilling for shale gas must be very expensive. How do costs for the total exploration, the drilling or processing, and the end result, where you've extracted the gas, compare to those for natural gas and liquid natural gas?

[James Fraser]

It's an entirely different process than for liquefied natural gas. To give you some specifics, when we first go into an area we drill what we call exploration wells. They are typically multi-million-dollar events of $8 million to $10 million. Part of that is for the drilling process itself, and the other part is for the completion process. With shale gas, the ability for the gas to flow is very low, so we have to create a natural pathway for it to get to the surface. We use the fracture stimulation technique my colleague mentioned. The actual cost of that stimulation is the most expensive part of the process. A typical exploration well could cost as much as $10 million to drill and complete.

Once we learn more about the specific project we're in, those costs on shale plays always come down. Our history shows us that those costs will typically be cut in half or a third over the next couple of years.

A good example that our company uses is in the Marcellus shale play. We started our first well there in November 2008, exactly two years ago, and our first well cost $8 million. We typically drill and complete wells now for about $4 million, so we've cut our costs in half. At the same time, the reserves or the gas production from that well have increased with time. That's also a characteristic of the shale plays. The costs go down as we drill more, learn more, and create more efficiencies. The reserves that are produced from the wells get better and better as we learn the proper recipe for how to drill and complete the wells more effectively.

[Alan Tonks, Liberal, York South—Weston, ON]

So your conclusion is that with the technology and research looking at mitigating the difficulties with respect to the danger and the effect on the aquifer and the environment, shale gas will be a competitive replacement price-wise for dwindling natural gas deposits, and so on.

[James Fraser]

That's exactly right. In the last few years there has been a real transformation in North America in going to the shale gases versus conventional gases. That's determined from what we call the finding and development cost, which is the cost per unit of production. With the conventional assets, which are dwindling, as you mentioned, it's typically twice as expensive from a finding and development cost than what we've shown in the shale gas assets in the last number of years. So they're very competitive, sir.

[Alan Tonks, Liberal, York South—Weston, ON]

Thank you.

Do I have time for one more question?

[The Chair, Conservative, Leon Benoit]

You have one minute, Mr. Tonks, so go ahead.

[Alan Tonks, Liberal, York South—Weston, ON]

The production of methane gas has been cited as problematic with respect to another environmental pollution carbon imprint. How is the industry accommodating that particular environmental issue, the technology issue?

[Kevin Heffernan]

I think it's important to realize that shale gas is like any other natural gas resource. In some areas the emissions associated with development are higher than our traditional average conventional supply. In other places, the emissions and the CO₂ content of the gas stream are lower than in our traditional average gas supply. In that sense, shale gas is like any other natural gas supply source.

Yes, the process of producing gas is more intensive, but we also need to remember that an average shale well might produce 10 to 20 times more gas than a traditional conventional western Canadian gas well. While the emissions at the beginning of the process may be higher, associated with the completion process in particular, the amount of gas the well recovers is an order of magnitude greater than the gas that a conventional well would produce.

[The Chair, Conservative, Leon Benoit]

Thank you, Mr. Tonks.

Madam Brunelle, please go ahead with your questions for up to seven minutes.

[Paule Brunelle, Bloc, Trois-Rivières, QC]

Thank you, Mr. Chairman.

Good morning gentlemen.

Mr. Fraser, Talisman Energy is a company that is very involved in Quebec. Obviously through the current BAPE hearings we have witnessed broad opposition on the part of the Quebec public to shale gas extraction. Correct me if I am mistaken, but contrary to British Columbia, in Quebec this extraction takes place in densely populated areas and in agricultural areas, and our fear is that this will create few specialized jobs. Shale gas extraction is not necessarily a priority for Quebeckers because they prefer greener sources of energy and their needs are less pressing.

