South Africa's Sasol is paying $1-billion to Talisman for a stake in the Montney shale gas play, as global energy giants increasingly pour capital into the promising British Columbia area in a quest for long-life reserves.
Sasol will acquire a 50-per-cent working interest in all Talisman lands, existing wells and processing facilities in the Farrell Creek region, which represents 22 per cent of Talisman's resource potential in the Montney shale play - currently estimated to be a total of 44 trillion cubic feet of natural gas.
Calgary-based Talisman will remain the operator, but the injection of Sasol capital - together with strong drilling results - will allow it to speed up the pace of development from four production wells completed in 2010, Talisman executive vice-president Paul Smith said Monday.
"As a result of the success we've seen in the Montney Farrell Creek area this year, it's pretty safe to say our activity will be higher next year than it was this year for us," Mr. Smith said.
Sasol is the latest offshore energy company to move into North American shale plays, betting on long-term success for the rich but technically challenging projects, even though industry experts expect booming shale production will depress prices for the next several years.
Sasol is making its first foray into shale gas production, and expects to gain valuable expertise through its partnership with Talisman, a major operator in the leading shale plays in North America.
In June, Encana Corp. announced a joint venture partnership with China National Petroleum Corp. to develop some of its Montney and Horn River. Earlier in the year, Encana said Korea Gas Corp. would pay $1.1-billion over five years to develop unconventional gas properties in northeastern B.C. Korea Gas has also committed $20-billion to the Kitimat liquefied natural gas (LNG) project, which would export gas from Canada to Asian markets.
Ziff Energy gas analyst Bill Gwozd said the foreign companies are looking to invest in North American developments in order to gain expertise in horizontal drilling and hydraulic fracturing - the aggressive development techniques that have unlocked shale gas reserves in previously trapped underground reserves.
He said Talisman and other North American producers are still facing production costs that are higher than the market price for the gas, and so are eager to bring on well-capitalized partners to spread the risk and take a long-term view.
"Producers aren't making money by poking holes in the ground right now," Mr. Gwozd said. "And so if they can transfer some of the risk to other parties who actually have an interest in either developing the horizontal drilling technology, or who need the actual energy itself ... those are the types of drivers for why investments would be made."
As part of the deal, Talisman and Sasol will also examine the possibility of building a gas-to-liquids plant in Western Canada for making transportation fuels, a move that could provide a new, potentially lucrative market to soak up some of the glut of natural gas.
Mr. Smith said such a plant would allow the producers to benefit from the large spread between crude oil and natural gas prices.
Typically, a barrel of crude oil is seen to have six times the energy content as a million cubic feet of natural gas. But in North America, it is trading at roughly 20 times higher - creating an opportunity for Sasol's technology that transforms natural gas into high-value products like diesel and naphtha.
"We believe there has been a structural shift in the dynamics between natural gas and oil prices making our GTL technology an even more attractive value proposition" relative to exported liquefied natural gas, Sasol general manager Lean Strauss said in a conference call with analysts.
Sasol already has several gas-to-liquids plants in operation in South Africa, Qatar, and one that is being built in Nigeria.
In British Columbia, Talisman's Mr. Smith said the partners will be mindful of market conditions as they develop the Farrell Creek property. Under the deal, Sasol will pay Talisman $260-million in cash, and carry 75 per cent of its costs for developing the property, up to a limit of $760-million.
A system known as the Fischer-Tropsch process uses carbon monoxide and hydrogen to create liquid transportation fuels and naphtha from both coal and natural gas.
It was developed by German scientists, Franz Fischer and Hans Tropsch, in the 1920s and commercialized in Nazi Germany in the 1930s. It provided an important source of war-time fuel for Germany, which was oil-poor but coal-rich.
South Africa's Sasol refined the process and used it to produce synthetic transportation fuel from the country's vast coal reserves during the apartheid regime, when South Africa was hobbled by international sanctions.
The U.S. military supported ongoing development of coal-to-liquid technology, based on the Fischer-Tropsch process, to lessen its dependence on imported oil. The Air Force (the largest U.S. consumer of transportation fuel) has had B-52 test flights using a blend partly derived from coal-to-liquids technology.
The U.S. was forced to stop that work under the 2007 Energy Independence and Security Act., which prohibited the military from using fuel derived from unconventional sources. Environmental groups are now suing the U.S. government, claiming that the oil sands fall under the same definition of "unconventional" sources as coal-to-liquids fuel, and are hence covered by the prohibition.