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NE British Columbia Development Booming

Canadian natural gas producers telegraphed intentions to continue accelerating supply development on their "near frontier" of northeastern British Columbia by setting a record at the latest monthly auction of provincial drilling rights and adding to the ten-fold increase -- from the millions to the billions -- in auction revenues year-to-date 2008, compared to the same period last year.

The industry paid C$610 million (US$610 million) for access to 1,327 square kilometers (530 square miles) of BC's share in the eastern foothills of the Rocky Mountains. Top dollar -- C$32,500 per hectare (US$13,000 per acre) -- was fetched by parcels 45 kilometers (27 miles) west of Dawson Creek, the mile-zero starting point of the northbound international Alaska Highway.

"This month's phenomenal sale once again demonstrates British Columbia is a premiere jurisdiction for oil and gas investment," Provincial Energy Minister Richard Neufeld gloated in a statement announcing the auction total. "I am certain these record-breaking results will continue to attract new interest in the coming months."

Gas is the target for virtually all drilling in BC, where oil targets are rare, small and scattered. Industry spending on BC drilling prospects stands at C$1.6 billion (US$1.6 billion) so far this year, a 10-fold increase over the C$164 million (US$164 million) in provincial drilling rights auction revenues for the comparable period of 2007.

BC's spectacular July auction alone nearly matched total Alberta drilling rights sales of C$640 million (US$640 million) so far this year. Although Alberta continues to account for about four-fifths of Canadian drilling and production, the industry is working on multi billion-dollar inventories of development prospects acquired there in previous years' auctions. Provincial royalty increases announced last fall for 2009 also cooled down the Alberta market.

The BC drilling rights rush is credited largely to shale gas plays known as Horn River and Montney. Well known among geologists for years, the prospects have graduated from science projects to commercial programs as a result of advancing techniques for frac'ing or fracturing rock formations with high-pressure injections of improved materials to create flow channels for tight gas reservoirs.

Strengthening exports and prices for Canadian gas, following a two-year slump, have also raised expectations that markets will support the expensive new drilling play. BC remains a preserve of producers with the right combination of size, expertise, deep pockets and patience to mount longer, costlier supply development programs than prevail in shallow gas fields that have in recent years dominated drilling in Alberta and Saskatchewan.

BC shale gas targets are among the largest but also costliest Canadian supply development prospects, requiring new roads and pipelines as well as the industry's most sophisticated drilling and well completion technology. "This area is extremely underdeveloped from an infrastructure point of view," Peters & Co. financial analysts in the Canadian gas capital of Calgary noted in describing the Montney area.

On top of the spectacular July BC drilling rights sale, the emerging shale gas development wave is also credited for inspiring Shell Canada's recent C$5.9 billion (US$5.9 billion) takeover of Duvernay Oil as a major owner of prospects in the region (see related story). While predicting supply additions will eventually be measured in trillions of cubic feet of new reserves, producers have also cautioned development will take time and the pace will be governed by markets, technical capabilities and infrastructure improvements.

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