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Defying Convention
Vol. 9 Issue 5 - June 2005
by Tom Maloney
Unconventional.
That one word says it all. On the cover of the annual report EnCana Corporation issued this April, printed in large green and blue letters against a starkly black background, it virtually shouts the companys vision of the future.
When it comes to North American gas and oil, the future really is unconventional, CEO Gwyn Morgan told shareholders at the annual meeting in Calgary, noting 75% of sales from continuing operations will come from so-called unconventional sources.
Unconventional? Its such a strikingly odd word for a company from Calgarys conservative oilpatch to adopt as a mission, a mantra. Yet with worldwide demand showing no more sign of backing down than Fort McMurray real estate, traditional reserves declining and prices reflecting the situation, Morgan believes the timing is right.
Energy industry companies large and small are looking to previously uneconomic reserves to meet the demands of a persistently hungry world. Tapping them demands new methods, new technology, new thinking.
Ken Sinclair of Canadian Spirit Resources Inc. personifies this new direction of the oilpatch. In 1992, with Albertas coalbed methane sector in its infancy, he founded the Canadian Coalbed Methane Forum. The consortium started with 13 oil and gas producers and later evolved into the Canadian Society for Unconventional Gas.
For some 30 years he toiled for oilpatch consultants like TerraTek Inc. and Sproule Associates Limited as a scientist, recommending for or against coalbed methane gas plays. Sometimes the clients listened, other times not.
Now its his company, his turn to roll the dice, his ultimate responsibility. At first working out of a garage, Sinclair partnered with president Phil Geiger to launch Canadian Spirit Resources Inc. three years ago. The companys fortunes rest primarily on a pilot coalbed methane project in northeastern B.C. Will their gamble pay off? Faithful investors have bet some $30 million on it.
No question, Im in the right place, says Sinclair, vice-president of business development for the Calgary-based company. Very simply, I want to make myself a lot of money, rather than a lot of money for other people.
Canadian Spirit and dozens of companies like it are dedicated to the new wave of Albertas energy, unconventional gas so-called because its tougher to reach. The unconventional reserves are lurking in coalbeds, deep deposits, tight sands, fractured shale and a sub-Arctic phenomenon known as methyl hydrates.
In the Western Canada Sedimentary Basin alone, proven conventional gas reserves dropped to 54.9 trillion cubic feet (tcf) in 2003 from 56.2 tcf a year earlier in spite of a feverish, record-setting pace for exploration. In the words of John King, senior vice-president of Technology Services at Precision Drilling, producers are running to catch up.
Explorers drilled a record number of wells in 2003, and again in 2004. Assuming projections come true, another 17,000 record wells will puncture Canadian soil this year, the majority in Alberta which produces 80% of the countrys natural gas.
Western Canada isnt running out of gas so much as running out of easily procured gas. Ending are the eureka days of drilling an inexpensive shallow well to tap into enormous pools. So, while it costs exponentially more money to drill unconventional wells, companies ranging in size and wherewithal are undertaking the risks with a common gusto.
Unconventional gas makes up about 9% of output in Canada, compared with nearly one-third of production in the United States. Because of geological differences, explorers caution the gap wont be closed automatically. Still, the optimism is palpable in voices ranging from the Morgans to the Sinclairs.
Theres still tremendous initiative in the U.S. but Americans went through the Hubbert Curve 18 years ago, says King. The world is moving north now.
Some companies are going into largely unexplored basins, while others return to sites which have produced oil and gas in the past from conventional reserves. On the Western Canada Sedimentary Basin, Canadian Hunter Exploration Ltd. pioneered the notion of turning formerly productive fields into rediscoveries. Wringing the sponge, if you will.
Ron Hietala, now president of a fledgling Calgary company, Golden Eagle Energy Ltd., cut his teeth with Canadian Hunter as vice-president of Technical Services. Sitting in a Calgary downtown office jammed with maps, charts and reports, the petrophysicist scrawls a resource triangle on a notepad. Depicted at the triangles peak is the reservoir of conventional gas. The wider area below represents coalbed methane, wider still are gas from shale tight gas, and methyl hydrates.
As you go down further in the triangle, the reservoir gets tougher and tougher to crack, but the base amount of gas gets larger and larger, says Hietala. Where were operating to date is really only in the top part of the triangle. What drives the ability to move down are two factors: technology and price. Youve got to have the technology and money together to be able to push down.
Coalbed methane (CBM) represents the current strata on the resources triangle. MGV Energy Inc. began testing quietly for CBM in the late 1990s and today, it rivals EnCana in Alberta for commercial production.
Its a different kind of wildcatting, says Mike Gatens, president of MGV Energy and chairman of the Canadian Society for Unconventional Gas (CSUG). Traditionally the explorationist went looking for the needle in a haystack. These unconventional deposits are quite often thick and continuous over vast areas, and the locations are well understood. The wildcatting element is in finding areas with a known accumulation, where the right combination of property access, technology and cost all come together to make a project economically feasible.
The onus is on the engineers, geologists and petrophysicists to figure out reams of increasingly sophisticated seismic results. The new buzzwords in the oilpatch are formation evaluation can enough gas squeeze through hairline fractures of coal to justify millions of dollars in well piloting?
When it comes to unconventional gas, scientists and executives alike have embraced the grassroots entrepreneurial spirit of days bygone. All the juniors and intermediates are doing unconventional gas wells, says Sinclair. Most multinationals are still doing the big, bad and beautiful. If they find out theyre wrong, well make perfect acquisition candidates.
While the stock market casts some doubt on Canadian Spirits potential, yanking down the share price on the TSX Venture Exchange from $6.90 in early February to $3.90 in a span of three months, Sinclair says its all about patience. In the Farrell Creek area, the company has found a huge resource of natural gas, documented by Sproule Associates to be in the 400 to 600 billion cubic foot range. Question now is, can it be removed efficiently?
Were spending a lot of money on technology so we can build on a sound base, Sinclair says. All our homework is done, and were taking our time so when we get to the commercial stage, everything will be set up Were a high-risk company with high-risk investors. At the end of the day, well see if we were right.
As for EnCana whose annual report heralds the new direction of the patch it vaulted over a pair of multinationals last year to become the number-one producer of natural gas in North America. Says CEO Gwyn Morgan, We havent just gotten bigger, we believe weve gotten better through unconventional thinking. 
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