Natural gas firms see oil production as solution to low prices

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Faced with prices that could remain mired at low levels for another three years, a growing number of natural gas companies are working to boost oil production, using technology perfected in new gas fields to discover new volumes of crude.

The pursuit of natural gas has also brought companies into areas that, they are now discovering, contain oil that could also be extracted, making new shale gas plays even more lucrative.

In the Horn River, a massive northeastern B.C. pool of gas that lies buried roughly three kilometres underground, at least one company is laying plans to drill into a deposit of oil that lies above the gas, at 1,500 metres below the surface.

Quicksilver Resources Inc., a mid-sized natural gas company with just over 50,000 hectares in the Horn River, has discovered areas of what it calls "significant mobile oil saturation" in a rock formation known as the Exshaw/Bakken.

The company found the oil as it drilled to the gas below; it is now planning a horizontal well that will directly tap into that oil to assess its viability later this year.

Other companies with land in the area have not been outspoken about oil potential there; Encana Corp. chief executive officer Randy Eresman said Wednesday that the company is not currently pursuing crude in the area.

"We don't have any wells in it," he said at the TD Newcrest Unconventional Oil & Gas Forum, being held in Calgary this week.

But Quicksilver chairman Toby Darden said the oil exists across the company's entire Horn River lease - and likely across those leases owned by others in the Horn River as well, including Encana, Apache Corp. and EOG Resources Inc.

While he warned that the first test well "will be somewhat rudimentary and not very glamorous and probably won't knock the tops off the rooftops," he said the oil could boost the viability of a play that, while it has extraordinary gas reserves, lies far from markets.

"It has the potential to enhance economics," he said. "We are excited to test it."

The search for oil could reshape those purely gas-focused companies that have emerged to develop North America's new shale deposits. Massive deposits in Texas, Louisiana, Pennsylvania and B.C. have both revolutionized industry's supply expectations and created worries about a glut that have helped sink gas prices, especially relative to crude.

A thousand cubic feet of natural gas contains roughly one-sixth the energy equivalent of a barrel of oil. But oil is currently trading at a level nearly 18 times higher than gas. That disparity has already created much change: companies with oil lands are diverting their capital into crude - and even gas companies are moving away from so-called "dry gas," and toward deposits that also contain natural gas liquids, which are priced nearer oil.

Those moves have been motivated by a belief that there is little reason for a quick gas recovery.

"We believe gas prices are going to be bound at $4.50 [U.S. per thousand cubic feet]for the next three years," Mr. Darden said.

And while Encana said Wednesday that it has had so much success in one of its three main plays, B.C.'s Montney, that it can now make a profit with gas at $3.15, much of the industry loses money at prices below $5 to $6.

But what both Quicksilver and Chesapeake Energy Corp., one of the top three gas producers in the U.S., are discovering is that the technology used to unlock shale gas can also pay huge dividends in oil. Chesapeake, for example, recently announced that it purchased more than 200,000 hectares in the Eagleford play in Texas, on land that contains oil shales.

"We've utilized our play identification skills and our leasehold acquisition skills to quickly build out a position there, and there are other areas where were doing that as well," said Jeffrey Mobley, Chesapeake's senior vice-president of investor relations and research.

Only 9 per cent of the company's production is currently in non-gas form; by 2012, it expects to boost that to 15 to 20 per cent.

In part, it is counting on its technological abilities to get it there. Oil shales, for example, have long bedevilled industry as incredibly difficult sources of crude to develop.

But, Mr. Mobley said, "our industry is on the verge of being able to apply the skills that we've learned in developing dry gas shale plays to identify areas where you can get oil, which is a much bigger molecule, to flow."