Wells of fortune

Calgary oilman Mike Graham remembers the summer of 2003 in B.C. Forest fires were consuming half the province and threatened the city of Kelowna; it was the worst forest fire season on record. The provincial government’s bill for fighting all the fires was nearly $400 million – more than double the cost of the previous worst season, 1998.

That catastrophe is seared in Graham’s memory because at the time his company, EnCana Corp. (ECA-T), was putting together what would be the biggest purchase of oil and gas leases and drilling permits in B.C.’s history. With the costly 2003 forest fire season winding down, the September sale of oil and gas leases in northeast B.C. brought in $418 million – most of it paid by EnCana.
Presto, B.C.’s entire forest fire bill was covered, leaving money in the bank.

“I’ve thought of that many times,” Graham recalls with a chuckle. As executive vice-president of EnCana and president of the company’s Canadian Foothills Division, he has been the driving force behind the company’s B.C. exploration programs. EnCana’s bidding policy on leases and drilling permits is to make a big splash: acquiring rights that cover entire townships, rather than a section here and a section there. “It was a huge undertaking,” he says, “and a huge amount of money went into the B.C. coffers just when the forest fires were burning around Kelowna.”

That September 2003 lease sale started a resource boom the like of which this province has never seen before – so much so that, increasingly, the world’s energy giants look to B.C. rather than Alberta for their next Canadian natural gas bonanza. Geologists in Houston and Tulsa, as well as Calgary, are now studying maps of B.C., and since EnCana’s bold entry in the province, the hunt has been joined by Royal Dutch Shell (RDS.A), Exxon Mobil (XOM-N), Talisman (TLM-T), EOG Resources (EOG-N), Apache Corporation, Murphy Oil (MUR-N) and a host of other mid-sized and smaller companies. They’re all betting that B.C. is the next hot spot for natural gas on this continent – and pumping billions of dollars into the economy at a time when the traditional resource engine, forestry, is on the ropes. For the last few years, natural gas royalties have pumped considerably more money into Victoria’s coffers than stumpage fees from trees harvested – and that trend is likely to continue.

In the first eight months of 2008, the $418-million record was broken three times: first in May with a $441-million lease sale, then again in July with a $610-million lease sale and again in August with a $501-million lease sale. In total, the province had already collected $2.08 billion from the industry for leases and permits by the end of August, with four more monthly auctions still to come; by year’s end, these lease sales, combined with the annual royalties paid by natural gas and oil producers, are expected to put B.C.’s petroleum revenues for 2008 somewhere just under $3 billion. To further cement the comparison, B.C.’s lease sales for 2008 have blown Alberta – with only $744 million by the end of August – out of the water.

The sale of petroleum leases and drilling permits points to the future. Companies lay out all that money – and it’s pure gravy for the province – for nothing more than the right to explore for oil and gas, and drill holes to test out the formations. If the oil companies don’t find anything, too bad. There are no refunds. But it is a well-educated gamble for the players, and the odds are that B.C.’s natural gas production – currently at about 3.8 billion cubic feet a day (compared with Alberta’s 14.2 billion cubic feet a day) – will increase significantly.

“There’s a good chance that within the next five to 10 years B.C.’s gas production will exceed Alberta’s gas production,” says Dave Pryce, Western Canada vice-president with the Calgary-based Canadian Association of Petroleum Producers (CAPP). “Alberta has been producing gas at a high rate for a number of years, and it is a challenge to maintain it. B.C. represents the growth potential for Canada.”

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