Obviously water use and environmental harm are particularly problematic for us. In fact, Talisman Energy violated the rules at the end of October because this summer the company used four million litres of water in order to hydraulically fracture its well at Gentilly. Out of those four million litres of water, three million were not treated and ended up in open reservoirs. That was of great concern to the public. We're told that there are about 30 wells, but imagine if there were 1,000, 10,000 or 15,000. That would be of great concern.

Is it your intention to do any research? Do you intend to improve the treatment of this waste water after fracturing? Do you intend to reduce the amounts of water? What do you want to do in order to reassure the public?

[The Chair, Conservative, Leon Benoit]

Mr. Fraser, do you want to answer that?

[James Fraser]

Absolutely, Mr. Chairman.

First, Ms. Brunelle, you're correct that there is a process now, the BAP process, which is ongoing. As a matter of fact, Talisman specifically has been very engaged in that process over the last month or so, and we understand it won't conclude until early February. Some of the issues you've brought up are being discussed in that format.

Specifically on water, everything we do is tightly regulated by the ministries of natural resources and environment in Quebec. So everything we do requires a permit. For example, we used surface water to fracture stimulate that well. We had permits to extract the amount of water we did. Conversely, we have permits from the MDDEP to take that water to a municipal treatment plant for disposal.

In the long term and on a large scale, if we hope to develop that resource, that is not what we would do with our water. There are two reasons for that. First, we try to reuse as much of that water as we can. In the example you cite, we will use that water again the next time we fracture stimulate a well, which won't be until next year. So we are keeping it, as you correctly cited, in an above-ground containment so that none of the water hits the ground. Our intent is to use that water the next time we fracture a well next spring. So reuse is a big part of our strategy.

The sewage treatment plants are not the solution for long-term treatment of water in Quebec. In other jurisdictions where there aren't very robust shale businesses, that isn't what happens. There are other technologies that exist today, such as reverse osmosis and evaporation, where this water is treated at scale. There have been two wells fracture stimulated in Quebec this year, so we are not at the scale yet to use those longer-term solutions. That's why we've used the sewage treatment plant.

But I'd like to be clear that everything we do is regulated by the MDDEP. We have permits from the MDDEP when we take that water to the disposal site. The sewage treatment plant also has to approve the treating of that water in their facility. So nothing that we've done is outside of current regulations. We really support a robust regulatory environment in Quebec, as well as any place else we operate.

[Paule Brunelle, Bloc, Trois-Rivières, QC]

I'll thank you on one point, among other things, and I agree with you that this is a matter of provincial jurisdiction. I'm in the wrong seat to speak to you about this today but now that the committee is debating this, I have questions and I'm concerned about the health of my constituents.

Your answers indicate that the Government of Quebec is not ready. The Mining Act should be reviewed, etc. We are suggesting a moratorium to provide time to examine all environmental data.

I know that you do not support a moratorium. Can you tell us why?

[James Fraser]

Thank you, Mr. Chairman.

Yes, Madam, I will explain that.

You're correct. My company does not support a moratorium. Why we don't is because we think Quebec has a great opportunity right now to understand the resource of the province. Quebec uses natural gas today. About 10% of the energy consumption in Quebec is fuelled by natural gas that comes from western Canada, specifically Alberta. So here's an opportunity for Quebec not to have those imports of gas. The largest single use of energy in Quebec is from fuel oils. We think Quebec has an opportunity, if this gas was proved as a resource, to replace that fuel oil, which has a much dirtier carbon footprint than clean-burning natural gas.

Back to your safety question, this is a well-known process. The impacts on the environment are well known. We think it has been studied through North America and other jurisdictions for many years, and we feel that the technologies and the mitigation procedures exist today where we don't have to go through an extended period of study. We think those studies already exist in other places.

[Paule Brunelle, Bloc, Trois-Rivières, QC]

Thank you.

[The Chair, Conservative, Leon Benoit]

We go now to Mr. Cullen for up to seven minutes.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

Thank you, gentlemen, for being here.

I have a question with respect to landowner and property rights. You work in Alberta and British Columbia. If a landowner refuses or doesn't want a well, do they have the right to stop the well from being drilled?