After more than a decade of unsuccessful grappling with technical issues, a beginning has been made on tapping Canadian coal seams for natural gas on a commercial scale.

PanCanadian Energy Corp. and MGV Energy Inc. reported they have started producing coalbed methane with enough success to contemplate a 250-well program if the early trials keep on working out. MGV is a Canadian subsidiary of Fort Worth, TX-based Quicksilver Resources Inc., which has made a specialty of unconventional gas production.

So far, PanCanadian and MGV have drilled 95 wells in a year-old joint venture in coalbed methane. The total includes 25 exploration and 58 pilot wells in the newly-producing area, a region of the eastern Alberta plains named Palliser after the leader of a mid-19th Century British surveying expedition.

The British surveyors recommended against ever trying to settle the area because it was an exceptionally arid part of the always dry high plains of western Canada. Their advice was ignored when PanCanadian’s original parent, the Canadian Pacific Railway, was built in the late 19th Century — with disastrous consequences in droughts of the 1920s and ’30s. But land grants associated with the railway in the area later became a cornerstone of PanCanadian’s growth into one of the top five Canadian gas producers, because it turned out to have prolific conventional reserves at shallow depths.

The coalbed methane project is intended to prolong production from PanCanadian’s land legacy as the conventional reserves run down and the properties become part of EnCana Corp. in a recently-announced merger with Alberta Energy Co. So far, the coal wells are gas counterparts to “strippers” on the oil side of the industry, with production ranging from thirty to 250 Mcf apiece. But the area is flat and easily accessible by Canadian standards, the coal seams lie at depths of less than 3,000 feet, and relatively little additional investment is required because the region is already studded with gathering and production facilities.

So far, commercial output has been achieved by six wells and others are in production-testing stages. Provided the program continues to chalk up successes, it is projected to generate up to 600 Bcf of sales gas for the joint venture. PanCanadian and MGV estimate recoverable reserves as up to two Bcf t per square mile of the coal deposits, and the partnership covers up to 300 square miles.

It remains to be seen whether Canada’s first coalbed methane production is also its last for a long time to come, however. PanCanadian acknowledged that the Palliser project is “unlike most other large CBM developments.” Besides the established “infrastructure” built for conventional gas, the area is dry underground as well as on the surface:”A unique set of geologic features in the Palliser block results in low water production rates.”

The jury is still out in the industry on whether coalbed methane can become a significant supply source in Canada. A handful of companies are doing field work, and the British Columbia government has declared intentions to build coalbed methane incentives into its royalty system.

But last fall, the Canadian Gas Potential Committee discarded a 1997 projection that 251 Tcf of gas would eventually be produced from the nation’s coal deposits. The number was cut to zero after field trials and exploration confirmed that Canadian coalbeds are in general much harder to tap than their American counterparts. Thanks to a different geological history, Canadian deposits have been found to have very low permeability or natural ability for gas to flow.

The reservations of the gas potential committee, which is led by retired National Energy Board chairman Roland Priddle, are echoed in current cases before the NEB involving TransCanada PipeLines Ltd. In an expansion application filed this winter, the pipeline said it cannot forecast coalbed methane reserves because the exercise is just too riddled with complete uncertainty.

In a toll case, the Canadian Association of Petroleum Producers predicted there will be an “opportunity” for new sources to replace today’s conventional western production as it runs down that will reach one Bcf/d in 2010 or 2011 and reach the range of five to six Bcf daily in 2020. But CAPP also said the gap could be filled by either Arctic gas or coalbed methane, and that it is not about to predict what the mixture will be, or even if both sources will be tapped.

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