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British Columbia Unlocking Shale Play Magic

British Columbia (BC) is posting its eighth annual increase in natural gas reserves while continuing a streak of strong monthly drilling rights sales, amid rising expectations that provincial output and exports will keep on growing at an accelerating rate.

Industry replaced 177% of gas production with added supplies in 2007, shows a new inventory compiled by the BC Oil and Gas Commission. Established reserves climbed to 483 billion cubic meters (17 Tcf), up 4% since the agency's last formal count of gas found and ready to tap under foreseeable economic conditions with current technology as of year-end 2006.

BC stands out as the only gas-producing jurisdiction in North America able to demonstrate such a prolonged record of consistent supply growth, commission CEO Alex Ferguson observed.

"There has been a decrease in drilling but an increase in overall established reserves, which really signifies potential for increased activity in coming years," Ferguson added in releasing the annual inventory.

Industry provided confirmation that growth is on the horizon by betting big money that it can continue BC's stellar record of rewarding exploration and new technology with increasing gas volumes per productive well or new field discovery.

Mostly Alberta-based companies paid C$220 million (US$207 million) for 804 square kilometers (310 square miles) of drilling properties at the September monthly sale of Crown or government-owned mineral rights in northeastern BC.

The latest auction increased 2008 year-to-date BC sales of gas prospects to about C$2 billion (US$1.9 billion), or double the province's previous annual record of C$1 billion (US$940 million) set in 2007.

Much of the action is credited to developing shale gas plays known as Horn River and Montney, where the industry is transplanting Texas horizontal well and formation fracturing technology developed in the celebrated Barnett field around the Dallas-Fort Worth area.

Estimates of BC's shale gas resource endowment are colossal. "With commercial success of several shale gas plays in the United States, British Columbia's shales are now being recognized as potential reservoirs and are estimated to have the potential capacity to hold 250 to 1,000 Tcf of gas-in-place," said a paper by the BC Ministry of Energy, Mines and Petroleum Resources.

"Though recoverable volumes will be considerably less, shale gas remains a significant untapped resource," the ministry said. Since 2002 the BC commission has approved 12 experimental shale gas production schemes.

While the industry is allowed to keep details and results confidential as competitive information, enthusiastic drillers such as EOG Resources, EnCana and ARC Resources are starting to let out encouraging words in general terms at financial or technical conferences. At least some of the province's reserves increases are believed to include early gains generated by regional adaptations of the Texas technology.

BC's Liberal government has adopted the emerging gas supply growth as an industrial feather in its cap and is taking steps to ensure that prospects stay bright. "This government's willingness to work with industry on developing the oil and gas industry has heightened investor interest," BC Energy Minister Richard Neufeld said in announcing the latest mineral rights auction results.

The willingness included recent enactment, without fanfare, of a "net profit royalty" promised by a Liberal energy strategy document about two years ago. The action creates a BC gas counterpart to an oil sands royalty regime that lit a fire under development in northern Alberta's bitumen belt starting about 10 years ago.

The BC gas regulations are still too new -- and leave too much discretion over their details in the hands of administrators -- to know exactly how the system will work out in practice as the new production methods develop, industry sources caution. But enough is known to ensure interest in the emerging northern shale gas play stays so strong that it could siphon activity away from Alberta as its previously announced royalty increases go into force in 2009, say producers active in both provinces.

The new BC gas regime scraps a cruder traditional approach of collecting royalties as double-digit percentage shares, off the top, of gross revenues. Instead, levels charged innovative supply development such as shale gas production will be restricted to a nominal 2% of gross revenues until producers recover all costs of projects including agreed returns about equal to prevailing interest rates.

Following payout, provincial royalty rates will rise by stages to 15%, 20% and 35%, with the timing of the increases left variable and driven by calculations of when each project's revenues reach double and then triple its initial costs. The rates will be applied to net revenues after production costs and not exceed 5% of gross, the new regulation stated.

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