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Canadian Producers Putting Money Where the Gas is: BC

Preparations are continuing at a brisk pace for large-scale supply development in northeastern British Columbia (BC) as soon as natural gas markets show reliable signs of making a comeback.

Canadian producers telegraphed their intentions with their checkbooks at BC's October drilling rights sale by spending C$370 million (US$344 million) for 658 square kilometers (263 square miles) of prospects. In the first 10 months of 2009 industry spent C$701 million (US$652 million) to scoop up BC gas targets.

Attention continues to center on shale and other tight geological formations, which are saturated with gas that responds well to unconventional methods, led by horizontal wells and aggressive use of high-pressure fluid injections to fracture flow channels in the deposits. Although unconventional well costs are high, industry behavior confirms that the reserves tapped in Canadian tight gas formations are big enough to justify the added expenses.

Year-to-date 2009 prices paid at BC's monthly drilling rights auctions average C$867 (US$806) per acre, 10 times more than the average C$78 (US$72.50) an acre fetched by mostly shallow and small conventional Alberta targets so far this year, report financial analysts at the Calgary energy shares boutique of Peters & Co.

The investment firm estimates that breakeven prices for a typical horizontal well in the highly technical Montney formation in BC run from about C$3.90 (US$3.63) to C$6.50/Mcf (US$6.04/Mcf) for wells with initial production rates in range of 6-3 MMcf/d.

Husky Energy Inc. highlighted northeastern BC's attractions by announcing results from production tests of two northern evaluation wells into the Montney and kindred Doig formations on its 11,500 acres of drilling rights in the region. One well flowed a total of 8.3 MMcf/d from two geological zones and another had output of 2.9 MMcf/d from a single layer. And last week Apache Corp. raised the estimated ultimate recovery on its Horn River Basin wells to more than 12 Bcf/d (see related story).

The land sale results and periodic encouraging disclosures of well test performances prompted optimism from BC Minister Blair Lekstrom, who represents a northern gas area constituency in the provincial legislature. "BC is leading the way in developing a vibrant natural gas industry that will continue to drive the provincial economy," he said. "BC is one of the most competitive natural gas jurisdictions in North America, and the results of the stimulus package show that companies feel secure investing here. In this day and age capital investment is very fluid, and we want to encourage companies to do business in BC."

He was referring to temporary royalty reductions, announced this summer to offset soft gas prices, as well as permanent incentive schemes. An array of industry-friendly BC policies range from cost-sharing development of infrastructure such as wilderness roads into drilling regions to a net profit royalty regime for shale gas that holds rates down to nominal levels until costs are recovered then applies the levies as shares in only after-expenses revenues instead of gross sales.

Strengthening markets are on the horizon FirstEnergy Capital Corp. said in a research note to investors. The Calgary investment house estimates that the industry has bottomed out with a combination of depressed drilling and production shut-ins that cut Canadian output by about 2 Bcf/d, or about 12%, to 14.5 Bcf/d. "Unless there is an exceptionally warm start to November, we foresee incremental heating loads and a slow upward creep in net exports," FirstEnergy said. "Some stability" is expected to begin to show in prices over the next two weeks, followed by increases in late 2009 or early 2010 as heating season demand draws down virtually full gas storage facilities.

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