Where to from here? Oil & Gas Investor article by Bettina Pierre-Gilles

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Bettina Pierre-Gilles article on the "Oil & Gas Investor" magazine.

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Where to from here? Oil & Gas Investor article by Bettina Pierre-Gilles

  1. 1. C OA L B E D M E T H A N EWHERE TO FROM HERE?Drilling in the Horseshoe Canyon coals is gaining momentum, and operators are shifting tomore horizontal wells to unlock the Mannville’s potential.BY BETTINA PIERRE-GILLES, PHASIS CONSULTINGT he Canadian economy was strong throughout last year, the coal formations. As of the end of the year, the most with the energy industry a major contributor to active industry players were: that growth, seeing its highest level of activity. • EnCana Corp.; According to data compiled by the Canadian Association of • Quicksilver Canada (formerly MGV Energy Inc.);Petroleum Producers, Canada produced 17 billion cubic feet • Apache Canada Ltd.;(Bcf) a day of conventional gas last year.Drilling for oil and gas • Trident Exploration Inc.;was at its highest level ever,while production remained stable. • EOG Resources; Although there was an increase in drilling and well com- • Centrica Canada Ltd.;pletions, production remained unchanged. Supply of conven- • Canadian Natural Resources;tional natural gas in Canada is fast becoming scarce. • Paramount Resources Ltd.;According to the National Energy Board’s 2004 assessment, • Devon Canada Corp.; andthe remaining conventional gas supply is mainly in the • Fairborne Energy Trust.Western Canadian Sedimentary Basin (WCSB). Alberta has the most vibrant CBM activity in Canada. With gas demand rising at a rate of about 1.6% yearly, The coals available for exploration and development arehow does Canada supplement its conventional supplies to found in the Horseshoe Canyon, Belly River, Scollardkeep up? The answer relies heavily on developing uncon- (Ardley) and Mannville formations.ventional resources—the Fort McMurray oil sands, tightgas, shale gas and natural gas from coal—better known as HORSESHOE CANYONcoalbed methane (CBM). The Horseshoe Canyon formation is still the only commercial According to the 2001 resource assessment released by CBM play in Canada. It gained commerciality from a joint-ven-the Canadian Gas Potential Committee, Canada’s CBM ture project in 2002 between Quicksilver and EnCana (thenresources range between 500- and 700 trillion cubic feet of PanCanadian). There are more than 2,700 wells in thegas. The majority of that unconventional resource’s Horseshoe Canyon, of which 1,650 are producing an averagereserves are in the WCSB, with the Alberta foothills and of 150,000 cubic feet of gas a day.plains regions holding the largest amount of the CBM CBM production depends on the thickness of the coalreserves within the basin. seam.The Horseshoe Canyon contains Upper Cretaceous, In British Columbia, CBM isreferred to as coalbed gas (CBG), andthe resource there is still in the earlyexploratory stages. However, itshould be noted that once CBG pro-duction comes onstream, it willshake unconventional supplies andtake its place in the mix. Drilling for CBM in Alberta is cur-rently at its peak, mainly because ofhigh natural gas prices. Last year,some 3,000 CBM wells weredrilled—almost double the numberof the previous year’s well count. More than 2,500 CBM wells cur-rently are producing at an averagedaily rate of 140,000 cubic feet per day. Although there was a strong Note: 2004 Includes 692 re-completions.increase in CBM production, there Sources: CAPP and FirstEnergy Capital Corp.were no significant new entrantsinto the producers’ mix to develop Coalbed-methane wells drilled more than doubled in 2005, and more growth is projected.20 Canadian Energy Investment Opportunities • June 2006
  2. 2. C OA L B E D M E T H A N Elow permeability, almost fully dry coal. It has three coalzones: the Drumheller, the Carbon Thompson and theDaly-Weaver.The formation has an average coal thicknessof 1 to 2 meters, and is found at depths varying from 150to 800 meters. Along with the Horseshoe Canyon is the Belly River Group,containing the McKay, Taber and Lethbridge coal zones, withan average thickness ranging between 1 and 3 meters. Because the coals in the Horseshoe Canyon are dry, it isless expensive for producers to complete wells in the area,as they do not have to deal with water-disposal issues. Atypical well on average costs C$275,000 to drill and com-plete, with a rate of return of 35%-plus and a 1.5-year pay-out. The majority of wells in the Horseshoe Canyon arecompleted using vertical drilling techniques. The major players in Horseshoe Canyon are EnCana,Quicksilver, Apache, Fairborne, ConocoPhillips (through itsrecent acquisition of Burlington Resources), Canadian NaturalResources and various others. Because of its commercial success, the Canyon’s coal playis becoming saturated, so acquiring a piece of land in thatformation has become as pricey as drilling a new well in theless-developed Mannville. Although there are substantiallyhigh levels of gas available in the deeper areas of HorseshoeCanyon, the cost of the technologies to get the gas out doesnot support the economics for drilling at those depths.MANNVILLEThe Mannville contains Lower Cretaceous coals.The coalsfound closer to the plains have sub-bituminous to high-volatile