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Alberta’s Duvernay enters the spotlight

Play could rival BC’s Horn River; Encana, Chevron among firms building a presence

BY ANY standards, the Devonian shale of northwestern Alberta is worthy of the growing attention it is receiving. It covers double the land area of British Columbia’s (BC) prolific Horn River basin, underlies 10 commercial plays, has pay zones that are 100-200 feet thick and has attracted government land-sale revenues in the hundreds of millions of dollars over the past two years.

But the enormous untapped potential of the Duvernay, at depths of 6,000-12,000 feet, has lain dormant, while shallower opportunities elsewhere in the province have been exploited.

And it could remain a sleeping giant for some time to come, while it awaits the release of a new regulatory framework from the Alberta Energy Resources Conservation Board (ERCB) and the likely concentration by explorers to study the shallow Colorado Group shales and Mannville coals, which Ziff Energy Group, a consultancy, views as having the best potential as Alberta’s next big unconventional plays.

But that does not detract from the growing, yet coy presence in the Duvernay of such big gas players as Encana and Chevron.

Encana has teased observers over recent months with hints of an acreage position that executive vice-president Mike Graham says is large and “very material” to the company and has already demonstrated “significant liquids potential”. He won’t say how much land Encana holds or what it paid for the acquisitions beyond acknowledging that 2010 was a “pretty good year to buy land in Canada”. Encana added an across-the-board total of 0.5m net acres for about C$650 ($669) an acre.

Encana chief executive Randy Eresman fired up intrigue last year when analysts said they were eager to learn more about Encana’s shale activities and he offered a terse: “And so you should be.” And the company raised the interest level earlier this year with its C$5.4bn joint-venture deal with PetroChina, primarily concentrated on BC’s Cutbank Ridge plays, but including unidentified Alberta lands.

About the same time, Chevron confirmed it had acquired 200,000 acres in the Duvernay formation to establish what an executive at the supermajor says is “an important core [Canadian] land position in shale gas”. Gary Luquette, president of Chevron’s North American exploration and production business, says the company plans to evaluate the acreage by starting appraisal drilling later this year.

The Duvernay plans are just one element of Chevron’s drive to exploit vast North American unconventional gas reserves, powered by its $3.2bn take-over in November of independent producer Atlas Energy, which will help it keep pace with rival ExxonMobil.

Other hints of the Duvernay’s scope and prospects could come from exploration drilling by junior companies such as Galleon Energy, which has so far reported 100 feet of net gas pay from a vertical well; a partnership of Yoho Resources, Celtic Exploration and an undisclosed participant, which drilled its first horizontal well last year to a vertical depth of 10,000 feet at a cost of C$6.2m; and newly minted Tourmaline Oil, led by Mike Rose, the former chief executive of Duvernay Oil (sold to Shell for C$5.8bn in 2008) and Berkley Petroleum, and a pioneer in the Alberta Deep basin, which embraces the Duvernay play.

ERCB chairman Dan McFadyen told a natural gas conference in Calgary late last month that the agency hopes to start discussions on a new regulatory framework for unconventional gas and oil by mid-2011 and have a regime in place by 2013. The ERCB is already undertaking its own assessment of 15 shale horizons, including the Duvernay, after deciding in 2009 that interest in shale gas in the province would eventually ramp up.

Chris Theal, managing director of energy with Macquarie Capital Markets Canada, says the goal for the Alberta government should be to understand how it can compete in the shale age, where it “falls short” and what steps are needed to simplify its royalties.

He says that means providing the industry with a royalty framework that “allows risk takers to recover capital costs upfront, make a rate-of-return over the medium-term and ensure the government gets a good return on its resources”.

Mike Dawson, president of the Canadian Society for Unconventional Gas, says industry interest in the Duvernay points to a “huge, emerging potential” shale prospect that could amount to two or three plays the size of Horn River, which carries estimated resources of 100 trillion cubic feet.

McFadyen says the ERCB’s goal to “become the world’s best non-conventional” regulator by 2013, with a regulatory framework that includes the public’s right to be fully informed, feel confident that development is needed and that all steps are being taken to avoid unnecessary activity.

He says the objectives are to reduce risks to conservation, public safety and the environment, which requires “new and innovative processes and procedures”, including protection for surface and subsurface waste and limiting the impact of large-scale well fracturing.

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