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Gas-Rich BC Immune to Drilling Slump

Gas-Rich BC Immune to Drilling Slump

As construction begins on Alliance Pipeline, Canadian natural-gas producers are mounting aggressive northern drilling campaigns to fill up the added export capacity when it goes into service in October of 2000. Northeastern British Columbia, the starting point for Alliance's 2,320-mile route to Chicago, has emerged as an E&ampP hot spot.

A record 635 wells were drilled in 1998 in the gas-rich region, a vast wilderness along the eastern slopes of the Rocky Mountains and the southern legs of the Alaska Highway. While most Canadian forecasters predict poor oil prices will slow down the pace somewhat this year by limiting exploration budgets, few expect the record to stand for long. B.C. gas is projected to fill about one-third of Alliance's initial capacity of 1.325 Bcf/d.

By the end of this February, the new B.C. Oil and Gas Commission reported 480 new well applications. Rather than a slump, northeastern B.C. this winter has been the scene of a scramble to complete previously-approved wells and tie-in pipelines by an annual deadline of April 1.

A leading B.C. pipeline contractor, Transline Enterprises, reported working on 12 projects simultaneously after slow decisions on budgets among producers due to poor oil prices delayed the start of the annual winter field season almost until February. Most work must be done in at-times bitterly cold weather between November and mid-March, because rapid spring thaws, ushered in by warm chinook winds flowing in from the Pacific over the Rockies, melt thousands of square miles of northern muskeg swamps into deep bogs impassable for industrial equipment. One of the prouder boasts among the 14 pipeline contractors in the regional industrial capital of Fort St. John is never having been forced to leave expensive pieces of equipment mired in muskeg for the warm season.

Northeastern B.C., until the mid-1990s regarded as a forbiddingly remote and expensive frontier, this winter emerged as a highly fashionable place to be. Up to 86 drilling rigs were kept busy by a who's-who of 33 exploration and production houses ranging from Alberta Energy Co. and Beau Canada Exploration Ltd., through Husky Oil Ltd. and Petro-Canada, to Suncor Energy Inc. and Union Pacific Resources Inc. Analysts and leading gas producers such as Poco Petroleums Ltd. rate northeastern B.C. as a highly competitive answer to the newer supplies in the United States in the deeper waters and geology in the Gulf of Mexico.

B.C. wells have repeatedly yielded "world-class" test flows reaching into the range of 60-80 MMcf/d. Gas specialists like Poco observe that while deep wells in northwestern Alberta and northeastern B.C. cost C$5-$10 million (US$3.4-$6.7 million) or upwards of 10 times as much as shallow drilling in eastern Alberta, the difference in rewards is far greater for companies that can afford the frontier. A typical eastern Alberta shallow well, costing C$300,000-$700,000 (US$200,000-$470,000), yields reserves of 1 Bcf or less and production in the range of 1 MMcf/d. On the northern frontier, wells yield 20-50 Bcf of reserves and production of 10-30 MMcf/d. In northeastern B.C., Canadian producers boast success rates of 50% for exploration wells and 80% for development drilling in known fields.

The flurry of B.C. activity follows successful negotiations on a new deal for the industry with the provincial government. As of this year, B.C. has cut royalty rates on fresh discoveries by up to 40%, created the new oil and gas commission as a speedy "one-window" agency for project approvals, committed nearly C$100 million (US$66 million) into road and allied "infrastructure" improvements, made peace agreements with native communities including MOUs, or memoranda of understanding, on consultation procedures and clearly marked out the boundaries of environmentally off-limits areas that left about 75% of the region open for business.

The B.C. frontier is catching on to the point where it has begun to attract international attention. When Richmond, VA-based Dominion Energy Inc. laid out C$390 (US$261 million) for Remington Energy Ltd. in late February, the U.S. power and gas conglomerate made a point of telling its shareholders that the deal spelled a "move into northeastern British Columbia, one of North America's major gas supply regions." B.C. also figures as a star growth prospect in the forecasts of leading international consulting houses including Chicago-based Gas Research Institute. GRI's latest Baseline Projection this winter described the region as having "emerged over the last 10 years as an important region for natural gas production."

GRI accepts predictions by Canadians, including CAPP and a study by the KPMG accounting house, that B.C. reserves additions and production will about double. Although the Chicago forecasters are more cautious than the Canadians, GRI still foresees B.C. reserves additions increasing to 1.6 Tcf/year by 2015 from a historical average 700 Bcf. Annual production is expected to climb to 1.2 Tcf from the 700 Bcf anticipated this year.

Canadians see faster growth rates than GRI largely on the strength of pipeline additions including Alliance. Vancouver-based Westcoast Energy Inc., owner of B.C.'s gathering web and a 23.6% interest in Alliance, underlined the high expectations March 10. To concentrate on growth prospects, Westcoast sold a reliable but conservative utility money-earner, distributor Centra Gas Manitoba Inc., to Manitoba Hydro for C$245 million (See related story this issue). Westcoast explained that it expects to spend C$1.6 billion (US$1 billion) this year on "core" growth ventures, including Alliance and its 37.5% of Maritimes &amp Northeast Pipeline.

Gordon Jaremko, Calgary

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