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Alberta's Shale Draws Big Spenders

Shale gas development is poised to spread into Alberta on a large scale after producers paid C$365 million (US$343 million) for a new target zone north of the provincial capital of Edmonton.

In the last provincial government auction of Crown mineral rights for 2009, the industry last week laid out the cash for 1,470 square kilometers (588 square miles) of a deep, dense geological formation known as the Duvernay. The hot property fetched more than the C$347 million (US$326 million) spent at all the other twice-monthly Alberta sales for 2009.

Identities of the producers behind the near-record rights auction were kept confidential by specialty resource rights brokerage firms that did the bidding and buying.

Financial analysts speculated that the action was mostly driven by senior gas field operators such as Talisman Energy, BP Energy Canada, Shell Canada, Apache Canada and EnCana Corp. All have large shale gas positions in northern British Columbia (BC); declared intentions of expanding unconventional drilling; a penchant for technical innovation and deep pockets to mount expensive long-range projects.

By Canadian standards the new shale target is also a bargain. Unlike BC's remote hot spot -- the Horn River Basin near the southern boundary of the Northwest Territories -- the Duvernay is in an area well served by roads, pipelines, processing plants and communities of experienced industrial workers fostered by generations of conventional drilling and development. The location offers reduced costs and project time compared to BC, where the shale gas target zone lies beneath a virtually virgin wilderness of rugged woods and muskeg swamps.

The mineral rights action also comes amid high industry hopes that Alberta will enact a counterpart to BC's highly favorable unconventional gas royalty regime, which holds rates down to token levels until project costs are recovered, then imposes levies only on net revenues after expenses (see NGI, Aug. 10).

The industry is pressing the Alberta government hard for a similar break via a "competitiveness review" of provincial fiscal and regulatory policy. The lobbying is disclosed by minutes of a by-invitation-only meeting in the Calgary Petroleum Club of 33 producer representatives and the review panel, which includes recently retired financial and corporate executives.

"There is a need to be very attentive to what is happening with shale gas and the technology surrounding it," the consultation minutes say in reporting themes of the discussions. "We need to get onto the 'shale boat.'"

Similar commentary, although in more reserved language, has appeared in government policy statements and drilling incentive announcements that acknowledge that the supply side of the gas industry is rapidly changing. A multi-volume technical inventory of potential shale development targets has also been published by the Alberta Geological Survey, a scholarly arm of the province's Energy Resources Conservation Board (ERCB).

While most Alberta shale exploration activity remains highly secretive while producers do technical research into areas to nominate for rights auctions, one eager firm is publicly highlighting the province's possibilities. Only a 90-minute drive southeast of Edmonton, Stealth Ventures Inc. has begun Alberta's first shale gas production in an area called Wildmere.

The firm is an exploration-stage industry junior that describes itself in financial disclosures as a "highly speculative" venture into new technology and geology. The board of directors includes former Alberta energy minister Murray Smith, who is a friend and informal adviser of Premier Ed Stelmach. The ERCB recently authorized further trials of evolving production methods.

The Stealth program highlights a wide variety of potential shale targets documented to be available in Alberta by the provincial geological survey. Unlike the big fields in Texas, Louisiana and BC, the Wildmere deposit is a shallow drilling target known to geologists as the Colorado Shales. Production is lower and slower, but shallow shale development has proven to be much cheaper with growing experience that includes about 120 wells to date. Wildmere wells were C$300,000 (US$282,000) each as costs peaked in booming 2008, Stealth has reported. In a slower 2010, costs are forecast to dip as low as C$200,000 (US$188,000).

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