B.C. shale gas set to be next generation's oil sands

B.C. shale gas set to be next generation's oil sands
Patrick Brethour, Globe and Mail, 14-Dec-2007

B.C. trumps Alta. with $1B oil and gas haul
Claudia Cattaneo, Financial Post, 14-Dec-2007

Alberta falls behind British Columbia in oil, gas land sales
Dina O'Meara, Calgary Herald, 14-Dec-2007

B.C. Trumps Alberta
Claudia Cattaneo, Financial Post, 14-Dec-2007

B.C. drilling rights net record fees
Scott Simpson, Vancouver Sun, 13-Dec-2007

COMMENT: Years away from production, for one thing. But years of potential for environmental impacts, many of which we can only guess at.

See also B.C. beckons Alberta's royalty-shy producers

VANCOUVER — In the remote north of the province, there is a vast warehouse of hydrocarbons lurking in difficult geology, waiting for the right combination of technology, economics and entrepreneurial guts to free them.

A generation ago, that description applied to Alberta and its oil sands. Today, that scenario is playing out in British Columbia and its shale gas fields where trillions - yes, that is a T - of cubic feet of natural gas could be on their way to market.

Yesterday, the province unveiled its single most successful auction of oil and gas exploration rights in nearly three decades, a $401-million haul that pushed the year's tally past $1-billion. By itself, the size of the Dec. 12 auction is impressive. But what is even more striking is that two-thirds of the payout came from four parcels near Dawson Creek in northeastern B.C.

B.C.'s energy ministry is reluctant to talk about specific bids, citing confidentiality. But the area surrounding Dawson Creek is known to be home to shale formations, formed from the mud of the Triassic era. Flash forward a few million years, and that mud has been transformed into crumbly rock far below the surface of the Earth - rock that comes attached with an enormous quantity of natural gas molecules.

Problem is, shale formations are far different than a typical natural gas well, in which the pressure of the reservoir is usually enough to force a steady stream of gas to the surface. In shale formations, natural gas molecules are stuck to the rock, and must be peeled away before they will flow to the surface. Although the physics differ, shale gas and the oil sands face the same maddening economic dilemma: Everyone knows the resource is there, they just have no clue how to turn those molecules into profit.

So, just as the oil sands lingered for decades as Alberta's conventional industry flourished, so have shale resources remained unloved and untapped. Until now. As the auction results show, big bets are starting to be plunked down on shale gas. Those bets may not pay off. As with the oil sands, only a small portion of the huge amount of known resources may ever be produced. "The question remains - what is actually recoverable?" says Glenna Jones, vice-president of Canadian equities for Ross Smith Energy Group Ltd. in Calgary.

But the industry is clearly willing to gamble.

Technology is part of the explanation. New methods of examining old data make it easier to determine the most promising areas in the shale gas plays. The growing sophistication of horizontal drilling techniques, which can free those sticky molecules, also helps.

The British Columbia government has done its bit, introducing a favourable royalty regime earlier this year that was designed to lure exploration spending to the rugged - and therefore expensive - northeast of the province.

However, neither of those developments are brand new, nor dramatic. Neither easily explain the sudden surge of interest in B.C.'s shale gas. What does is the looming reversal of industry profitability under the royalty regimes of B.C. and Alberta. For the moment, Alberta has the edge, although precise calculations are tough because of the welter of circumstances that go into calculations. But once Alberta hikes its royalties in 2009, the advantage will swing to British Columbia.

Not surprisingly, then, companies that are buying the rights to oil and gas exploration are edging out of Alberta, where land sales have plummeted 60 per cent this year, just as B.C. marks its best year ever.

And that is one more thing that B.C.'s shale natural gas and Alberta's oil sands have in common. Eleven years ago, Alberta slashed royalties on the oil sands, creating a gravity well that pulled tens of billions in capital into the Fort McMurray area and gave birth to a major new branch of the energy industry.

A decade later, Alberta and its royalty regime seem set to duplicate that success - this time, by pushing capital into the waiting arms of B.C.

pbrethour@globeandmail.com

CALGARY -- The British Columbia government pocketed $401-million in its latest sale of oil and gas rights, boosting the province's annual haul to a record $1-billion, as oil and gas companies piled into the western-most province out of frustration with Alberta's royalty increases and excitement about two new unconventional gas plays.

"We are feeling pretty good in British Columbia," Richard Neufeld, B.C.'s Energy Minister, said in an interview Thursday after the province revealed the results of its auction on Wednesday. "B.C. is underdrilled. It's a good place to invest. There are programs in place to actually encourage investment. And we actually want them to do it."

B.C.'s 2007 revenue from oil and gas rights exceeds the previous record of $647-million set in 2003, when EnCana Corp. assembled a large land position for its Cutbank Ridge play. It also comes at a time of relatively soft natural-gas prices.

