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Devon feeds British Columbia gas frenzy Independent adds up to 8 Tcf to potential gas resources at Horn River; joins others in warning of cost, infrastructure problems Gary Park For Petroleum News
The Horn River Basin in far-flung northeastern British Columbia is now more than two-thirds of the way to its estimated potential shale gas resources of 50 trillion cubic feet after less than two years of exploration effort.
The scramble to secure rights in that area, along with Montney to the south, continued apace at the latest government land auction, which pulled in C$220 million – once a staggering single-sale result, but now falling into the “ordinary” category after the benchmark returns of C$610 million in July and C$501 million in August.
Devon Energy has joined the list of companies offering details of the potential size of the emerging shale gas play.
Chris Seasons, president of Devon’s Canadian unit, said the Oklahoma City-based independent may have uncovered 5 trillion to 8 trillion cubic feet of gas and believes its 153,000 acres may be capable of producing 700 million cubic feet per day based on test wells last winter.
“This is not small by any stretch of the imagination,” he said.
Devon’s numbers add to a growing basket that includes 16 Tcf by an EnCana-Apache joint venture, 6 Tcf from EOG Resources and 3 Tcf to 6 Tcf from Nexen.
At the upper end of the forecasts, these companies have accumulated 36 Tcf, closing in on the 50 Tcf projected for the area by Wood Mackenzie.
Seasons told a North American Oil and Gas Conference sponsored by investment dealer Peters & Co. that Devon is still in the “very early stages” of commercial development and is now grappling with perhaps the toughest challenge of all – getting the resource on-stream, economically.
While drawing parallels between Horn River and the Barnett Shale in Texas, where Devon is producing 1 billion cubic feet per day, he said northern B.C. is accessible only in winter and does not have the same infrastructure as the Barnett, located around the Fort Worth metro area, although the B.C. government is helping finance roads that will expand the drilling season to 10 months.
“We’re not drilling on the outskirts of suburban Dallas, we’re drilling in the bush,” Seasons said, adding that trying to frac wells in temperatures of minus 50 degrees Fahrenheit with the amount of water that is required is “a bit of a challenge.”
“It is the logistics of getting up there,” he said. “When you operate in the winter, you burn fuel, so it is just generally a higher cost.
“I can see a day when there will be a real demand for sand and fresh water for pumping … all things that may constrain the overall industry at some juncture,” he said.
In addition, Seasons said he is concerned “there will be a real shortage of technical staff and skilled trades to make this all happen.”
But he is confident Devon, based on its experience in the Barnett, “will lick” the problems.
Controlling costs key to shale gas play On the matter of potential resources, Seasons was less forthcoming on Devon’s 150,000 net acres in the Montney play other than saying it has greater variability than Horn River in terms of reservoir quality, but it does hold great potential.
Apache Canada president John Crum told the conference the industry will seek ways to curb costs. Otherwise, he said Horn River “will have a hard time making it, certainly where gas prices are now.
“Bottom line is, if you can’t get your costs down, plays like this don’t make sense,” he said.
Bruce March, CEO of Imperial Oil, told the conference its joint venture with sister company ExxonMobil plans to drill exploratory wells this winter on the JV’s 115,000-acre lease, which will help determine resource quality and productivity.
“This is an area that has demonstrated promise for significant natural gas resources and pilots by others in the area,” he said.
Chris Feltin, a research analyst at Tristone Capital, cooled some of the over-heated enthusiasm for Horn River, suggesting the winter freeze-up and lack of water needed to extract gas from the tight rock formations makes him question whether there will be enough production to offset recent declines in Western Canadian volumes.
Peters & Co. and Wood Mackenzie believe many of British Columbia’s unconventional plays can be economic at gas prices of C$6.50 per thousand cubic feet, but RBC Dominion Securities analyst Gordon Gee has raised the threshold to C$8.
AJM Petroleum Consultants CEO Robin Mann has estimated the current average cost of C$10 million for a Horn River well could drop to C$6 million-$8 million as operators adapt to the region.
While resource numbers and costs are getting juggled, there has been no tapering off in the industry willingness to dig deep to stake out positions.
Bidders shift focus to Horn River The B.C. government reported that its September returns of C$220 million pushed the total at the midway point of the 2008-09 fiscal year over C$2 billion, with the major interest concentrated west of Dawson Creek and north of Fort Nelson in the Western Horn River Basin, where three drilling licenses fetched C$98 million.
The leading buyers were Standard Land Co. at C$68 million, Meridian Land Services at C$22 million and Canadian Coastal Resources at C$7.8 million, all of them acting as brokers for unidentified clients.
Winning bids ranged from C$4,900 to C$14,400 per hectare (C$1,983-$5,828 per acre) as industry attention shifted north from the more advanced Montney area to Horn River.
In the Montney region, two licenses collected C$26 million, with bids of C$7,200-C$12,400/ hectare. They are located 15 miles west of the Groundbirch field and 10 miles east of Chetwynd.
Five lease bids averaging C$4,711/hectare to C$5,460/hectare generated C$7.4 million for the Kobes field, 30 miles north of Hudson’s Hope.
The total sale offered 105 parcels covering 92,973 hectares, with 94 parcels and 80,401 hectares selling at an average C$2,745 per hectare. The bids eased back to a more traditional range after averages of C$4,596/hectare in July and C$4,359/hectare in August.
The drilling licenses carry an exclusive right to explore for petroleum and natural gas, giving the successful bidders three to five years to drill wells, depending on location.
Leases carry primary terms of five to 10 years.
Focus on B.C. as Alberta reserves decline Collecting just C$74 million from the first of its September auctions, Alberta nudged its year-to-date total to C$894 million at a per-hectare average of C$394, compared with C$1.03 billion averaging C$449 per hectare in the same period last year.
B.C. Energy Minister Richard Neufeld said his province is gaining industry attention as its gas reserves have climbed for eight consecutive years to 17.6 Tcf, while Alberta’s known reserves are in decline at about 48 Tcf.
He suggested that exploration success in B.C. has been a larger factor behind the geographic shift than Alberta’s royalty increases, which take effect in 2009.
The next B.C. sale is set for October 15, offering 120 parcels covering 75,768 hectares.
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