While conventional and shallow drilling die down, Canadian natural gas producers with deep enough pockets to outlive current low prices are switching to larger, more technical tight and shale targets for their next generation of supplies.

In a sign that the industry is planning years ahead for a market recovery, a long lineup has formed for a provincial road and pipeline construction program that opens up access to remote development zones on the gas “near frontier” in northeastern British Columbia (BC).

The scheme makes companies cover all costs of building new infrastructure up front but eventually repays up to 50% of their expenses in the form of provincial royalty reductions after production starts. In this year’s annual round of bids to participate, BC Energy Minister Blair Lekstrom reports receiving applications for 68 projects worth C$760 million (US$692 million).

Immediate approvals, for the proposals deemed to offer the most benefits to the province soonest, were granted to 19 companies for 31 projects worth C$120 million (US$109 million). BC sets high standards of admission to the infrastructure scheme, with Lekstrom saying the province has a rule of thumb of eventually receiving $2.50 back for every $1.00 foregone now by its royalty programs.

Early repayments for BC’s array of incentive schemes continue to flow into the provincial treasury, although at a pace reduced by the recession, in the form of mineral rights sales. BC’s August monthly auction netted C$37 million (US$34 million), bringing the 2009 year-to-date total to C$321.7 million (US$293 million).

The sales of government-owned mineral rights are down compared to 2008, when an industry rush to snap up all the best known tight and shale drilling targets generated record full-year sales of C$2.66 billion (US$2.42 billion). But the average price paid per hectare (2.47 acres) of C$1,291 (US$1,175) so far this year is still the third-highest in the history of BC drilling rights auctions.

The Canadian industry’s switch to more difficult but larger wells with longer producing lives is also showing in the behavior of the drilling rig fleet, report Calgary investment houses Peters & Co. and FirstEnergy Capital Corp., which maintain close watches on the largest, publicly-traded field service contracting companies. As of this week, 130 Canadian rigs capable of wells deeper than 2,450 meters (8,000 feet) were drilling. The number of active shallow rigs made for well depths of less than 1,850 meters (6,000 feet) — formerly the busiest part of the Canadian feet — was only 23.

“Contractors with rig fleets which are able to drill deeper will continue to experience higher average utilization levels,” Peters analysts Todd Garman and Daniel MacDonald predict in a research note for investors. Overall, the gas price trough has cut drilling activity and numbers of provincial well permits in half.

But the Canadian industry’s leading indicators also foreshadow acceleration of development of tight and shale gas formations in northern Alberta and BC known as the Montney and Horn River.

The number of provincial permits granted for deep, long horizontal wells into the new supply sources in first-half 2009 rose to 396, up by 24% from 320 approvals in the same period last year, the Peters analysts report. In another sign that a switch is underway to bigger and more technically demanding gas targets, the average amount of time spent drilling Canadian wells has increased sharply, rising to nearly 11 days this year from six-and-a-half days when prices were still high and made short-lived shallow reserves economic in 2007.

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