Quebec Gas Industry on Hold Amid Costs, Environmental Concerns

Investment in Quebec’s nascent natural-gas industry is on hold as developers wrestle with a proposed moratorium and high costs that limit profits, according to a report released this week by the province’s government.

Canadian companies including Talisman Energy Inc. (TLM) and Junex Inc. (JNX) say they may invest elsewhere because of exploration costs that are more than double those in other North American regions. The costs add to uncertainty about potential regulation and financial support from the Quebec government amidst a review of the environmental impacts of projects.

“We’re in the very early stages of our strategy and have to determine if shale gas is economic in Quebec,” said David Mann, a spokesman for Calgary-based Talisman, which has drilled five wells in the province.

Quebec is a latecomer to drilling using a process called hydraulic fracturing that injects water, sand and chemicals to shatter dense underground shale rock and release gas. Concerns about water contamination resulting from the technique has led to a halt to horizontal drilling in the state of New York while potential hazards are studied.

A 336-page report by Quebec’s environmental assessment bureau this week recommended a moratorium on the practice until further investigation determines the impact. Developers also face profitability “obstacles” because of exploration costs, a lack of expertise and equipment available in the province, and low prices for gas, the report said.

Junex, based in Quebec, rose 2 Canadian cents to 96 cents at 12:46 p.m. on the Toronto Stock Exchange. Talisman rose 15 cents to C$22.69 ($22.71).

Gas for April delivery rose 9 cents to $3.92 per million British thermal units at 12:48 p.m. on the New York Mercantile Exchange.

Because the gas industry is still in its infancy in Quebec, drilling equipment must be shipped from Western Canada, and most of the developers are small local companies, said Ken Chernin, an analyst at Jennings Capital Inc. in Halifax. Small drillers may look to other parts of Canada to invest until Quebec determines operating rules for the industry, he said.

“We could see some companies like Junex looking elsewhere in the meantime,” said Chernin.

Junex is still deciding what to do in Quebec, said Dave Pepin, vice president of corporate affairs and head of finance. The company, based in Quebec City, was waiting for the report to be released before deciding its capital spending plan for the province, he said.

“We’re in the process of evaluating everything and going to the board and making a decision,” Pepin said yesterday in a telephone interview. “We’re in the pilot phase. There’s no industry. There’s no services here.”

Exploration of shale gas in Quebec costs C$10 million per well, according to the report commissioned by the provincial environment ministry.

Wells in the Marcellus Shale, the gas deposit nearest Quebec and to eastern U.S. population centers, cost about $5.2 million last year, Halliburton Co. (HAL), the second-largest oilfield services company, said in an investor presentation last year.

Encana Corp. (ECA), Canada’s biggest gas producer, spends about as little as $1.7 million to drill and connect a well to a pipeline at its operations in Piceance, Colorado. The company, based in Calgary, doesn’t operate in Quebec, said Carol Howes, a spokeswoman.

Quebec has drilled about 30 wells compared with almost half a million in the western provinces since 1947, according to the Calgary-based Canadian Association of Petroleum Producers.

“The onus is on industry to continue to work with the Quebec government to ensure Quebecers understand the process and technology being used and are comfortable with industry activity and how it’s regulated,” said Travis Davies, a spokesman for the Calgary-based group.

To contact the reporter on this story: Jeremy van Loon in Calgary at jvanloon@bloomberg.net

To contact the editor responsible for this story: Susan Warren at susanwarren@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.