If you’ll pardon the mangled metaphor, there’s a gold mine of natural gas trapped in the coal seams of Alberta — maybe as much as 500 trillion cubic feet of gas in place.
Enough to attract growing attention from some of the largest E&P companies, with EnCana showing the way and now Nexen ready to open up a new prospect.
Having spent C$100 million and drilled 80 wells over the past four years, Nexen (with a 40 percent working interest), Red Willow Production (a unit of the Southern Ute tribe of Colorado) and Trident Exploration (founded by three men from the U.S. Rocky Mountain states), as operator, are ready to move to the commercial phase of developing the Mannville formation, which stretches across central Alberta and is rated as the largest coalbed methane play in North America at an estimated 300 tcf.
The partnership expects to invest C$400 million in the next 18 months exploiting potential recoverable resources of 412 billion cubic feet, part of a greater area holding 4 tcf, of which 1 tcf is rated as economically recoverable.
Nexen is targeting 150 million cubic feet per day of coalbed methane production by 2011, matching Canada’s current total output.
Formation more difficult than U.S. coal seams
But getting to this point has not been easy because the Mannville formation is described by Trident President Jon Baker as more difficult than the U.S. coal seams, of which only 10 percent are considered economic.
Baker downplays suggestions that once Mannville is into commercial production it will be easier for other companies, arguing that the Horseshoe Canyon formation, which extends from central Alberta down the middle of the province and into Belly River play in the southeast corner and has reserves of about 70 tcf, is still a better bet.
The industry apparently shares that view, according to Alberta Energy and Utilities Board data showing that 90 percent of Alberta’s coalbed methane wells have been drilled in Horseshoe Canyon and Belly River and only 7 percent in Mannville.
While Alberta tries to close a 20-year gap in coalbed methane production enjoyed by the U.S. and scientists work to crack the code of complex geology, the Alberta government has high hopes for coalbed methane.
CBM could extend gas production
Energy Minister Greg Melchin told the Financial Post that coalbed methane could extend the province’s gas production into the next century.
He said Alberta is “clearly on the cusp of something large.”
The National Energy Board has projected coalbed methane production of 500 million cubic feet a day by the end of 2005 to 3 billion cubic feet per day (one-fifth of current volumes) within two decades.
The sector is already on the path to that goal, with coalbed methane drilling accounting for 15 percent of Western Canada’s wells, up from virtually nothing three years ago.
Based on current commodity prices of US$7.50 per thousand cubic feet and the gas-strapped outlook for North America, the economics are also promising, with FirstEnergy Capital, the Calgary-based investment dealer, calculating that gas prices of only US$4.25 can yield a return on coalbed methane of 10 percent.
Water from formation a concern
But coalbed methane poses a worry. Although the Horseshoe Canyon coals are relatively dry, the Mannville zone involves producing large volumes of water to the concern of environmentalists, land owners and farmers.
The Alberta government answered those concerns in late 2003 by naming a multi-stakeholder advisory committee to gather information and hold public hearings on whether and how coalbed methane development should proceed.
Working groups from the committee delved into water, surface, air, royalties and tenure issues, with water emerging as clearly the key issue for Albertans.
In preliminary findings issued in mid-July, the committee surprised some by recommending lower provincial royalties for up to five years on coalbed methane wells drilled in the Mannville formation to promote development of the resource.
It urged the government to “increase the opportunity for education and public awareness of the possible effects of coalbed methane development, calling on the Alberta Energy and Utilities Board and Alberta Environment to make a joint effort to consolidate coalbed methane data.
Recommendations to protect environment
But the committee also recommended action on several fronts to protect the environment, including:
• Standard procedures for sampling, analyzing and monitoring saline and non-saline water quality and quantity for coalbed methane wells and for potentially affected non-saline water wells.
• Review drilling and completion practices for new and re-completed water wells and “energy” wells, to ensure regulations are appropriate for the purpose of the well concerned.
• Consultations with coalbed methane operators and drilling contractors about current and future requirements to protect non-saline aquifers.
• Investigations to determine whether coalbed methane drilling and completion practices may affect aquifers and review regulations to decide whether changes are needed.
• A review of existing requirements for the deep-well disposal of non-saline produced water and to consider appropriate alternatives.
• Establish criteria for the beneficial use of non-saline produced water.
• Review the regulatory process for new ways to support minimal surface disturbance and reduced cumulative impact associated with coalbed methane development.
The Pembina Institute for Appropriate Development flatly opposed any lowering of royalties, arguing that industry “should bear the full cost of development, since any form of subsidy distorts the playing field with respect to renewable energy,” said Mary Griffiths, the institute representative on the government-appointed committee.
She noted that industry has already embarked on pilot projects in the Mannville formation “without royalty reductions.”
Kim Chow, chairman of the Canadian Society for Unconventional Gas, argued that the preliminary findings reflect a “good balance” of viewpoints.
Chow’s predecessor, Michael Gatens, chairman and chief executive officer of coalbed methane producer MGV Energy, insisted the industry was not looking for a handout, but he noted that Mannville is a much more difficult formation than Horseshoe Canyon and might need incentives before companies will take the risk and spend more money to develop the resource.