Alberta's numbers, by contrast, have collapsed. The province, which is at war with its oil industry over a 20% average increase in royalties effective in 2009, collected $673-million this year from the sale of conventional oil and gas rights, down from $1.47-billion last year, and $650-million from the sale of oilsands rights, down from $1.96-billion last year.

Saskatchewan, the other beneficiary of Alberta's government-industry tensions, is also thriving, collecting a record $250-million from Crown land sales this year, up from $176-million last year.

Andrew Boland, research director at Peters & Co., said companies bid aggressively in B.C. to secure rights in two promising, emerging plays: the Montney, a tight sand resource play west of Dawson Creek, and the Horn River Basin shale gas play near the Northwest Territories' border that has the potential to rival the massive Barnett shale play in Texas.

"The shale gas land sale and interest ... is several years in the making, so it has nothing to do with the royalty situation," Mr. Boland said. "The Montney interest was there before the royalty situation, but the interest in it has probably been heightened by it being a better place to do business for some plays."

While the parcels were purchased anonymously through brokers, EnCana was likely the big bidder of the Montney lands. EnCana, Apache Corp., EOG Resources Inc., Nexen Inc. and Devon Energy Corp. were the likely bidders for the Horn River lands.

Pierre Alvarez, president of the Canadian Association of Petroleum Producers, said oil and gas companies are responding to B.C.'s favourable terms introduced in recent years, including royalty credits to assist with the cost of building roads and pipelines, and royalties for unconventional gas that involve a lower front-end royalty until payout.

"There is a real sense that things are happening over there," Mr. Alvarez said. "Over the course of this year, land values in B.C. have not dropped the way they have in Alberta. In fact, they have shot up."

B.C.'s big land sale weakens the Alberta government's argument that oil and gas industry spending in the province has been cut due to lower gas prices, the high Canadian dollar and high costs, since B.C. has the same conditions.

However, B.C. is seen as having more potential than Alberta for large discoveries.

Saskatchewan has said it will not increase its oil and gas royalties to attract more activity to the province.

Mr. Neufeld said he's waiting to see what Alberta ultimately implements.

"The government seems to be hot and cold about whether they are going to maintain what that they said [in late October]," he said.

Financial Post

The threat of a bigger government take is being blamed for a dismal year-end auction of oil and gas rights in Alberta, which saw provincial sales fall behind neighbouring British Columbia for the first time.

Since both provinces are primarily natural gas basins, low commodity prices can't be blamed for Alberta bringing in a scant $68 million in conventional and oilsands land sales Wednesday, compared with B.C.'s $401 million Thursday, said analyst Cody Kwong, with FirstEnergy Capital Corp.

"The new royalty framework that's been put into place has been chasing the active explorers out of Alberta," Kwong said. "In a risk context, the economics can't compete with B.C. and Saskatchewan."

The new royalties, which take effect in 2009, would take between 15 per cent and 20 per cent more off producers' bottom line in Alberta compared with royalties in flanking provinces.

Meager land sales would appear to support claims by oil and gas majors such as Canadian Natural Resources Ltd. and EnCana Corp. that the larger bite from revenues would signal an exodus from the province.

Over the year, Alberta's natural gas and oil land sales plummeted 52 per cent to $710.7 million, down from last year's record $1.47 billion.

Sales and leases on natural gas and oil properties reached $37.45 million at the Dec. 12 auction, down from $54.41 million a year ago.

Oilsands leases also tumbled, falling to $30.76 million, from $88.54 million last December.

In contrast to declining interest in Alberta's conventional oilpatch, British Columbia's December land sales surpassed the $1-billion mark for the first time, hitting $1.05 billion. The previous record was $646.7 million in 2003, according to the provincial government.

Surging interest in British Columbia bucks arguments that soft natural gas prices have been the sole factor behind majors in the Alberta oilpatch reducing drilling programs.

"Aggregate drilling budgets will always be attached to the commodity price," Kwong said. "But everyone has a choice of where they can drill, geographically. With this new royalty, British Columbia and Saskatchewan are going to the places people are going to be redeploying their capital programs. Why take a 50 per cent royalty hit in Alberta when you can take a lesser royalty hit in B.C. or Saskatchewan?"

Saskatchewan took in a total of $250 million this year in land sale revenue, surpassing $200 million earned in 1994. The average price per hectare -- $618 -- was well above the previous record of $450 set in 1983.

domeara@theherald.canwest.com

Claudia Cattaneo
Financial Post
14-Dec-2007

Dollar value of oil and gas drilling rights sold in 2007

British Columbia $1.05B

Alberta $673M

---

CALGARY - The British Columbia government pocketed $401-million in its latest sale of oil and gas rights, boosting the province's annual haul to a record $1-billion, as oil and gas companies piled into the westernmost province out of frustration with Alberta's royalty increases and excitement about two new unconventional gas plays.

