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Energy sector cost inflation may hit nine percent

Natural gas producer Encana says it's working to offset that inflation


October 6, 2011
by The Canadian Press

CALGARY: Encana Corp said it sees costs of labour, steel and services rising in the energy sector, but it expects the inflation it experiences to be less severe than the industry average.

“Although Encana is primarily a natural gas company, fluctuations in oil prices have a significant impact on our costs,” said Mike Graham, head of the company’s Canadian operations. In part, that’s because oil and natural gas producers compete for much of the same equipment and services, Graham told an investor conference call highlighting the company’s Horn River Basin natural gas assets in northeastern BC. “These inflationary pressures are expected to recede in the coming years as new equipment becomes available in the market.”

Encana is one of North America’s largest natural gas producers, with holdings in northeastern BC, Louisiana, Texas and elsewhere in North America. Graham said Encana forecasts cost inflation in Canada’s energy sector this year generally running at between seven and nine percent. However, he predicts Encana will realize a four- to six-percent inflation rate, likely at the low end of that range. “Our ongoing efforts to offset inflation are paying off,” Graham said.

He owed some of the success to Encana’s manufacturing-like approach to producing natural gas using so-called “resource play development hubs.” The hubs are centred around large tracts of land that touch each other and contain a high concentration of gas. The company can drill up to 16 horizontal wells into the shale rock deep underground from a single pad, reducing the surface footprint and lowering costs. Encana also looks to ink long-term contracts with its suppliers so it has some certainty over future costs.

“Designed for operational efficiency, cost reduction and to reduce our environmental footprint, resource play hubs are at the heart of Encana’s goal to lower our supply costs to $3 per 1,000cft equivalent over the next three to five years,” said Graham.

As it struggles with persistently low natural gas prices, Encana has been chasing after much more lucrative liquids-rich reservoirs. The company is also a partner in a project that aims to ship liquefied natural gas off the BC coast by late 2015 so the gas it produces can fetch a higher price in Asian markets. An engineering study is underway to pin down the costs of the Kitimat LNG terminal, in which Apache Corp and EOG Resources are also partners, said David Thorn, vice-president of Canadian marketing. Talks are also underway with possible Asian buyers of the liquefied gas.

“There’s been very strong interest to date,” said Thorn. “The expression of interest ranged from simply LNG supply to existing or planned regasification facilities through to participation all along the value chain from shipping, equity interest in the Kitimat facility as well as upstream participation.” Encana expects to decide whether to move ahead with Kitimat early next year.