ARCHIVED - High Investment Potential in Canadian Northern Oil and Gas

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Bulletin
Volume 1, Number 1
June 1994

Jurisdiction

Jurisdiction over oil and gas in Canada's North (north of 60° N latitude) is exercised by the federal government. The Northern Oil and Gas Directorate in Indian and Northern Affairs Canada manages this area which comprises about one-third of Canada. It includes the onshore mainland areas of the Yukon and the Northwest Territories, the Arctic Islands, and the offshore Beaufort Sea and Arctic Ocean.

Resources

The North contains about 25% of Canada's remaining discovered resources of each of conventional recoverable light crude oil and natural gas.

The importance of the northern basins is even more evident when we consider estimates of how much more conventional oil and gas is likely to be discovered. The North is estimated to hold about 40% of Canada's future discoveries of each of conventional recoverable light crude oil and natural gas.

Exploration for these resources is still at a relatively early stage. Compared to the 150,000 wells drilled to date in Alberta, less than 1,500 have been drilled in the North.

Rights issuance

The regime for issuing exploration rights is simple, straightforward, fair and competitive. Calls for Nominations precede Calls for Bids and all terms and conditions are specified up front. A single criterion is used to select winning bids.

There is an annual Call in the Beaufort Sea/Mackenzie Delta (the next Call for Nominations in this area is expected to open in January 1995).

Rights issuance has now been re-opened for the first time in 25 years in the southern Northwest Territories near producing gas fields and numerous oil and gas discoveries. This Call for Nominations in the Fort Liard area closes July 13, 1994. It will be followed by a Call for Bids closing in December.

Rights issuance is also expected to re-open in 1994 in the Mackenzie Valley including the area around the Norman Wells oil field.

At year-end 1993, 2.6 million hectares were held by industry under 151 active exploration, significant discovery and production licences.

Geology

The southern territories comprise the northern part of the prolific Western Canada Sedimentary Basin and feature exploration costs comparable to northeastern British Columbia and northwestern Alberta, both very active exploration areas. Several exploration plays are shared among these three areas, and the limited exploration in the territories to date indicates potential for a density of discoveries comparable to that in adjacent areas of the provinces.

Royalties

The main differences between northern British Columbia and Alberta and the southern territories are that in the territories the bidding terms and royalty rates are more generous.

The profit-sensitive northern oil and gas royalty regime is one of the most competitive in the world. While companies are recovering their initial investment, including a reasonable rate of return, royalty rates are extremely low. Prior to project payout, royalty rates begin at 1% of gross revenue, gradually rising (by one percentage point each 18 production months) to a maximum level of 5%. Following payout of the initial investment, including a reasonable rate of return, the royalty becomes the greater of 5% of gross revenue or 30% of net revenue (i.e. net of allowances for capital and operating costs).

Transportation infrastructure

There is capacity available in the oil pipeline from Norman Wells to the oil pipeline system in northern Alberta and in the gas pipeline from the Pointed Mountain and Kotaneelee fields to the gas pipeline system in British Columbia.

Oil and gas production operations

Norman Wells

The Norman Wells oil field is Canada's fourth largest producing oil field in terms of remaining reserves, with estimated ultimate recoverable reserves of 37.5 million cubic metres. Norman Wells production in 1993 was 1.8 million cubic metres of oil and 134 million cubic metres of natural gas. Cumulative oil production reached 19.5 million cubic metres. Imperial Oil plans to drill twelve wells in 1994-95 at a cost of $30 million. Production is expected to continue until about 2020.

Pointed Mountain

The Pointed Mountain gas field in the southern Northwest Territories has been a steady source of natural gas since 1972; by year-end 1993 cumulative production reached 8.6 billion cubic metres. Amoco is conducting workover operations at the present time on the K-45 well.

Kotaneelee

Natural gas production by Anderson et al from the Kotaneelee field in the southern Yukon amounted to some 492 million cubic metres in 1993. Cumulative production reached 1.3 billion cubic metres.

Cameron Hills

The Cameron Hills oil field in the southern Northwest Territories is undergoing staged development. In 1993, Paramount Resources et al completed a three well extended production test and a three dimensional seismic program. In 1994, more wells are planned.

Bent Horn

Oil production from the Bent Horn field in the Arctic Islands totalled some 57 thousand cubic metres in 1993. Panarctic et al ships Bent Horn production south in a double-hulled tanker during the open-ice season.

Native land claims

In 1970 all of the prospective areas in the North were held by industry under some form of exploration permit. However, the issuance of new permits (as the old ones expired) was frozen to allow time for the negotiation and settlement of Native land claims. This was expected to take only a few years, but it has taken over two decades, during which almost all earlier oil and gas rights expired.

Claims have now been settled with Native groups in the Beaufort Sea/Mackenzie Delta, in the Mackenzie Valley around Norman Wells (the fourth largest producing oil field in Canada), and in the Eastern Arctic, and much progress has been made in the Yukon. These settlements create certainty for industry by defining ownership of land. The vast majority of the subsurface is owned and managed by the federal government; Native groups have surface title to specific parcels and subsurface title to a portion of these. In managing oil and gas resources, the federal government works in partnership with Native groups and territorial governments.

Summary

Investors would be wise to consider now the potential returns from oil and gas exploration in Canada's North. The basins have excellent geologic potential for discovery of conventional light crude oil and natural gas. The regime for awarding exploration rights is simple, straightforward, fair and competitive. Royalties are low and profit-sensitive. The southern parts of the territories have exploration costs similar to northern Alberta and British Columbia and are served by existing oil and gas pipelines with spare capacity.

The Northern Oil and Gas Directorate is opening new areas to exploration in the vicinity of existing oil and gas discoveries. The Call for Nominations in the Fort Liard area of the southern NWT closes July 13, 1994. It will be followed by a Call for Bids closing in December. Rights issuance is also expected to re-open in 1994 in the Mackenzie Valley including the area around the Norman Wells oil field.

Northern Oil and Natural Gas Overview

Production (during 1993)
Oil 1847 thousand cubic metres (11.6 million bbl)
Natural gas 726 million cubic metres (25.6 Bcf)

Cumulative discovered resources (initial recoverable,
including condensate, at year-end)
Oil 346 million cubic metres (2.2 billion bbl)
Natural gas 811 billion cubic metres (28.6 Tcf)

Undiscovered recoverable resources
Oil 1686 million cubic metres (10.6 billion bbl)
Natural gas 4370 billion cubic metres (154.3 Tcf)

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