Drill rights auctioned for record $418 million
A single, massive gas field may be at the heart of this week's auction frenzy
Scott Simpson, with a file from Craig MacInnes
Vancouver Sun
Friday » September 12 » 2003
Single sale of exploration rights pushes B.C.'s annual oil and gas revenue to new heights. (See hardcopy for illustration)
B.C.'s robust natural gas sector lifted the province to a Canadian record this week, putting $418.7 million into government coffers with a spectacular monthly auction for gas and oil rights on Crown land in the northeast corner of the province.
That is more than three times the previous record for a single monthly auction for gas rights in B.C., and about 14 times average B.C. monthly sales of rights to companies that want to drill for natural gas and oil in the fossil fuel-rich northeast.
Companies paid record amounts for potential gas deposits deep beneath 187,000 hectares of land in the Rocky Mountain foothills in the Fort St. John and Dawson Creek areas.
In fact, the energy and mines ministry raked in three times the single largest sale profit ever recorded in neighbouring oil-rich Alberta, the former champion.
"Boy, is it nice to get some good news," Premier Gordon Campbell said Thursday, a day after the auction closed. "It's absolutely great news for everyone.
"In this one month alone, we have achieved oil and gas right sales that are equal to the previous record for an entire fiscal year.
"This is exceptionally good news, particularly at this time, and a powerful indication that the tax, regulatory and land-use reforms we've made are working."
Industry lobbyists echoed the premier's boast, agreeing that exploration interest is shifting to B.C. because of the provincial government's actions.
"It is record-breaking beyond all means," said Greg Stringham, vice-president with the Canadian Association of Petroleum Producers.
B.C.'s two previous best sales were $125 million in February 2001, when companies swarmed all over the vast Ladyfern gas deposit northeast of Fort St. John, and $60 million in March 2002.
Stringham said it is possible that a single, massive gas field may be at the heart of the activity.
Stringham said the auction underscores B.C.'s growing clout in the petroleum industry, and its increasing competitiveness with the nation's oil baron, Alberta.
In 1997, Alberta made six times as much money as B.C. from the sale of gas and oil rights, falling to less than double B.C.'s total in 2002.
Stringham said that this year, B.C. and Alberta are neck-and-neck.
One of the reasons for B.C.'s growth is that Alberta's gas resources are relatively mature while B.C.'s are still largely unexplored.
"B.C. has fresh new areas, some hot areas, and also the potential for some big finds of natural gas," Stringham said.
"I give full credit here to the B.C. government. Over the last couple of years they have been working on a number of initiatives to become competitive with Alberta, and globally.
"They've done quite a few things, regulatory reforms, improved royalties for deep gas, new roads and infrastructure, a new pipeline, all culminating in their oil and gas strategy last spring.
"That really was the icing on the cake that caused producers to look seriously at some of these deeper areas in B.C."
It wasn't immediately apparent which company or companies were behind the bids -- third-party companies frequently act as agents for drilling companies at the auctions in order to preserve their anonymity and mask their activities from scrutiny by rivals.
Nor were drilling companies contacted by The Vancouver Sun willing to speculate on who may have been behind the purchases.
Companies active in northeastern B.C. include Encana, Anadarko, Apache, Canadian Natural Resources, Burlington and Talisman.
Government bidding records show that several third-party companies accounted for the successful bids.
It's not expected that the successful bidder or bidders will remain in the shadows for long, given the need to recover the massive payments to the government.
Unless they announce in the near future their acquisitions, they'll come forward when they apply to the B.C. Oil and Gas Commission for licences to build roads and pipelines, and commence drilling.
In the meantime, speculation will be rampant and could have a buoyant impact on share prices for the potential bidders.
Martin King, an analyst with First Energy Capital Corporation in Calgary, expects drilling company interest in B.C. to remain strong in the coming months.
"I'd say the over-all trend, in terms of interest, is certainly going to persist," King said. "Now, whether they will keep paying those kinds of prices is a bit more debatable."
He expects Alberta to surpass B.C. in gas and oil rights sales by the end of the year, but says B.C. can expect its earnings from gas and oil resources will continue to grow -- particularly while natural gas prices remain high.
"Companies are out there thinking about what kind of price they are going to fetch for natural gas in the next couple of years and the consensus is that it's going to be something north of $4 US, maybe $4.50, $4.75 [per million British thermal units].
"They're looking at that, thinking the economics make sense to go in, drill for gas and hope they find something.
"Obviously the high prices for natural gas have gotten these guys to pay up and the winner is the B.C. government."
The previous record of $126 million came in February 2001, as companies scrambled for rights at the edges of the Ladyfern "elephant" gas field.
In all, the province this week sold gas and oil rights to 187,000 hectares of land, 180,000 of which was in a single target area and accounted for about $410 million of the total amount.
The price paid per hectare was a record as well -- $2,322 per hectare compared to a recent average of $436 per hectare. In some cases, the parcels drawing the big bids exceeded $4,000 per hectare.
Almost all the bids were for land in a single Rocky Mountain foothills area between Chetwynd and Dawson Creek, south of Fort St. John and north of Tumbler Ridge.
The area is expected to yield what the industry calls "deep, tight gas" that would have been beyond the reach of drilling technology only a decade ago.
The gas is suspected to reside at depths between 2,500 and 3,000 metres, and won't support the short, fast bonanza that characterized Ladyfern.
Instead, it's going to provide slow, steady output that will provide a sustained return that could last for decades.
Only recently has the industry developed the technology necessary to make this type of drilling economic.
The government instituted in May a new royalty system that encourages drilling of deep wells in mountainous areas, low-productivity wells, summer wells and recovery of natural gas trapped in coal seams.
Those type of wells had not been considered economically feasible before the royalty changes, the government said.
"This is a sector that is brimming with confidence and booming with activity, which is paying off in excellent revenue and job growth," said Minister of Energy and Mines Richard Neufeld.
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