"We are feeling pretty good in British Columbia," Richard Neufeld, B.C.'s Energy Minister, said in an interview yesterday after the province revealed the results of its auction on Wednesday. "B.C. is underdrilled. It's a good place to invest. There are programs in place to actually encourage investment. And we actually want them to do it."

B.C.'s 2007 revenue from oil and gas rights exceeds the previous record of $647-million set in 2003, when EnCana Corp. assembled a large land position for its Cutbank Ridge play. It also comes at a time of relatively soft natural-gas prices.

Alberta's numbers, by contrast, have collapsed. The province, which is at war with its oil industry over a 20% average increase in royalties effective in 2009, collected $673-million this year from the sale of conventional oil and gas rights, down from $1.47-billion last year, and$650-million from the sale of oilsands rights, down from$1.96-billion last year.

Saskatchewan, the other beneficiary of Alberta's government-industry tensions, is also thriving, collecting a record $250-million from Crown land sales this year, up from $176-million last year.

Andrew Boland, research director at Peters & Co., said companies bid aggressively in B.C. to secure rights in two promising, emerging plays: the Montney, a tight sand resource play west of Dawson Creek, and the Horn River Basin shale gas play near the Northwest Territories' border that has the potential to rival the massive Barnett shale play in Texas.

"The shale-gas land sale and interest … is several years in the making, so it has nothing to do with the royalty situation," Mr. Boland said.

"The Montney interest was there before the royalty situation, but the interest in it has probably been heightened by it being a better place to do business for some plays."

While the parcels were purchased anonymously through brokers, EnCana was likely the big bidder of the Montney lands.

EnCana, Apache Corp., EOG Resources Inc., Nexen Inc. and Devon Energy Corp. were the likely bidders for the Horn River lands.

Pierre Alvarez, president of the Canadian Association of Petroleum Producers, said oil and gas companies are responding to B.C.'s favourable terms introduced in recent years.

These include royalty credits to assist with the cost of building roads and pipelines, and royalties for unconventional gas that involve a lower front-end royalty until payout.

"There is a real sense that things are happening over there," Mr. Alvarez said.

"Over the course of this year, land values in B.C. have not dropped the way they have in Alberta. In fact, they have shot up."

B.C. drilling rights net record fees

VANCOUVER - British Columbia raked in a record amount of revenue - more than $1 billion - in 2007 from its monthly auctions of natural gas and oil lease rights, Energy, Mines and Petroleum Resources Minister Richard Neufeld said on Thursday.

The December auction was the topper, attracting $401 million to lift the province over the billion-dollar mark for the first time in history - far better than the previous record of $647 million set in 2003.

"That's the second-largest monthly sale we've had in B.C. and the largest cumulative annual amount in the history of British Columbia," Neufeld said in an interview.

"It demonstrates that the industry is very interested in British Columbia's prospects and continues to buy land."

He added that the bids, representing acquisitions of drilling rights to 595,559 hectares of land primarily in northeast B.C., will eventually translate into additional employment for the province.

The price is also a record - $1,758 per hectare, almost double the previous high in 2005 of $922 per hectare.

Neufeld said it may take five years, and in some cases perhaps as long as 10, before drilling or extraction is underway on all the properties picked up this year by exploration and production companies.

That bodes well for B.C., he said, because it's an indication that the province can in future expect a large, steady flow of royalty revenue.

In many cases, the names of the companies behind the acquisitions are not made public because many rights buyers acquire land through third-party land agents and don't publicize their actions until they've picked up all the land they seek.

Neufeld said a lot of this year's acquisitions reflect growing interest in large-scale B.C. properties that are believed to hold large deposits of gas within vast underground fields of brittle shale.

"There are a number of companies that have been doing some drilling for what is called shale gas. We estimate there is a lot of it in British Columbia," Neufeld said.

"Most of this [auction] revenue as I understand, is in areas where shale gas could be predominant.

"It's been said to me that it's probably the largest shale gas play in North America, so I believe there is a bit of a rush on. They need large acreage, apparently, so these companies are spending huge sums of money for some of this acreage."

Principal areas are around Dawson Creek south of Fort St. John, and around Fort Nelson.

Neufeld noted that shale fields produce less gas per day than conventional wells, but tend to produce gas over longer periods of time - which means a long, steady flow of royalty revenue into the B.C. treasury.

He said one of the reasons B.C. is attracting so much investment - particularly in a year when North American prices for natural gas are depressed due to a relative over-supply - is that gas production in Alberta is waning as more and more of its fields are exhausted and new sources become more difficult and expensive to find.

"We're the only jurisdiction in Canada that has posted an increase in our known reserves every year for the past five years," Neufeld said. "As the industry describes it, northeast B.C. is way under-drilled, under-produced. There is lots of opportunity for many years into the future and who knows what technology will bring in the next decade."

ssimpson@png.canwest.com

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