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British Columbia Peak Winter Rig Count Eclipses 2008

Sharply lower natural gas prices and reduced demand have led to a big drop in the rig count across North America, but so far at least one area has been spared: British Columbia (BC). Spurred by interest in northeastern BC, the province's drilling rig count hit a peak fleet of 104 in February, compared with 96 for the same time a year ago.

An oil and gas land rights sale in late March which brought the province C$15 million in bonus bids also closed out the 2008-2009 fiscal year at an all-time high, with C$2.4 billion in total sales, or more than double 2007-2008's record pace, said Energy, Mines and Petroleum Resources Minister Blair Lekstrom.

Last year's total exploration land sales trumped the previous year by C$1.2 billion, breaking every tracked record for oil and gas land rights sales in BC, Lekstrom said. The record pace in the last fiscal year nearly mirrored the record-setting 2008 calendar year total of C$2.66 billion in land rights sales.

"The records shattered by the 2008-09 oil and gas land rights sales underscore the unprecedented growth of the BC energy sector," said Lekstrom. "Investors recognize the oil and gas resource potential in BC evidenced by records like an incredible C$33,649/hectare bid for a drilling license." Ongoing infrastructure projects and the royalty program incentives "make BC a very attractive place to invest in oil and gas."

In just the past two years energy companies have poured millions into northeastern BC to secure drilling rights in several prospective natural gas plays, including the Horn River and Montney areas.

"Last year was an incredible year" for BC's rights sales, Lekstrom said. "But we know at some point industry was going to change their focus to development. There's been a pullback in oil and gas, and BC is weathering the storm, not facing the same pullback."

Overall, producers operating in Canada are pulling back just as they are in the Lower 48 states. In the first three months, producers spent a total of C$102 million for new exploration rights in BC, Alberta and Saskatchewan, according to the NEB. That's a drop of 85% compared with the total C$675 million spent in the first three months of 2008.

BC set a record at its March auction, but the year-to-date total of C$40.1 million is 86% lower than in 1Q2008, the province noted. Even though spending in the past two fiscal years has set records, Lekstrom said the province expects to have a deficit for the full year because of lower royalties and less money from new exploration licenses.

For example, in full-year 2008 the average sale for new exploration rights in BC was C$3,220/hectare. The average in 1Q2009 in BC was C$780/hectare. In the March land sale, officials offered 33 parcels covering 13,594 hectares in northeastern BC, and they sold 27 parcels covering 12,054 hectares at an average price of C$1,246/hectare.

One lease bid in Montney, in the Groundbirch, BC, area, went for C$5,000/hectare for a total of almost C$1.3 million. Three lease bids of between C$5,300/hectare and $14,300/hectare for a total of more than C$8 million were made on land located in the Sukukna area, near Chetwynd. And one drilling license received bids of more than C$2.7 million for a parcel northwest of the Groundbirch field.

BC was the "only significant jurisdiction in Canada" where drilling activity in the first two months was higher than a year ago, said Lekstrom. "I am not sure we will experience the same type of slowdown others may," he said, referring to neighboring provinces.

BC officials are taking several steps to ensure that they encourage energy dollars to continue to flow to the province.

With BC's blessing, Canada's National Energy Board in late February moved to combine northern Alberta and BC into a natural gas common market by transferring federal jurisdiction to TransCanada Corp.'s NOVA grid in Alberta (see NGI, March 2a). The switch enables TransCanada to build NOVA extensions across Alberta's boundary into BC.

The move by the NEB followed a successful open season by TransCanada in February for capacity on its proposed Horn River Pipeline. Shippers signed up for an initial 378 MMcf/d of service, or enough to justify building a 155-kilometer (100-mile) extension to the Horn River Basin (see NGI, March 2b).

In early March BC -- as well as Alberta -- also unveiled a plan to encourage infrastructure development by increasing the amount of natural gas and oil royalty credits available to producers (see NGI, March 9). Lekstrom said the move by BC officials was "imperative to support and encourage economic activity," and the credits "will improve our competitive position..."

Meanwhile, Alberta and Saskatchewan have seen their drilling rig counts fall sharply in the past few months. In Saskatchewan, officials estimated in late March that lower commodity prices and lower bids for land would reduce provincial revenue in 2009 by around 14%, or about C$1.7 billion. Alberta won't issue its budget estimates for a few more days, but its revenue numbers also are forecast to be well below those in 2008.

Alberta oil and gas land sales between January and March totaled C$55.9 million, compared with C$200 million for the same period of 2008. The peak drilling count this winter in Alberta was 279, versus 435 rigs a year ago. Saskatchewan's land sales fell 97% in the first three months from a year ago to C$6.3 million from C$197 million in 1Q2008. The drilling count in Saskatchewan reached 37 at the winter peak this year, which was 30% lower than the 53 running at the peak of the 2008 winter season.

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