Calgary-based EnCana is digging in to expand its vast coalbed methane (CBM) resources, announcing Tuesday an ambitious plan to develop 700,000 acres of property in southern Alberta — assets estimated to contain more than 2 Tcf of recoverable natural gas.

In the next five years, EnCana expects to increase gas production from coal seams to more than 200 MMcf/d.

“This CBM resource play, like our traditional shallow gas plays, covers great expanse and is estimated to hold multiple trillion cubic feet of recoverable natural gas,” said COO Randy Eresman. “We have successfully demonstrated that our application of technology and large repeatable drilling programs can drive down development costs to achieve attractive financial returns. Typical of EnCana’s other large resource plays, CBM lands could potentially yield several hundred million cubic feet per day of long-life gas production.”

EnCana’s CBM resources are integrated with the company’s widespread shallow gas developments. On its CBM lands east of Calgary, in which it holds 100% royalty-free interest, EnCana has extensive shallow gas processing facilities and gathering pipelines already in place, infrastructure that can be readily employed in CBM development.

The assets contain a “huge” network of shallow gas wellbores plants and pipelines, Eresman said, which will enable EnCana to “dramatically” lower its CBM costs. “We are tapping into coal seams with a combination of new and existing wells, then processing and transporting the added CBM production through existing facilities.” He said the CBM wells produce sweet natural gas with a small amount of associated water production, offering the company “a distinct competitive advantage that is expected to keep our costs the lowest in industry.”

The development project would build on EnCana’s demonstration site north of Strathmore, AB, where production currently is 3 MMcf/d from 35 wells. In the last half of 2003, EnCana has begun drilling a 200-well program, with 100 on stream by the end of the year. If that goal is met, EnCana’s CBM production going into 2004 would be about 10 MMcf/d.

“Within our southern Alberta fee lands, single CBM sections are estimated to contain an average of 2 Bcf of recoverable natural gas resource, based on four to eight wells per section,” said Eresman. “We are drilling, completing and tying in these wells for about C$250,000 each. We estimate total life-cycle finding and development costs of approximately C$1.50/Mcf. The reservoir characteristics support long-term predictable anticipated gas production growth.” If it obtains regulatory approval, EnCana also plans to commingle its shallow gas and CBM production within existing well bores to minimize the number of new wells drilled.

In 2004, EnCana expects to drill another 300 wells, which would take production to about 30 MMcf/d by the end of next year. The 2004 CBM program, an estimated C$90 million investment, includes further appraisal drilling to identify future development opportunities within the company’s 700,000-acre prospective area.

This year, EnCana said it remains on track to achieve a 10% increase in sales from continuing operations over pro forma 2002 levels. Full year 2003 sales are now forecast to average slightly below the midpoint of the previously announced sales target of between 740,000 and 797,000 boe, which is comprised of between 3-to-3.1 Bcf/d and 240,000-to-280,000 bbl of oil and natural gas liquids (NGLs) a day, excluding Syncrude.

In 2004, daily sales are forecast to average between 820,000 and 870,000 boe, comprised of between 3.25-to-3.45 Bcf/d and 280,000-to-295,000 bbl/d of oil and NGLs per day. Upstream capital investment in 2004, excluding divestitures, is forecast to be in the range of C$5.1 billion to C$5.5 billion. A plan to divest of between C$500 million and C$1 billion in non-core oil and gas properties is reflected in the sales guidance. These potential divestitures represent 30,000, or possibly more, boe/d, which primarily would be heavy oil in Western Canada, EnCana said.

“We see a continuing opportunity to divest of non-core properties at attractive values,” said CEO Gwyn Morgan. By redeploying some of its capital into “higher-return internal growth projects on our low-unit-cost,” Morgan said EnCana’s long-life core asset base is anticipated to create considerable intrinsic value for shareholders.” He said the company remains focused on annual sales at 10% per share “for several years ahead.”

In other news, EnCana announced a change to its long-term compensation plan to align employees’ interests with those of shareholders. Following regulatory approval, EnCana’s future individual stock option grants would be significantly reduced and a new long-term performance share unit plan would be created. Payment of any units would be conditional upon EnCana’s total shareholder return over a three-year period at least achieving the median of peer companies in Canada and the United States.

The company also has adopted new share ownership guidelines designed to help ensure that management has a “meaningful” ownership interest in the company. In addition, the board of directors has approved discontinuing any further stock option grants to directors, partially replacing their value with deferred share units.

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