Gas industry sees coal-bed methane as the next frontier, Production could quadruple by 2006

Gas industry sees coal-bed methane as the next frontier, Production could quadruple by 2006 by Dave Ebner, January 10, 2005, Page B4, The Globe and Mail
CALGARY — Coal-bed methane will leap to prominence in Canada this year, energy industry players say, with about one in every eight wells drilled in the country hunting for natural gas trapped in seams of coal. “It is the largest untapped natural gas opportunity in North America,” said analyst Nick Rontogiannis of TD Securities Inc. in a recent report about coal-bed methane’s “coming of age” in Western Canada. Coal-bed methane — methane is the primary component of natural gas — is what’s called an unconventional source of gas, requiring greater technical acumen and higher natural gas prices to justify exploration over conventional gas. And while companies in the United States have drilled for coal-bed methane for more than a decade, efforts in Canada have only begun in the past couple of years.

Production of coal-bed methane could quadruple by 2006, according to the National Energy Board, reaching about 400 million cubic feet a day, up from about 100 million cubic feet a day at present. Still, even with the jump, the figure will be only about 2 per cent of all the natural gas produced in Canada. But it is the potential size of the prize that has companies such as EnCana Corp., Apache Canada Ltd. and MGV Energy Inc. chasing the opportunity. Proven reserves of conventional gas in Canada stood at 56.5 trillion cubic feet at the end of 2003, according to the Canadian Association of Petroleum Producers. Estimates suggest there is at least that much coal-bed methane that can be economically extracted. “Producers will continue to migrate toward a focus on unconventional natural gas opportunities, in which Canadian coal-bed methane will be a core focus,” analyst Andrew Potter of CIBC World Markets Inc. said in a December report. Looking at how unconventional exploration evolved in the United States, Mr. Potter predicted that the next big hunt will be for so-called shale gas. This is natural gas contained within predominately fine-grained rocks, mostly shale. “You’ve got a lot of [coal-bed methane] projects that are in the early exploration and evaluation phases,” said Michael Gatens, chairman of the Canadian Society for Unconventional Gas and head of MGV Energy, the domestic arm of Fort Worth, Tex.-based Quicksilver Resources Inc.

Coal-bed methane, however, is not without controversy. In many areas, coal is saturated with water, demanding that the water be extracted before gas production can reach optimal levels. The handling and disposal of the water — and the impact on underground aquifers — has raised alarm bells among environmentalists. It’s a hot issue in southeastern British Columbia, where the provincial government is trying to encourage major coal-bed methane development.

In Alberta, water is less of a problem. The coal in the Horseshoe Canyon geological formation — where Canada’s only coal-bed methane production is happening right now — is mostly dry. But extracting gas from the promising Mannville group of coals, where commercial production could begin soon, would generate copious amounts of saline water. The sheer number of coal-bed methane wells is also a worry. Economical extraction can require many more wells than conventional exploration. There are about 150,000 producing oil and gas wells in Alberta at present and the National Energy Board has predicted that as many as 50,000 coal-bed methane wells could be drilled on the Horseshoe Canyon play. Mary Griffiths, an environmental policy analyst at the Alberta-based Pembina Institute for Appropriate Development, said the province has strong regulations in place for things such as water but she is worried the rules don’t consider the potential long-term repercussions of coal-bed methane. “The cumulative impact of a large number of wells should be subject to some sort of environmental assessment,” she said.

The Petroleum Services Association of Canada has predicted 24,035 wells will be drilled in the country in 2005, up from 22,160 in 2004. The entire gain is a result of the predicted increase in drilling for coal-bed methane, 3,000 wells this year — one of every eight wells — compared with 1,000 wells last year, one of every 20 wells. Such an increase in drilling is great news for drillers, Peters & Co. Ltd. said in a report last month, declaring that coal-bed methane “could represent the biggest growth opportunity” for the oil patch service sector. Growth of gas production in Canada is also entirely dependent on coal-bed methane, the NEB said in November. It sees gas production of 16.9 billion cubic feet a day in 2006, up 300 million cubic feet from 2003 — all of the advance coming from coal-bed methane.

Ms. Griffiths is part of discussions being co-ordinated by Alberta’s Department of Environment and Department of Energy. The government wants to put together a wide-ranging report on coal-bed methane. The water issue is being considered, as well as the impact on land and air. Other matters such as royalties and tenure — the subsurface mineral rights — are also being discussed. The report is supposed to be published in June or July. Mr. Gatens is also part of the talks. He said it was unfair to suggest that coal-bed methane requires significantly more drilling than conventional gas. While in the past one well per section of land (256 hectares) was typical for natural gas drilling, today several wells per section are often drilled to recover conventional gas. Coal-bed methane recovery typically requires four wells per section and some times upwards of eight. Coal-bed methane has taken off in the United States, where it accounts for close to 10 per cent of all natural gas produced. The industry was supported by tax incentives until the early 1990s, which roughly equalled $1 (U.S.) per thousand cubic feet, enormously helpful when the price of gas was generally less than $2 before rising in the past five years. Analysts suggest coal-bed methane only makes sense to pursue with a gas price higher than $3 or $4. The benchmark spot price of gas on the New York Mercantile Exchange has barely traded for less than $5 in the past two years. The prospects for coal-bed methane have ignited excitement among some investors. While the projects are often small parts of large companies such as EnCana, coal-bed methane is the sole focus of upstart Canadian Spirit Resources Inc. The company has gas but no production and plans a pilot drilling project this year on its land in northeastern B.C. [Emphasis added]

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