Canada not ready for shale gas boom

Thursday, October 14, 2010

SHAWN McCARTHY

OTTAWA — Canada’s fledgling shale gas industry faces a growing clamour for tighter regulations and greater protection of local water sources amid fears that aggressive drilling techniques carry a heavy environmental cost.

The enormous potential of shale gas resources is considered a “game changer” in the North American energy landscape, promising large supplies of relatively low-cost fuel for decades. But the industry is encountering stiff opposition in Quebec, New York state and other jurisdictions where residents and environmentalists worry that drilling techniques using chemical-laced water, a process known as fracking, pose a threat to drinking water and wildlife.

As Quebec holds raucous and divisive hearings over the future of its promising shale industry, a new study to be published Thursday by the University of Toronto argues that Canadian regulators are wholly unprepared for the shale gas boom that is sweeping North America.

“To date, Canada has not developed adequate regulations or public policy to address the scale or cumulative impact of hydraulic fracking on water resources,” says the report by Ben Parfitt, a Victoria-based researcher whose work was commissioned by the water program at the University of Toronto’s Munk School of Global Affairs.

Mr. Parfitt said the federal government is virtually absent from the discussion, while provinces issue oil companies with individual water-use permits despite having little understanding of the cumulative impacts of increasing drilling activity, no public reporting on the chemicals or amount of industrial water withdrawals and no systematic mapping of the country’s aquifers.

Without a more robust regulatory approach, “rapid shale gas development could potentially threaten important water resources, if not fracture the country’s water security,” Mr. Parfitt wrote in the study, which will be formally released Thursday at a day-long Munk School conference.

The international oil industry is investing heavily in North America shale plays. Just last weekend, Calgary-based Talisman Energy Inc. announced it is teaming up with Norway’s Statoil ASA for a $1.3-billion (U.S.) acquisition of properties in Texas’ Eagle Ford shale. As well, China National Offshore Oil Company (CNOOC) said it is investing $1-billion for a one-third stake in Chesapeake Energy Corp.’s Eagle Ford play.

In Canada, companies like Talisman, Encana Corp., and U.S-based Apache Corp. are planning massive investment in northeastern B.C. and western Alberta, notably in the prolific Horn River and Montney plays. Companies are also eager to develop Quebec’s Utica shale zone and in New Brunswick. As well, the industry is applying the drilling and hydraulic fracturing techniques to other oil and unconventional gas fields in Alberta and Saskatchewan – using high-pressured, chemically-treated water to break open tight formations and release the trapped hydrocarbons.

The industry acknowledges that massive expansion of shale development through hydraulic fracturing could threaten water supplies if not properly done, but insist that provincial regulators and the companies themselves are prepared to meet the challenge through water recycling, and tapping salt-water aquifers.

In northeastern B.C., “there is a realization the full-blown development in some of these shale regions is going to tax the water availability if we go forward with a traditional, business-as-usual approach to how water is used,” said Kevin Heffernan, vice-president of Calgary-based Canadian Society for Unconventional Gas, a industry-backed association.

“And certainly the industry is very, very aware that shale-gas development is water intensive and is working hard to find approaches that are going to make sense for the long term,” Mr. Heffernan said in an interview.

But Mr. Parfitt suggests the industry – with the blessing of the B.C. regulator – is forging ahead with development plans in British Columbia and elsewhere while key questions remain unanswered.

While the industry claims there is no evidence that hydraulic fracturing has contaminated aquifers, the researcher cited a number of cases in the United States where ground water was tainted during nearby drilling activity. And there is no requirement in Canada for companies to disclose what chemicals they use in fracturing – as there is in several states.

As well, there has been no assessment in B.C. – or other provinces – of how the industry will be able to dispose of massive amounts of waste water that is produced during the drilling, a key concern regarding possible surface water contamination.

“The pace of the shale gas revolution demands greater scrutiny before more fracture lines appear across the country,” he said.

How to find the biggest gains on the TSX

DAVID PARKINSON

From Thursday's Globe and Mail

For the Canadian stock market, it turns out, the adage is wrong: Success does come overnight.

A new study from CIBC World Markets shows that over the past decade, all of the gains on the Toronto Stock Exchange have been achieved while the market was sleeping – in the daily differences between the level at which the benchmark S&P/TSX composite index closes one day and the level at which it opens the next.

Since early 2001, these overnight gains have generated an average annual price gains of 11.3 per cent, compared with 4.1 per cent for the index overall – and an average annual loss of 3.9 per cent during trading hours.

“In fact, an investor who had only exposure to intraday moves would have experienced a 35-per-cent decline in capital over the past 10 years,” wrote CIBC World Markets quantitative strategists Peter Gibson and Jeff Evans.

“In addition, intraday returns have been approximately 32 per cent more volatile than overnight returns, making the results even more substantial on a risk-adjusted basis,” they wrote.

While the researchers haven’t yet identified the root causes of this phenomenon, they largely dismissed one possible explanation – that the market is affected more by key developments that typically happen while it’s closed, such as economic data and earnings reports.

“What’s curious about this is that it’s systematically to the upside,” Mr. Evans said in an interview Wednesday. He noted that the overnight market gains held even in the 2008 downturn, when the economic news was “uniformly negative.”

He also noted that while the overnight effect exists in other equity markets, such as in the United States, “it’s much less pronounced” than in the Canadian market. One possible explanation is Canada’s heavy exposure to natural-resource commodities (resource stocks account for nearly half of the S&P/TSX composite), which may make the TSX more sensitive to overnight commodity price gains in foreign markets.

“We haven’t dug into that yet, but we’re going to take a closer look at it” in follow-up research, Mr. Evans said.

Compensation for Risk

Their best guess, for now, has to do with the uncertainties that dog all investors when the market closes and they must sit, helpless, while overnight developments around the world could derail their best-laid investing plans.

“It’s compensation for the risk of holding overnight,” Mr. Evans suggested.

Regardless of the causes, the finding does imply a very profitable strategy for investors: Simply buy all your stocks each day just before the market closes, then sell them all each morning at the opening bell.

But there’s a rub: All that daily buying and selling would impose onerous transaction costs.

“To implement an overnight arbitrage, an investor would need to transact approximately 500 times per year (buying each evening at the close, and selling at the open the next day, for approximately 250 trading days per year),” Mr. Gibson and Mr. Evan said. Based on typical fees of about 1-cent per share per trade for active retail trading accounts, the costs “are sufficiently high that arbitrage is unprofitable,” they said.

“The strategy would only be feasible for investors with low transaction costs, or if used as an overlay to other strategies with a lower transaction frequency,” they concluded.

“In principle, however, longer-term investors could exploit this discrepancy by shifting trades towards the end of the day. This would avoid unnecessary exposure to intraday price risk for which investors are not being compensated, and increases exposure to overnight ‘gap risk,’ for which investors are compensated.”