Energy companies made their biggest bet on the long-term future of Canadian natural gas exploration since the credit crisis began in 2008, putting down $404-million to secure new land to hunt for shale gas in northeastern British Columbia.
The auction in B.C. Thursday was among the largest single sales of exploration land in Canadian history. The major investment indicates the industry has fully shaken off the malaise of the past two years, and is ready to invest in natural gas even though the current price has been depressed because of ample current supplies.
"There's a lot more confidence - you can see it just walking around town," said Brian Lavergne, chief executive officer of Calgary's Storm Exploration Inc., which was active in northeastern B.C. before selling to ARC Energy Trust. He's starting a new company focused on B.C.'s Horn River basin, a hub of much of the latest excitement.
"It's night and day," said Brad Turner, president of Britt Land Services, a broker who was active in Thursday's sale on behalf of energy sector buyers. "Last year, there was no new capital. This year is completely different: We have money, positive cash flow, oil prices are high, we think gas will come back and the technology is good."
Shale gas - natural gas trapped in tight rock that is difficult to recover - has sparked a revolution in the energy business by unlocking vast new supplies. For a time, supply swamped demand, but this year the pace of supply growth has slowed considerably due to low prices.
Gas supply in the United States has risen only 1 per cent this year, according to data compiled by the U.S. Energy Information Administration, far slower than the stunning growth rates of as much as 9 per cent recorded in 2008, the fastest in decades, when the first widespread flush of shale gas gushed out of the ground.
So while the current price of gas leaves many potential wells unprofitable, the industry is betting the situation will eventually change, perhaps quickly. FirstEnergy Capital Corp. estimates that American gas supply will fall this year, just as demand in sectors such as electricity generation climbs.
Longer term, moves such as Environment Minister Jim Prentice's call this week to phase out coal-fired electricity generation in favour of sources such as natural gas are also weighed by companies making long-term wagers on natural gas.
"It's not the gas price in the here and now but the future, and elevated demand," said analyst Robert Fitzmartyn of FirstEnergy.
What's also coming together in remote and rugged northeastern B.C. is infrastructure to handle all the predicted action from potentially wildly prolific fields like the Horn River. Roads are being built, pipeline capacity is increasing and gas processing facilities are being constructed and expanded.
Just this month, Spectra Energy Corp. announced a new gas processing plant to open in 2011, part of $1.5-billion the company has spent in the region.
The $404-million spent by energy players on Thursday is a welcome injection into the B.C. treasury and triples this year's take from land sales to $609-million. The province had estimated about $250-million would be spent in the auction.
"We were all surprised we were high as it is. It's a good signal to us the industry has lots of confidence in the province," said Energy Minister Bill Bennett, who added that companies are preparing territory to increase future production in anticipation of higher prices.
The shale gas revolution has also migrated to Alberta, where the first stampede occurred in December, when $384-million was spent at a single sale. In 2010 so far, $838-million has come into the treasury, much of it from companies looking to stake out emerging shale plays.
Such exploration rights money is bright news for provinces dealing with deficits. On Thursday, Alberta announced that its 2009-10 deficit was only $1-billion, far lower than the predicted $4.7-billion. A big boost was the $854-million of land sales cash in the last four months of the fiscal year that ended March 31.
The good news has spread to Saskatchewan, too, but for oil. Interest in the Bakken oil field in the southeastern region of the province has reignited, with land sales this year bringing in $276-million, more than double the $118-million in all of last year, though much lower than the record $1.12-billion in 2008.
In B.C., there was a mad rush to secure shale gas territory before the credit crisis triggered the economic meltdown of 2008, with companies spending an astounding $1.55-billion in three auctions in May, July and August of that year. The total for the year was a record $2.26-billion.
With files from Nathan VanderKlippe