NR22 | Natural Resources Magazine | July/August 2010

VIVE LASHALE REVOLUVIVE LASHALE REVOLU

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When the CEO of Corridor Resources ordered an explorationdrill started near Elgin, N.B. in 1999, everything he’d studied aboutthe local geology told him he was going to tap into a huge reservoirof natural gas. But his confidence in the Will DeMille well wanedas the drill chewed though rock, rock and more rock. There weresome pockets of shale gas to be sure, but at the time, the technologydidn’t exist to tap into that source of natural gas.

“We considered the well a failure and plugged it,” Miller told agroup of Nova Scotia oil and gas players who gathered this springto toast him on his pending retirement from the business. “Weflared some gas from the shale, but the shale was not considered tobe a reservoir that was producible at that time.”

That was before the shale revolution which has quietly beenturning the world energy scene on its head.

Up until two to three years ago, the conventional wisdom wasthat the U.S. was running out of natural gas. People talked animat-edly about another energy crisis, and investors began developingplans to build multi-million-dollar terminals to import the liquefiedform from abroad.

All that has changed. With advances in horizontal drilling, 3-Dseismic imaging, and hydraulic fracturing (smashing) of rock,companies like Corridor can now tap into previously inaccessiblegas. It seems North America is awash in natural gas.

In June 2009, the Potential Gas Committee, a semi-official body,revised its estimate of the U.S. gas inventory, raising it 39 per centabove its assessment of just three years earlier. The biggest part ofthat boost came from higher estimates of shale gas, which,according to the Committee, now account for two-thirds of theU.S.’s technically recoverable reserves - enough to supply thecountry for 90 years.

Ken Chernin, an analyst with Jennings Capital in Halifax, haswatched the shale gas market unfold in Atlantic Canada, and acrossNorth America. He said there is little doubt the shift to shale gas isa “game changer” for the industry. “I recently heard someonesuggest shale gas will impact the gas industry with the same forcethe Internet has impacted communication. I agree with that assess-ment. I think it is going to be that big.”

Pioneered by small, independent U.S. producers such as MitchellEnergy (acquired in 2002 by Devon Energy for $3.5-billion), theshale gas industry has been bolstered and legitimized now that thebig players with deep pockets are elbowing their way into thesector, says Chernin.

In December 2009, ExxonMobil bought out XTO Energy Inc. in a$31-billion all-stock deal. France’s Total SA, the world’s fifth-largestoil and gas company, acquired a 25 per cent interest in Chesapeake’sBarnett shale assets in north Texas for $800-million cash and apromise to spend an additional $2.25-billion to gain new access todeep fields. Most recently, Royal Dutch Shell stepped up its interest ingas shale properties in May with a $4.7-billion purchase of EastResources, a privately held company with 650,000 acres under licencein the northeastern U.S.

“These are big companies paying out big money. These are thekinds of deals starting to make believers out of doubters,” saysChernin.

Talisman Energy Inc. is one of Canada’s biggest shale gas players,with projects in B.C., a million acres in Quebec, and a billion-dollarinvestment in Pennsylvania. But it has eyes for projects beyond NorthAmerica, too. It says it believes Europe represents an attractive market

Norm Miller thought he had a winner.

TIONTIONA TECHNOLOGY-DRIVENBOOM IN SHALE GASPRODUCTION HASROCKED THE INDUSTRY,REDUCING THE NEEDFOR IMPORTS ANDDRIVING DOWN PRICESBY STEVE PROCTOR

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for natural gas, and shale plays in Hungary,Germany, and Ukraine are already attractingsome big energy names.

Chernin believes there is significant oppor-tunity for the shale revolution to make animpact in Atlantic Canada as well. He pointsto Corridor’s success and two inde-pendent inventory reports. The firstreport indicates there are 1.9-trillion cubicmetres of natural gas trapped in a 300-metre-thick shale formation that begins two kilo-metres beneath the surface in the Sussex-Elginarea of New Brunswick. The second studyindicates there is a similar size amount of gastrapped in rocks in an area hugging the Bayof Fundy in Nova Scotia known asthe Windsor Block. That volume dwarfs the

output of any Canadian offshore oil project.“The whole of eastern Canada’s potential

is very exciting,” said Les Fyffe, directorof the geological surveys branch ofNew Brunswick’s Department of NaturalResources. “But the shale gas potential is theexciting part to New Brunswick.”

It has been exciting too for Miller. But onlyafter he watched shale gas technology evolvesouth of the border did he decide it was timeto take another look at old Willie. When hedid, he found the largest concentration ofshale gas in North America.

