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Canadian Lease Sales Presage Continued High Level of Drilling

December 19, 2005
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Canadian producers telegraphed intentions to keep on drilling for natural gas at maximum speed by stockpiling targets at hectic Crown mineral rights auctions in Alberta and British Columbia. Alberta netted a record C$2.3 billion (US$2 billion) on oil and gas rights sales in 2005, prompting forecasts that field activity will stay strong potentially for years to come.

The new Alberta peak is double the previous high of C$1.15 billion (US$978 million) set in 1997. The Alberta rights purchases built up an inventory of 32,435 square kilometers (12,970 square miles) of drilling targets among scores of companies that participated in the auctions. Last week Alberta's final 2005 auction alone netted a single-sale record of C$544 million (US$462 million) for 4,740 square kilometres (1,890 square miles) of drilling targets.

B.C. chalked up its second best year for Crown petroleum and natural gas rights sales. The province netted C$534.2 million (US$454 million) for 2005 by auctioning off 5,794 square kilometers (2,318 square miles) of drilling targets. B.C. rights sales peaked in 2003 at the height of a land rush triggered by completion of Alliance Pipeline between Fort St. John and Chicago three years earlier. The annual provincial record set then still stands at C$646.7 million for 7,335 square kilometers of drilling targets.

"The stage is set," said Roger Soucy, president of the Petroleum Services Association of Canada. "If commodity prices hold up, I wouldn't see a change in activity levels certainly for the next two or three years, if not more."

The huge inventory of resource leases accumulated by corporate buyers spells sustained high levels of producer activity, agreed Don Herring, president of the Canadian Association of Oilwell Drilling Contractors.

But, activity is unlikely to accelerate much because crews and equipment are already running flat out with 90% or more of available drilling rigs hard at work, Herring and Soucy agreed. The big purchases of new property are a signal that the industry intends to keep the action going, provided markets stay strong, they said. Both trade associations are forecasting record drilling of 25,000 or more western Canadian wells this year, with about 70% of the activity directed towards natural gas.

When energy prices are high, the sales are major provincial revenue sources. About 80% of mineral rights in Alberta belong to the provincial government under the Canadian constitution and property ownership policies dating back to the late 19th Century. Virtually all oil and gas rights belong to the provincial government in B.C.

"The revenues generated from these land leases benefit all Albertans by contributing significant funding for priority programs such as health, education and infrastructure," Energy Minister Greg Melchin said in a statement announcing the sales record. But his department's records also show the auctions are a highly variable income source as a barometer of industry conditions, with annual revenues going through wide swings depending on markets and prices.

Over the past 10 years annual Alberta oil and gas rights sales have exceeded C$1 billion five times, but also dropped five times. Annual revenue was cut in half, into the range of C$500-$600 million, in 1998, '99 and 2002. The 2005 sales record highlights industry intentions to maintain aggressive expenditures on new drilling and development, analysts said.

"The aggregation of lands to boost drilling inventory levels has become a key element of all companies' strategies," Peters & Co. said in an investment report. Alberta's colossal December auction "reflects on how lucrative 2005 has been for (exploration and production) operators while also highlighting opportunities still left in the mature Western Canadian Sedimentary Basin, "FirstEnergy Capital Corp. told its investor clients. Of the 2005 Alberta rights sales revenue, C$433 million or about 20% was fetched by 3,553 square kilometers of oilsands leases. The C$1.827 billion, 80% majority of the industry spending was on 28,882 square kilometers of drilling targets.

In hot Canadian industry competition over drilling prospects, plans for oil and gas rights parcels are not disclosed at the auction stage. Buyers also often mask their identities by hiring specialized brokerage firms to make rights purchases, to avoid attracting rival bidders for drilling targets.

Field scouts and analysts routinely single out purchases by big firms such as EnCana and Talisman to try guessing industry intentions, but a high proportion of the auction purchases are kept behind the cloak of confidentiality. However, locations of most properties in the Dec. 14 auction indicated the industry plans to continue concentrating on natural gas drilling, FirstEnergy and Peters said. Interest appeared to be heaviest in coalbed methane development areas around Calgary and Edmonton, and in exploration regions along the foothills of the Rocky Mountains and in northwestern Alberta.

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