Encana’s problem in Nova Scotia: A money-gushing white elephant

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As Encana Corp. changes focus from natural gas to oil, the company faces an unlikely conundrum: What to do with a gas project off the coast of Nova Scotia that is raking in the revenue?

Encana's Deep Panuke project, which sits about 250 kilometres southeast of Halifax, sold gas for an average of $19.14 per thousand cubic feet in the first quarter of 2014. That was about three times higher than Encana's total average realized price for natural gas during the quarter, which was $6.37 per thousand cubic feet, excluding hedges. Deep Panuke benefited from a cold winter along much of the northeasten seaboard and its proximity to New England, where winter hit particularly hard.

"Panuke rocked in the first quarter," Doug Suttles, Encana's chief executive, told investors at the company's annual meeting Tuesday in Calgary. "The polar vortex helped."

However, Mr. Suttles wants to shift production toward oil, natural gas liquids and unconventional resource plays. Deep Panuke does not fit the mold.

Encana executives have considered selling Deep Panuke before and they have made it clear that it is not part of the new strategy. For now, however, Mr. Suttles plans to keep it. "I can confirm today, though, as we sit here right now, we're not marketing Panuke."

"It's obviously different from the other things in our portfolio, but right now we're enjoying the benefits of a significant investment in that asset and I would expect us to do it for the time being," Mr. Suttles said Tuesday.

Deep Panuke contributed $395-million (U.S.) to Encana's operating cash flow in the first quarter. The company's total cash flow reached $1.1-billion or $1.48 a share, up from $579-million or 79 cents a year earlier. It posted a profit of $116-million, up from a loss of $431-million in the first quarter of 2013.

The offshore project proved not only to be a major cash generator for Encana – it is also seen as a big jump for Nova Scotia as it seeks to build its energy sector after years of false starts. The province has also become an offshore oil exploration target for oil majors, including Royal Dutch Shell PLC and BP PLC. Nova Scotia now has two oil and two natural gas projects, and its proximity to Europe and India has interest on the rise.

"Nova Scotia's energy industry is very strong," provincial Energy Minister Andrew Younger said in an interview. "We don't necessarily end up giving the oil companies the highest profit in the world, in Canada, but there's a very stable regulatory environment. So, that is always seen as a bit higher on the scale of priorities."

Deep Panuke had a rocky path to fruition that began before the creation of Encana. It was discovered by a predecessor company, PanCanadian Energy, in 1999. Back then reserves were estimated at one trillion cubic feet of gas. The company applied to develop the reserves three years later, saying it envisioned a 400-million-cubic-feet-a-day project at a cost of about $1-billion. The target startup was 2005.

However, the early plans were dogged by cost fears and regulatory delays. Encana, formed by the merger of PanCanadian and Alberta Energy, withdrew its application in 2003, and went back to the drawing board to redesign the project.

The company came back with a new application in 2006 after downsizing the development. It planned to produce 300 million cubic feet a day by 2010 with a cost estimated at $700-million. The company sanctioned the project the following year, and after more delays, it started in 2013.