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British Columbia Nurturing, Growing Shale Gas Resource

Even though northern shale drilling remains in its infancy, the British Columbia cradle of the emerging natural gas source is catching up fast to the traditional mainstay of Canadian supplies.

The latest official count by the BC Oil and Gas Commission pegs its province's established reserves at 33 Tcf. The BC total already stands at 85% of Alberta's comparable inventory: 39 Tcf of gas in all forms, as recorded by its Energy Resources Conservation Board. While Alberta reserves are forecast to continue depleting by 5-10% per year, the BC supply is headed in the opposite direction -- and at a brisk pace.

The BC commission's inventory report recorded the 10th consecutive increase in provincial established gas reserves. It was also the biggest one-year jump on record for BC: 9.7 Tcf, or 42%. Industry forecasts of much bigger gains to come in BC are driving serial expansions on the supply side of the Canadian pipeline system.

Additions and extensions to TransCanada Corp.'s western Nova grid, which the National Energy Board (NEB) approved recently as a package called the Northwest Mainline Expansion (see Daily GPI, March 5), rest on forecasts of 131 Tcf of marketable gas or established reserves eventually being developed from BC shale deposits exceeding 500 Tcf.

A further BC addition by TransCanada-Nova is already working its way through the NEB process under the name of Northwest Mainline Komie North Extension. The new delivery capacity will serve the prime shale gas source: the Horn River Basin between the Yukon and Northwest Territories' southern boundaries and BC's northern-most town, Fort Nelson, at mile 300 on the Alaska Highway.

The BC development pattern -- drilling less but getting more -- shows in commission records. The agency's data banks show a steep drop in wells drilled in the province after gas prices, along with the rest of the economy, hit the skids. The number of BC wells fell by 32% from 926 in 2008 down to 625 in 2009. Activity only staged a partial recovery in 2010, when the industry drilled 702 BC wells. But at the same time, average reserves additions per BC well shot up more than seven-fold from about 3 Bcf into a range of 23 Bcf or more.

Not even the current natural gas price slump across North America has halted drilling in BC, despite its notoriously high costs in remote locations known for generations as the Canadian industry's "near Frontier," as opposed to the far one in the Arctic.

So far this year, in January and February, 90 wells were drilled in BC, commission records show. That is down by nearly one-third from 134 BC wells in the first two months of 2011, but not by as much as the plunge by prices of about 50% during the period. With the BC government encouraging them, Canadian producers are building up northern shale supplies to go after bigger game than domestic or even U.S. markets by trying to break into the global trade in liquefied natural gas (LNG) (see Daily GPI, Feb. 10).

BC's Liberal party premier, Christy Clark, unveiled a provincial natural gas growth strategy soon after the NEB granted the first of two 20-year export licenses to a pair of LNG terminal projects on the northern Pacific coast at Kitimat. The sponsors include top Canadian shale gas developers Apache Corp., EOG Resources Inc. and Encana Corp., as well as an alliance of northern aboriginal and U.S.-based marketing organizations.

Clark, setting aside worries about drawing fire from BC environmental groups, called the LNG export schemes a case of "opening the door to new clean energy projects" even though northern shale production, like its southern variations, involves hydraulic fracturing. "My government is positioning liquefied natural gas as a cornerstone of British Columbia's long-term economic success," Clark said in a February policy statement. The statement, while light on details, included a signal that her administration intends to keep a favorable royalty structure that her predecessors enacted as BC shale gas development began four years ago.

The system mimics Alberta's encouraging net-profit regime for its oilsands by limiting royalties to nominal rates until projects recover initial capital costs, then by imposing the provincial levies only on sales revenues left after deducting agreed production expenses. BC's new gas policy, under the heading of "maintaining competitiveness," pledges to "ensure an effective royalty regime." The package says, "Our royalty programs help encourage oil and gas development by providing incentives designed to meet BC's unique resource challenges such as infrastructure development in remote northern locations. BC royalty programs are competitive with other North American programs and reflect the cost to extract the resource."

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