B.C. shale gas set to be next generation's oil sands
PATRICK BRETHOUR
December 14, 2007
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.
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