Coal-bed methane industry finds a home in Peace Country

Scott Simpson,
VANCOUVER SUN
January 9, 2009

Canada Energy Partners wins over Hudson's Hope and becomes a first in B.C.

Condemned in many British Columbia communities as an environmental hazard, coal-bed methane development has found a home in the Peace River Valley.

A junior gas exploration company with a head office in Vancouver, a CEO from Baton Rouge, La., and a drilling partner from Texas, has succeeded where industry giants including Shell, Encana and BP, have faltered.

The Vancouver junior, Canada Energy Partners, and Texas-based GeoMet Inc.
announced earlier this week that they'd begun commercial shipment of coal-bed methane from an initial spate of wells in the vicinity of the historic northeast B.C. town of Hudson's Hope.

It is the first coal-bed gas project in B.C., where controversy has dogged every effort by the government to develop a potentially lucrative resource, to reach commercial production.

"There has been real resistance in the Fernie area, real resistance in Smithers, Vancouver Island, Princeton, Klappan," Baton Rouge native Ben Jones, president and CEO of Canada Energy, drawled in a telephone interview. "Our area is about the only one that has been sailing along -- with bumps, some stormy weather, but [it] has continued to sail."

Jones first came to B.C. in 1999 and acquired his first drilling lease for coal-bed methane in 2001, just as the government was gearing up to promote it.

He got the rights for an average $120 a hectare in an area of the province where recent bids exceed 100 times that amount, and multinationals such as Talisman Energy are talking about 10-year, $7.5-billion investments in coal-bed methane development.

So far Canada Energy and GeoMet, through subsidiary Hudson's Hope Gas, have drilled eight wells, with three now in production and five in the process of pumping out underground water so that the gas can begin to flow.

"With conventional exploration, your best production is at the beginning.
The best day is the first day and everything is downhill from there, whereas in coal-bed methane it's exactly the opposite," Jones said.

"These things will build over time, but it makes for an excruciating manager's life because it will make you pull your hair out.

"We will not have recouped our sunk costs probably for several years, but we could be in a positive cash flow as to our lease-operating expenses this year."

The global financial crisis hasn't hurt and Canada Energy chairman John Proust said it's not likely to pose future problems.

"We were very fortunate to do a significant financing prior to the market coming down, so we are well financed," he said from his Vancouver office.

"We've got approximately $16 million in our treasury currently and that takes us well through this year, well through next year."

In addition, he noted, Canada Energy has a development agreement with Crew Energy to undertake shallow and deep gas drilling on its properties in the Peace Region, which could bring in additional resource revenue.

Proust notes that the company could drill as many as 315 wells on its coal-bed project alone.

Since 2003, coal-bed methane, or CBM, has on three occasions been the subject of resolutions by the Union of B.C. Municipalities urging the province to deal exhaustively with community concerns before another well is drilled.

The principal fear is a repeat of environmental disasters that took place in the United States, notably Wyoming, as unsophisticated drilling efforts caused breaches in underground coal seams that allowed gas and saline water to contaminate aquifers containing potable water in the vicinity, and careless surface disposal of saline water that contaminated the landscape.

Those problems did not go unnoticed here in B.C.

Last month, the province announced a two-year moratorium on Shell Canada's drilling efforts in the Klappan coal field in northwest B.C., where aboriginal groups, environmentalists and local politicians were united in opposition to drilling on the premise that it could lead to contamination of drinking water and salmon streams.

Canada Energy and its 50-per-cent partner, Geomet, meanwhile, have worked through their issues and are now generally regarded in Hudson's Hope as a model of good corporate citizenry.

Jones noted that northeast B.C. is already home to a booming natural gas industry that has bolstered the province's finances at a time when resource revenues from forestry are crashing.

"Most of those people there were more familiar with oil and gas operations than any of these other areas. I think that was part of the reason we've been able to proceed along.