To bring this shale gas to commercialproduction, Corridor partnered last year withApache Canada Ltd., a subsidiary of ApacheCorp. of Houston. Apache has committed to

spend $25-million by June 2011 on landowned by Corridor in southern NewBrunswick. If the project is successful, it couldmean at least 5,000 wells over severaldecades, said Miller. No results expected until2011.

Other companies have tried to get into thelocal shale gas scene with less success.Triangle Petroleum of Calgary spent $32-million to drill several wells near Kennetcook,70 kilometres north of Halifax, but failed tofind anything of commercial value. It spentmonths looking unsuccessfully for a partner,and recently switched its focus to a project inNorth Dakota.

Still, others remain undeterred. SouthwestEnergy Company of Texas paid $50-million

NR24 | Natural Resources Magazine | July/August 2010

2010

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Shale Gas Not NewWhile only attracting significant attention over the past few years, natural gas has been produced from shaleformations in the Appalachian Mountains of the United States since the late 1800s. The initial oil discovery atNorman Wells in Canada’s Northwest Territories in 1920 involved oil flowing from fractured shale deposits thatwere later found to be connected to the underlying conventional oil pool. In southeast Alberta and southwestSaskatchewan, gas has been produced from the SecondWhite Speckled Shale for decades. Another example:the Antrim Shale in theMichigan Basin, which has produced shale gas since the late 1940s. In all of these earliercases, there was sufficient natural fracturing of the shale to allow economical recovery typically through shallowvertical wells producing at low rates over a long time.

Nation Energy Board Primer on Shale Gas, May 2009

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to the Government of New Brunswick in lateMarch for exclusive licences to search andconduct an exploration program coveringover 2.5-million acres). Forent Energy ofCalgary said recently it is ready to launch a$4-million assault on lands adjacent to theTriangle property in Nova Scotia, andPetroWorth Resources Inc. announced thisspring it was selling off its interests in severalAlberta natural gas wells to focus on itseastern Canadian properties in Nova Scotia,New Brunswick and Prince Edward Island.

Why has shale gas become so hot soquickly?

It is abundant in supply, it burns morecleanly than coal and with new drilling tech-nologies allowing extraction from more typesof rocks, it is cheaper than offshore oil.Boosters suggest it will not only reverseNorth Americans’ dependence on foreign oilimports, it could reduce the political muscleof energy-producing nations like Russia andVenezuela.

Extraction and processing could createthousands of jobs and its composition mightmake it easier for electricity generators toswitch from coal to gas. Plants that burn coalproduce about twice as much carbon dioxideas generators using gas.

“It’s low-carbon, it’s low-cost, and it’sabundant. It is the perfect bridge to a futureof alternative fuels,” said Chernin.

Not everyone views shale so optimistically.Shale gas is messy. Millions of gallons ofwater mixed with sand, hydrochloric acidand a stew of other toxic chemicals areblasted at the shale. Public fears about threatsto water sources has prompted the State ofNew York to impose a moratorium ondrilling at the immense multi-millionMarcellus shale gas deposit until it ensuresthe project won’t threaten water sources.

A U.S. congressional committee is investi-gating several drilling firms, including twoCanadian ones, over worries the methodsbeing used to find shale gas are contami-nating water supplies and the U.S.Environmental Protection Agency haslaunched a two-year, $1.9-million study thatwill shine a spotlight on possible dangers.

Energy consultant, Benjamin Schlesinger,president of Benjamin Schlesinger andAssociates, of Bethesda, Md., doubts the U.S.probes will hinder development of new shalegas plays in Atlantic Canada. He told theaudience at a recent oil and gas conference inHalifax that the problems with watercontamination are highly localized and in

areas where fracturing is being done inshallow locations. To date, the shale gasformations in Atlantic Canada that have beenexplored are much deeper than those in theUnited States, he said.

Some also worry shale gas might actuallyslow the transition to renewable energy. Itmay be harder to convince people to adoptmore expensive green technologies whenshale gas is cheap and plentiful and cleanerthan coal.

Even the low price can present as a double-edged sword. While it means growingdemand for natural gas from homeownersand businessmen, the return for the supplierand distributor is lower, making cash-inten-sive exploration and commercialization moredifficult, too.

Nothing is certain, but a 2009 NationalEnergy Board report hints that whileCanadian shale gas production is currently inthe experimental or early developmentalstages, the possibilities for the future arebright. “Shale gas may be a key component ofsupply that will allow Canada to sustain itsown domestic requirements for natural gasfar into the 21st century... It is even possiblethat shale gas could allow Canada to becomea net exporter of LNG.” | NRM

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