These are the salad days for energy companies. With oil and gas prices shooting upward, it's no wonder the sector is filled with profit-gushers. EnCana (ECA) is no exception. But the Calgary-based outfit, formed in the 2002 merger of Alberta Energy and PanCanadian Energy, has employed a unique plan of attack. It's one of the most aggressive players in so-called "unconventional" or "tight" resources - hard-to-extract natural gas and heavy-grade oil.
Chief Executive Gwyn Morgan, a native Albertan and an employee of Alberta Energy since its creation by the provincial government in the early 1970s, helped devise the merger and the forward strategy. He spoke recently with BusinessWeek Corporate Strategies Editor Brian Hindo about his vision for EnCana, oil and gas prices, and speculation that the company could be a takeover target. Here are edited excerpts of their conversation:
Q: What were the reasons behind the strategy to sell off your conventional assets and focus exclusively on unconventional oil and gas in North America?
A: Onshore in North America, the only new growth of any significance is going to come from unconventional gas. We had built up the largest land position in North America around these types of plays. We realized that what we had built [in the past several years] was now our biggest competitive advantage.
Q: What's your outlook on pricing?
A: The price of oil is above anything we could have anticipated. When prices were very low in 1997 and 1998, most pundits couldn't figure out why they'd ever go up again. And now that they're very high, most pundits can't figure out why they'd go down again.
We used to think of $25 [per barrel] oil as being sort of normalized, an average price we use for our economics. When the U.S. dollar fell against almost all of the currencies that are either producers or consumers of oil, you have to adjust - that takes you to $30 a barrel.
If you were to have told me that $25 adjusted for currency to $30 is normalized, and we were going to have demand growth in a country of over 1 billion people that exceeds anything that has happened, I think my long-term [pricing] picture has to be higher. Then, if you add to that a combination of nationalism, populism, and terrorism in a lot of the producing states, you're going to have to add something for that. My sense is we're not going back to $30 oil.
Q: How about gas prices?
A: When oil is over $50, there's a lot of room for higher gas prices. The combination of that, plus the fact that the conventional fields in North America are falling off, would once again mitigate toward continuing strong gas prices.
Q: Drilling in unconventional fields poses technological challenges and can be capital-intensive. How do you keep costs down?
A: The big cost these days is obtaining the resource. And because we've built our resource base of millions of acres of land over a period of time, our return on capital on what we're investing to develop our oil and gas now in these unconventional fields is very high.
In conventional, your first day is your best day. In unconventional, your first day is your worst day, because your costs are higher, you're in a learning process in terms of applying technology that works the best to get tight reservoirs out. When you drill into a conventional reservoir, you have the classical eureka moment you see in the movies - where the gusher comes up, and it's wonderful, and everybody's happy and drinking champagne. After you put that on-stream, it starts to decline, and it's over fairly soon -- within a decade or less.
In our fields, most times you drill into them you don't get anything. It's a very technology-intensive approach to figure out how they can get the gas to flow. Once you begin to unlock it, then it's a question of continuously making that process better every year.
Q: Why haven't the supermajors gotten into this area in a big way?
A: There's two things. We have built up this land base that is basically irreplaceable. So access to resource is an issue. The second is we've built up this culture, focused on unconventional. Most of our people think unconventionally. It's very challenging to take a geologist, physicist, or engineer who has spent their career in conventional [and get them] to think about how to work unconventional fields.
Q: There has been some chatter that EnCana makes a nice acquisition target for a supermajor. Would the company be amenable to those overtures?
A: It's fair to say that I've been involved in building this company for a long period of time. This is now the largest industrial company in Canada by market cap, and it's a very strong enterprise. So naturally we believe our shareholders will do better with us continuing to create the value we're creating over a longer period of time.