"And I want to compliment Hudson's Hope. It's a community of a lot of good people and most of them are fairly reasonable. Some of the most vociferous opponents of CBM, I have very positive, constructive dialogue with."

The harshest critic in Hudson's Hope, local landowner Steve Metzger, has concluded that there is little risk to the city's water supply.

"I'm never one who would say it's impossible for the methane to get into our water supplies here. But I'm not personally concerned about that," Metzger said in a telephone interview. "I understand how far away the gas is from where our water supplies come from and it's real unlikely that that's going to be a problem."

Metzger is resigned to the presence of the industry in the community, but remains concerned about the possible industrialization of the local landscape as more wells are developed.

Even on this issue, he's taking a wait-and-see attitude. "It got to the point where, you know, it's gone ahead and it's not going to stop.

"The focus has shifted to, 'Okay, it's here, how can we deal with it?' "

Fort St. John MLA Richard Neufeld, B.C.'s energy minister since May 2001, said he never imagined it would take so long for the industry to gain a foothold in B.C.

"I think it will be a little bit slower than what I had hoped for, and maybe in retrospect, that's not that bad," Neufeld said. "I think you do have to let people get accustomed to it, and now that we have one area that's producing coal-bed gas into a sales line, that's good news we can talk about in the rest of the province."

Hudson's Hope Mayor Karen Anderson said a fraction of the community is still expressing negative opinions about the industry, "but on the whole, I am quite pleased with Hudson's Hope Gas and the way they have gone forth with this venture of theirs."

"We heard some horror stories of things that went on in the States," Anderson said. "We did not let that scare us. We took an open-mind approach and had those [stories] investigated. We had the pros and the cons come and talk to us.

"We decided that we are a little community, that we are looking for growth in our community, that we are welcoming businesses within our community.

They are just another type of a business and they have really stepped up to the plate and been really forthright with us.

"Personally, and I think I can talk for the majority of council, we are quite happy with the working relationship we have with Hudson's Hope Gas."

How much is out there

- B.C. is estimated to have a total coal-bed methane resource equivalent to at least 50 years' worth of conventional natural gas production.

- If industry can tap into that resource, it will generate billions of new royalty revenue dollars for the provincial treasury although the exact value will depend on the North American market price of natural gas over time.

- Coal-bed methane production is expanding in Alberta, Australia, China and the United States, where it now accounts for about 10 per cent of annual gas production.

What is coal-bed methane?

Coal-bed methane is the natural gas found in most coal deposits. It is virtually identical to the natural gas found underground in conventional sandstone formations. It was created, along with coal, as buried plant material was converted into coal over millions of years. The methane is effectively locked into the coal by the pressure created from being underground, and by saline water that sits in all the fractures where the gas might otherwise be able to seep. When the coal seam is drilled and the water is pumped out, the gas can begin to flow out of the coal, and becomes available to the gas producer. The resulting gas is typically a pure or "sweet" gas that requires very little processing before it can be passed along to consumers for home heating.

THE DEBATE

Controversy has dogged the B.C. government's efforts to establish a coal-bed methane industry. Disastrous events in some U.S. jurisdictions where the industry was allowed to proceed without proper environmental scrutiny has led to contamination of drinking water aquifers, livestock watering ponds, rivers and fields. That influenced many communities in B.C. which have been reluctant to see coal-bed methane reserves developed.

The industry's biggest challenge is managing the volume of water, often with a high sodium content, that must be pumped out of underground coal seams before coal-bed gas begins to flow.

THE FIX

Hudson's Hope Gas and its shareholders, Canada Energy Partnership and Geomet Inc., have addressed most community concerns through consultation and local investment. Water from its wells is removed by tanker truck and reinjected into spent gas wells near Fort St. John. According to the government, applications to re-inject water must be approved by the Oil and Gas Commission, and companies must keep this water isolated from potential groundwater zones. All disposal wells are lined with steel casing that is cemented into the well bore.