Natural gas in shale

Northern B. C.'s Horn River basin 'an elephant'

Nathan Vanderklippe, Financial Post  Published: Saturday, June 07, 2008

VANCOUVER - Deep beneath the mosquito-swarmed muskeg 100 kilometres from the Northern British Columbia outpost of Fort Nelson lies a vast rock formation that geologists have known about for decades, if not centuries.

Locked inside the shale rock of the formation, called the Horn River basin, is a vast pool of natural gas with a twist. Unlike traditional deposits, where gas surges to the surface once a well bore gives it a way out, this gas moves so slowly through the rock that it has long been considered impossible to extract and, as a result, has been left alone.

But sometime in the early part of this decade, an exploration crew with EnCana Corp. poked through the shale as they drilled a hole meant to look for other resources. What they found -- a surprising amount of gas that, contrary to expectations, did rise to the surface -- set in motion a chain of events that would eventually pour billions into provincial coffers as energy companies snapped up more than a million acres of land in a gas play that, according to one analyst, "dwarfs" anything else in Canada today.

"There's no question it's an elephant," said Jim Artindale, the vice-president of EnCana's Fort Nelson business unit. "How big the elephant is, that's still to be determined. But it's an elephant."

According to B. C. government estimates, no more than 50 wells have been drilled in the basin, which has twice the surface area of metro Toronto, and how much gas could be trapped beneath the surface is a matter of active interest for the seven major companies working there.

So far, estimates range wildly, from a possible 100 trillion cubic feet of Horn River gas in place to as much as 600 trillion. Much of that will never leave the ground, since shale gas is not easily coaxed to the surface, but EnCana estimates the basin should produce about 30 trillion cubic feet of gas. That amounts to 50% of the current total proven natural-gas reserves in the rest of the country, enough to power Canada's entire gas needs for nearly a decade.

But if this is a Canadian elephant, there is no denying that at least some part of its birth took place thousands of kilometres away, in the hot plains around Fort Worth, Tex.

Not long before EnCana unleashed the gas flow in the wilds of B. C., a series of smaller U. S. companies were beginning to unlock gas from a remarkably similar rock formation called the Barnett Shale. That Texas shale has been called the largest onshore gas resource in the United States, and the technology developed to plumb its depths is being transplanted far north to the Horn River, a formation called "Canada's Barnett."

How similar are they?

"On a scale of one to 10, probably an eight," said Gerry de Leeuw, vice-president of exploration with Devon Corp., the largest gas producer in the Barnett. In fact, almost all of the top players in the Horn River also have significant positions in the Barnett. There are, however, a few key differences between the two.

Working against the Horn River is its remote location. Where Barnett gas literally flows from residential backyards, the Horn River is utterly remote, nestled alongside the Northwest Territories border.

Working for it is its size.

"The estimates people are talking about is that it could be twice the size of the Barnett in terms of the gas in place," Mr. Artindale said.

But can anyone get that gas to market and pull in a profit, too? Firms may have spent vast sums to pick up huge land positions, but this is a bet that has produced some nervousness.

"It's almost like a gold rush," said Mr. de Leeuw of the industry's push into shale gas. "But you have to be very careful you don't get stuck holding the Bre-X bag."

Even if the Horn River resource is genuine, there are other reasons for caution. Environmental groups in B. C. have already co-ordinated attacks on Royal Dutch Shell PLC, accusing it of turning the province into "Nigeria North" for its pursuit of coalbed methane deposits. Eric Swanson, the corporate campaigner for the Dogwood Initiative, said an unconventional gas deposit like Horn River, in a wetland area, also raises special concern.

"You have to drill more wells," he said. "And it's a bigger footprint. For every well pad you clear, and every pipeline and road, you start to see pretty significant cumulative environmental impacts, especially on traditionally harvested foods like moose."

Perhaps more importantly, the Horn River gas lies beneath Treaty 8 lands, whose B. C. members have in the past blockaded roads and ordered oil and gas workers from their lands. Concern is already rippling through Fort Nelson, whose First Nations people maintain such a strong enough connection to the land that some hunt moose and tan hides the traditional way, using the animal's brains.

Yet Laurie Montour, who served as the Fort Nelson First Nations' land manager until two weeks ago, says there are signs that industry, which could eventually drill more than 4,000 wells in the Horn River, is working to make peace with hunters. Last October, companies with land in the Horn River sent representatives for a round of "speed-dating" to get acquainted with the Fort Nelson chief and council, a first.

On Monday will come another first: a meeting between the First Nations, the companies and the B. C. Oil and Gas Commission designed to discuss "how do we have controlled, sustainable gas development while protecting the land and people's ability to be out on the land," Ms. Montour said.

Those discussions will no doubt highlight Horn River development plans the companies say are infused with environmental sensitivity. A key strategy is to use pad drilling, where multiple wells -- typically eight, but perhaps as many as 20 -- are drilled from one location, instead of multiple individually cleared spots.

"That really minimizes the impact," Mr. de Leeuw said. "Companies have come to-gether with the intention to do it right."

The fact that those measures lower costs makes them "a win-win for everybody," he said.

Costs, however, remain the largest issue confronting the Horn River. The gas appears to be there: One Apache test well test-flowed at a promising initial rate of 8.8 million cubic feet per day. But a typical well now costs $10-million to drill.

Companies need 12-month access to the basin to work economically, but the water-logged land cover has limited most work to winters, when it's accessible by ice road. The roads are so rough it takes four hours to drive the 100 kilometres from Fort Nelson, and the area's distance from markets also means that gas transportation costs alone are $1.50 a gigajoule greater for Horn River gas than the Barnett's supply.

Take those factors together and, as it stands today, Horn River gas is too expensive to extract. Companies ultimately hope they can profitably sell its gas with prices at $8 a gigajoule -- they are now near $13. But to do that, "we've got to put a development model together that we can put our hand on our heart and tell the board that we can effectively cut in half the cost of these wells," said John Crum, president of Apache Canada. "Otherwise, this is very tough to do."It's not an insurmountable obstacle. All-season access and increased drilling will cut costs significantly. The first major cost test will occur next winter, when EnCana and Apache, which have established a Horn River partnership, plan to significantly expand their efforts."If we're successful this year in terms of achieving economic [flow] rate targets … we might drill anywhere from 20 to 80 wells," said EnCana's Mr. Artindale.Other companies are planning more limited drilling programs, as they slowly move to measure the Horn River elephant. Few are predicting that Horn River will produce commercial quantities of gas within five years."I think we're a long way from calling this the Barnett," Mr. Crum said. But, he added, "We all hope it is."

nvanderklippe@nationalpost.com