Horn River, Montney shale plays create interest in western Canada

The Horn River Basin is not a household name and neither are the subsurface shale formations in that part of western Canada. However, geologists and others in the oil and gas community will tell you the formation is the third-largest natural gas accumulation in North America with gas-in-place volumes estimated at about 500 trillion cubic feet.

The Horn River formation is composed of argillaceous bituminous limestone and dark siliceous and calcareous shale. Shale gas is produced from the siliceous shale in northeastern British Columbia and in the Northwest Territories where it outcrops. Horizontal drilling and fracturing techniques are used to extract the gas from the low-permeability shales. The shale reaches a maximum thickness of just over 1,000 feet in the Fort Nelson area.

Companies currently operating in the Horn River Shale formation include Encana Corp., Apache Corp., Devon Energy, ExxonMobil, Quicksilver Resources, Murphy Oil, Nexen, Talisman, and Stone Mountain Resources.

Other shale formations in this area of western Canada include the Montney Shale, just south of the Horn River Shale formation; the Exshaw Shale formation; and the Cardium Shale formation. Other subsets include the Duvernay, which is associated with the Montney, and the Liard and Cordova shale formations, which are found in the same general area as the Horn River Shale.

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Encana, which had been planning to jointly develop its Canadian natural gas plays with a deep-pockets investor but dropped its potential 50/50 joint venture with PetroChina Co. Ltd. in British Columbia and Alberta in June, said in September that it is selling off certain upstream and midstream assets in the Horn River Basin and other areas in western Canada. Encana holds acreage in several Canadian gas resources plays, including the Bighorn Deep Basin in western Alberta, the Cutbank Ridge and Greater Sierra in British Columbia, and coalbed methane assets in central and southern Alberta. The company is also selling assets in the United States, including a recent $590 million sale of a portion of its Piceance natural gas midstream assets in Colorado. Encana says it has additional divestiture processes underway. Randy Eresman, Encana president and CEO, says he hopes to close on all the transactions by year-end, and the company will use the proceeds to strengthen the company's balance sheet going into 2012.

With the US taking smaller volumes of natural gas from Canada due to its own extensive development of domestic shale resources, Canada is looking to the Far East as a potential market. The huge new Kitimat LNG project, under construction on the coast of British Columbia, is owned jointly by EOG Resources, Encana, and Apache Canada Ltd. The three companies hope to export their gas in the form of LNG to the Eastern Hemisphere by 2015, giving a boost to continued development of Canadian shale gas, such as the Horn River and Montney.

In late July, Canada's Talisman reported it was spending $510 million on increasing its position in the Duvernay Shale play in Alberta by 255,000 acres. So far this year, Talisman has been a major seller after monetizing positions in the Montney Shale to South African company Sasol Limited. The fact that Talisman chose to invest part of the funds into the Duvernay Shale indicates that this area may be the next major shale play to emerge in Canada following the success of the Montney and Horn River plays in British Columbia.

The potential of the Duvernay Shale had already led to a record land sale for Alberta in March with $842 million in revenues. The acquisition was at a cost of $2,000 per acre, which is high for an unproven play. However, with the Duvernay play rich in liquids and recent assets in the Eagle Ford Shale in South Texas selling for more than $20,000 per acre, it could prove yet to be a very desirable entry price for Talisman.

In June, Canadian natural gas company Progress Energy Resources Corp. agreed to sell 50% of its working interest in "certain British Columbia shale assets" to Malaysian national oil company, Petronas, for $1.1 billion. As part of the agreement, the two companies will create a partnership to develop a portion of Progress's Montney Shale assets. The JV covers 150,000 gross acres with an estimated gas resource of more than 15 tcf.

As part of the acquisition, Petronas and Progress have agreed to establish an LNG export joint venture to be owned 80% and 20%, respectively, to conduct a feasibility study on the economic viability of an integrated LNG export facility in western Canada. Petronas would serve as operator, and the two companies would jointly market the LNG.

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