The real reason for the rise and huge volumeThis story appeared today in the Globe&Mail. The whole area will probably be difficult to explore and put into production. It will also need a higher price for natural gas to make it economical.
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News from The Globe and Mail
Gas players gear up for B.C. rush
Huge discoveries in northeast ignite 'massive land grab' for drilling rights
DAVID EBNER
00:00 EST Monday, March 03, 2008
CALGARY -- The remote and rugged northern fringe of British Columbia is set for a frantic land grab by natural gas explorers, following months of speculation and intensified by last week's announcement of what could rank among the largest gas discoveries in Canadian history.
Located in northeastern B.C., with the key area centred on the Horn River Basin, very little was known about the play until last Thursday, when Houston-based EOG Resources Inc. said it might have reserves of six trillion cubic feet - the same as Mackenzie Delta, Northwest Territories, and a figure that would increase Canada's total proved reserves by roughly 10 per cent.
EnCana Corp. of Calgary - which claims the initial discovery of Horn River's potential - and partner Apache Corp. of Houston may also have 6 trillion cubic feet of gas, Apache said in early February.
EnCana, Apache, EOG, as well as Nexen Inc. of Calgary, are the four major firms on the play and hold exploration rights for more than 600,000 acres. In late March and again in late April, the B.C. government announces the results of the next two auctions of exploration rights in the province, with roughly another 200,000 acres up for grabs in the Horn River region.
"Everyone's looking at bidding at land up there, it goes without saying," said Dale Shwed, chief executive officer of Crew Energy Inc., a Calgary junior explorer that has a small position in the region.
Industry's focus on Horn River has increased steadily in the past year, most recently capped by the $67-million put down at B.C.'s February auction of exploration rights for land in the area. "I suspect the EOG announcement will push it through the roof," said Michael Harris, vice-president of investor relations at Nexen.
Major advances in technology are helping drive the frenzy, including horizontal drilling and subsurface fracturing of the complex and difficult shale rock in which the natural gas in Horn River is trapped. Unlike conventional pools, economically extracting gas from shale rock has been, until just recently, next to impossible.
But with the likes of EnCana and EOG successfully exploiting the Barnett shale play in Texas, other opportunities such as Horn River are poised to make the leap from theory to reality.
"This is setting up to be a massive land grab equivalent to that of the oil sands binge in Alberta during late 2005 and early 2006," analyst Robert Fitzmartyn of FirstEnergy Capital said in a report last Friday. "Land sales are likely to remain frantic over the coming months."
EOG's announcement on Horn River, one of a series of discoveries in North America the firm disclosed, stirred a buying spree among investors. EOG stock Thursday surged 18 per cent to an all-time high. Stock of Nexen rose 5 per cent as almost 28 million shares traded, 10 times the amount of a typical day.
Horn River - as well as the hot Montney play further south in the same area of B.C. - faces challenges beyond geology, led by its remoteness, where drilling is conducted in winter because rigs can only make it to locations when the rugged ground is frozen.
Seeing this, the B.C. government last year adopted an oil sands-like royalty framework for shale gas and other complicated plays. Once a project is approved, the royalty is a nominal 2 per cent of gross revenues until capital costs are recovered. It then rises in stages to a maximum of 5 per cent of gross revenues or 35 per cent of net profits, whichever is greater.
Wells at Horn River are expensive, roughly $10-million per hole. A handful have been drilled, with EnCana-Apache already producing gas from a couple of wells, and EOG set to put its first wells on-stream in June.
Shale gas requires high gas prices, analyst Gordon Gee of RBC Dominion Securities said last week, estimating a required long-term gas price of $8 per thousand cubic feet. If drilling costs come down, $7 might be adequate. The benchmark price of natural gas on the New York Mercantile Exchange on Friday was $9.73 (U.S.) per thousand cubic feet, much higher than the average of roughly $6 in this decade.
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