Providing coverage of Alaska and northern Canada's oil and gas industry
August 2007

Vol. 12, No. 32 Week of August 12, 2007

B.C. tests new horizons

Province unveils new ‘net profit royalty program’ to entice operators to tackle CBM, shale gas, tight gas, enhanced oil recovery

Gary Park

For Petroleum News

With its conventional natural gas sector floundering in heavy seas, British Columbia is taking active measures to open up its unconventional resources and remote basins.

The provincial government has made a widely anticipated move to introduce a net profit royalty program to stimulate exploration and development of coalbed methane, tight gas, shale gas and enhanced oil recovery.

Along with those expensive, technically challenging resources it is hoping to trigger interest in the largely unexplored basins of British Columbia’s “central interior,” which are far removed from infrastructure such as roads and pipelines.

The unveiling of the program coincides with the worst decline in gas drilling since the 1990s when northeastern British Columbia became one of North America’s hotspots.

Dragged down by commodity prices, the industry faces a 42 percent decline in well completions this year to 795 — a heavy blow for a government that has counted on natural gas as a major source of revenue to offset the struggles it has experienced in fishing, forestry and mining.

New royalty of 2% of gross for 10 years

The new royalty scheme will charge a rate of 2 percent of gross revenue from the start of production over a maximum 10 years, or until the initial capital investment is paid off.

From there, qualifying projects will advance through three tiers.

In tier one, royalties will be either 5 percent of gross revenue or 15 percent of net revenue, whichever is higher. Projects will remain at that level until capital cost plus 30 percent is recovered.

Tier two will be either 5 percent of gross revenue or 20 of net revenue, whichever is the higher. Projects will stay at that level until the capital cost plus 105 percent is recovered.

Tier three, which will last until the project is terminated, will pay a royalty rate of 35 percent on net revenue or 5 percent on gross revenue, which ever is higher.

If large capital infusions are needed to advance a project, the royalty rate will be reduced to 5 percent of gross revenue until that investment is recovered, at which point the project will proceed through the tiers.

Modeled on Alberta oil sands structure

Energy Minister Richard Neufeld said the regime has been modeled on the oil sands royalty structure in Alberta, which recognized the greater front-end risks and costs facing operators.

For the oil sands, the royalty is 1 percent of gross revenue until project payout, after which the rate is the greater of 25 percent of net revenue or 1 percent of gross revenue — a system that is currently being reviewed by the Alberta government.

However, Neufeld cautioned that each project will be judged on its merits and that blanket approval is not assured.

But the industry is hopeful the changes will be an incentive to develop resources that are known to exist, with an estimated in-place capacity of 500 trillion cubic feet for shale gas alone. What isn’t clear is whether they can be commercial.

Industry interest in shale gas strong

On the shale gas front, a joint venture of Apache Canada and EnCana indicated in July it is working on a venture in the Devonian-age Horn River basin that could be commercial “in a short period of time,” marking a breakthrough in Canada.

More than 40 leases are held in the basin by Apache, EnCana, EOG Resources, Devon Canada, BP Canada Energy, Nexen and Paramount Resources, with experimental wells drilled on about a dozen of the properties.

The Horn River basin and Cordova Embayment in the Fort Nelson area have triggered a stampede, with a surge of postings for the government’s next two land sales.

On Aug. 15 and Sept. 12, Horn River and Cordova comprise 55 percent of the combined postings, with Horn River offering 204,000 acres and Cordova 120,000 acres.

The total number of parcels on Aug. 15 is four times the average, while the average acreage is five times the monthly rights sales so far this year.

The government’s oil and gas division believes that if the Horn River play works, Cordova — which has attracted little interest to this point — would be the next obvious place to explore for shale gas because of its geological similarity to Horn River.

In 1976, Chevron Canada Resources said a well drilled in the Devonian shale was “bleeding gas from hairline fracture planes.”

Most land activity in Horn River is concentrated on experimental schemes licensed by EnCana, EOG and Nexen.

Total rights sales in and around that basin fetched more than C$125 million in 2006, with the vast bulk coming in September and October sales. Over the period of a decade, sales in the region totaled less than C$10 million a year.

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