bituminous coal ranks, while the thickest coal canbe found in the Red Deer area. Gates and Gething coals have ranks ranging from high-volatile bituminous to anthracite.The Mannville coal rangesin depth from 300 to more than 3,000 meters. The major geological characteristic of this zone is how wetits coals are—subsequently producing large amounts of waterbefore the gas is accessed. The Mannville group of coals has significant potential.Although the play to date is not commercial,the Trident/NexenInc.joint venture in the Corbett could soon change that.At theend of last year, there were about 230 wells drilled in theMannville,more than 110 of which now have production,aver-aging 75,000 cubic feet a day per well. Water production and disposal are the major issues holdingup commerciality in the Mannville. Drilling there has histor-ically been completed using vertical technology. A smallnumber of companies, however, have realized the need for atechnological shift, essential for commercializing that play,and have turned their attention to drilling horizontal wells.To date, fewer than 40 such wells have been drilled. While the Mannville is economic under vertical and hori-zontal drilling programs, based on analyses, more gas is pro-duced faster under the horizontal scheme and the payout isfaster within two years, compared with three to four years for See COALBED METHANE on pg. 43Oil and Gas Investor • www.oilandgasinvestor.com • June 2006 21
  3. 3. C OA L B E D M E T H A N ECOALBED METHANE, continued from pg. 21 commercial production from that formation. However, test wells have been drilled in the Ardley that show a greata vertical well. The cost for drilling a vertical well in recoverable potential. Another constraint for producers inMannville ranges from C$550,000 to C$800,000, while a that formation is freshwater production.horizontal well could cost from C$800,000 to more than The Ardley zone is the only CBM play where the industryC$1.5 million to drill and complete. players have adopted a wait-and-see attitude toward develop- The Mannville has proven to be economic with vertical ment. The geology of the Ardley coal zone makes it not onlyand horizontal drilling technologies. However, a smart pro- difficult, but also expensive for producers to explore there onducer with the right amount of capital from its investors a large scale.The fresh water produced in the area along withwould have better value for its investment by implement- the gas,creates an environmental headache that not many pro-ing a horizontal drilling program.This offers the possibility ducers are willing to approach, unless they obtain firm andto recover a high percentage of the in-place gas at higher decisive guidance from the regulators.rates, faster and economically. Nevertheless, the Ardley should not be entirely ruled out as Trident, in partnership with Nexen, announced in July a potential zone where CBM could be commercially produced.that the Mannville was commercial, based on the produc- As of the end of last year,about 20 wells had been drilled theretion results from their horizontal drilling program. with minimal production.Although the timing for full commercialization of the Where do we go from here? Looking at geopolitics, thisMannville coals is unknown, horizontal drilling is the most could be a great time for Canada’s oil and gas patch, particu-economic approach to take. larly CBM.While we may not see a sudden rush to explore the Ardley, we will, however, see a major shift in the Mannville,OTHER COALS beginning with a change from vertical to horizontal drilling,The Scollard formation is of Paleocene age and found at which may dramatically change gas outputs.depths between 300 and 600 meters. This formation iscomprised of four coal zones: Val dOr, Mynheer, Silkstone Bettina Pierre-Gilles is chief economist for Calgary-basedand Arbour.The area has low permeability,which may hinder Phasis Consulting. The CanOils Database® Want to Drill into Canada’s Oil & Gas Industry? Tracking the performance of the fast-changing Canadian energy scene just got a whole lot easier. The CanOils Database® gives you: • Timely coverage of all quoted Canadian oil & gas companies and trusts • Complete financial and operating data at your fingertips • Fast easy-to-use and powerful web-based software • Flexibility to customize your own reports and save formats for repeated use • Quality backed by Woodside’s 20-year reputation for data quality Outstanding functionality for: equity research, company benchmarking, acquisitions & divestures, industry-wide analysis, and strategic planning. The CanOils® service combines the high-quality company data of Calgary-based Woodside Research with the market-leading web software of London-based in- formation provider Evaluate Energy – all together in one powerful package. Find out how CanOils® can give you the edge in finding value in the Canadian oil & gas sector If anyone can help analyse Canada’s Energy Sector, CanOils® can! Call or Email today for a free demonstration! Contact John Shiry at 403-269 6003 Email: Info@ woodside.ca www.CanOils.com Evaluate Energy Woodside Research Ltd. “CanOils” and “The CanOils Database” are registered trademarks of Woodside Research Ltd. in both Canada and the United States of America.Oil and Gas Investor • www.oilandgasinvestor.com • June 2006 43

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