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Energy producers make $178-million bet on B.C. shale gas play

Amid a supply glut of natural gas, companies have slapped down a surprise $178-million bet in British Columbia on the long-term future of the commodity.

In the first significant spend in Western Canada this year, the money is for new exploration rights to the hot Horn River play in northeastern B.C.

While the surprise spending isn't a major reversal of the industry's funk, it does signal that energy producers still believe in long-term demand for natural gas, despite the crash in prices. And key players in the business are now convinced that politics will help underpin that demand, marketing the commodity's ample availability, and its locally sourced and cleaner nature, compared with coal or imported oil.

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Even with the unexpected haul for the provincial treasury, this year's take is way down: B.C. is on pace for an 80-per-cent decline in sales of new rights from last year's record and Alberta faces a similar slide, looking at its worst year since 1992. Saskatchewan is down 97 per cent from a record last year.

"[The decline]reflects the state of the industry," said Gregg Scott, president of Scott Land & Lease Ltd., a large land-acquisition consultancy.

Horn River epitomizes the problems of the present and the promise of the future. A shale play, it could be the largest gas discovery in Canadian history.

It is barely developed, but exploitation of similar geology in Texas and Louisiana is much further advanced.

Last year, a surge from those plays spiked gas supply in the United States by 7.1 per cent, the biggest such gain in decades. The volume of new supply was unforeseen. After a long plateau, most industry leaders and analysts believed there would be a peak and subsequent decline in production. The industry spent money on expensive liquefied natural gas facilities to import overseas gas.

The burst of additional supply then ran head-long into lower demand, as the recession sapped thirst for the fuel. The price sank so far that producers have been capping thousands of wells because they are not profitable at current prices. Supply has climbed another 2 per cent this year.

But even though low prices and ample supplies are hurting sellers of gas, new discoveries of vast reserves could be good news, said Peter Tertzakian, chief energy economist of ARC Financial and author of the new book The End of Energy Obesity .

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In recent years, tight supplies have led to acute price spikes, discouraging more widespread use of the fuel. If shale supplies are as ample as predicted, such swings might be quelled. The fuel is cleaner than coal and oil, and doesn't have to be shipped to North America from the Middle East, making the supply more secure - and keeping investment dollars closer to home. Gas is also usually relatively affordable, compared with oil.

These are all important political features that could see gas gain market share in electricity generation, Mr. Tertzakian said.

Industry groups - including the Canadian Association of Petroleum Producers - rushed yesterday to call gas "the fuel of the future," "clean-burning," and "sustainable," after a U.S. report this week suggested new shale gas fields could supply current American demand for 100 years at current consumption rates.

A lot more drilling has to be done to demonstrate the reserves are as large as suspected. Other issues, such as the environmental impact of new drilling techniques on the water supply, must also be resolved and could moderate the pace of development, said commodity price analyst Martin King of FirstEnergy Capital.

Mr. King projects prices will become much more reasonable in the next three years or so, with a ceiling of $7 (U.S.) to $9 per 1,000 cubic feet - far less than recent price spikes of $14 and $15, but still enough for sellers to make money.

For now, the current benchmark price of about $4 could fall - and the rest of the year looks bad for sellers of gas, Mr. King added.

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In B.C., the government celebrated yesterday's auction of Horn River rights as an endorsement of the region, even in a recession. But the energy world has changed, said Blair Lekstrom, the province's Energy Minister. Though B.C. once considered Alberta its chief rival, the government now sees Texas and Louisiana as the real competition when crafting policies to encourage business activity. Horn River producers have applied for a new ultralow royalty program, saying it's necessary because the region is remote and far from market.

"We look at all jurisdictions involved in this," Mr. Lekstrom said. "Our goal is to be the most competitive jurisdiction in North America," Mr. Lekstrom said.

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