The red soil of Prince Edward Island, most famous for its potatoes, is being tilled for deeper and more elusive fields. The search for natural gas on the picturesque eastern Canadian province, a popular summer vacation spot for many U.S. Northeasterners, reflects a trend of junior Canadian producers looking for petroleum reserves onshore PEI, Newfoundland, Nova Scotia and New Brunswick. "The eastern coast (including the offshore) is a very legitimate oil and gas play. Depending on which report you read, many reports say it's the new frontier and it's where Alberta was 25 years ago," says Gary Malone, chief executive of <$iOsprey Energy Ltd. >, a Bridgewater, Nova Scotia-based junior. The increasing maturity of the eastern Canadian offshore petroleum industry is a key reason for the blooming of interest in the Maritimes Basin, which underlies lands lapped by the Atlantic Ocean. The major oil companies' developments, such as Hibernia, Sable Island and Deep Panuke, are increasing the amount of services, expertise and infrastructure available in the area to junior producers. Other encouraging factors include low competition, relatively simple royalty regimes and the availability of large, contiguous land spreads. Osprey and a host of other juniors, including <$iCanadian Imperial Venture Corp. >, <$iGlobex Resources Ltd. > and <$iMeteor Creek Resources Inc. >, are focusing on the East Coast. Several larger U.S. firms, such as <$iColumbia Natural Resources Inc. >, <$iDevon Energy Corp. > and <$iEOG Resources Inc., > are also playing a role in the region. The activity ranges from collecting and analyzing seismic data in PEI to reentering wells in Newfoundland to <$iCorridor Resources Inc. >'s commencement of production this year to supply gas to a potash mine in New Brunswick. The mine, near the southern town of Sussex, is owned by Potash Corp. of Saskatchewan Inc., the world's largest fertilizer manufacturer. Corridor and PCS expect to produce jointly 3 million cubic feet of gas per day this spring from the McCully Field. Norm Miller, chief executive of Halifax, Nova Scotia-based Corridor, says the company and others are climbing a steep learning curve, such as drilling with air versus conventional mud while dealing with overpressured zones. Some questions like well productivity, which is expected to vary widely because of a channel sand-like depositional pattern, will only be answered over time, but Miller is excited about the region's prospects for gas production. "I think it could add materially to reserves in the area if we are successful," he says. "We could get a lot of gas coming out of the area because we've only really scratched the surface." The onshore basin is low permeability and low porosity-roughly analogous to the Jonah Field in Wyoming. <$iMcMurray Oil Co. > and <$iAlberta Energy Co. Ltd. > (which bought McMurray in 2000 for C$894 million) have relied heavily on fracturing to boost Jonah's daily production to about 200 million cubic feet. Miller predicts fracturing will be important to achieve commerciality in eastern Canada. Corridor is looking to its bigger and more experienced partner, EOG Resources, to provide it with technical help with permeability of 0.2 millidarcies and porosity of 6% to 7%. Under a deal signed last year, EOG must drill three wells early this year but does not earn any interest in Corridor's lands until it has punched six wells. The Houston-based company will receive half of Corridor's interest in three New Brunswick licenses (excluding areas where PCS and Corridor have joined forces) once it drills 12 wells or spends C$50 million. The Canadian division of Charleston, West Virginia-headquartered Columbia Natural Resources has spent about C$24 million in the past two years drilling 14 wells in New Brunswick. The company has been targeting the Albert Sand near Sackville and Moncton, with well depths of 1,600 to 3,420 meters. Drilling costs have ranged from "outrageous to reasonable," says Darcy Spady, general manager of <$iColumbia Natural Resources Canada Ltd. >, which is based in Fredericton, New Brunswick. The company would like its East Coast well costs to be similar to the cost of its wells in Zama in northern Alberta or Fort Nelson in northeast British Columbia. "The rock tends to be harder so we generally have to use air hammers and not fluids and rotary. It's a little bit different flavor than operating in western Canada," Spady explains. Columbia Natural Resources Canada, whose parent was bought by U.S.-based NiSource Inc. in 2000, operates more than 1.3 million acres in New Brunswick through partnership with firms including Corridor, <$iJ.A. Seglund > and <$iMariCo Oil & Gas Corp. > Its lower Carboniferous objective in eastern Canada is mainly an extension of the Appalachian Basin found mostly in West Virginia and New York, where Columbia owns more then 1 trillion cubic feet of reserves. While moving into Canada is a natural extension of the play, Spady says there is one significant difference. "In New Brunswick, we're essentially on the North Sea side of the Appalachians as opposed to our West Virginia-based operations, which are on the continent side of the Appalachians. So we are on a different flank." While Columbia is mainly seeking gas, its drilling has resulted in a small amount of light oil coming onto production in December from a field near Hillsborough, New Brunswick. It is currently analyzing recently shot seismic data before deciding on further drilling plans for 2002. While core samples and drilling tests are encouraging the hunt for gas, Spady says questions about the commercial viability of the country's eastern onshore projects will likely not be resolved for a few years. "To be really successful, I'd want to see a couple of 10-million-cubic-foot-per-day projects. Either 10 one-million-a-day wells in a field or a single 10-million-a-day well would put a smile on my face," he says. Osprey is also hoping to find oil. It produces about 210 barrels of oil equivalent per day from properties in Alberta and in the U.S., in Louisiana. Malone says western Canada and the U.S. onshore basins are mature and it is hard for juniors to find growing room in the crowded sandboxes. In contrast, the East Coast offers big upside if exploration programs result in commercial discoveries. "We like Alberta but it's very difficult in Alberta right now to acquire properties at a reasonable price because it is a fairly mature marketplace." Its production from Louisiana comes without exploration risk "as we're just developing reserves that are already there," he adds. "Having revenue and profitability allows us to take a bit of exposure on the exploration front, which gives the future blue sky." Osprey has a 10% interest in 642,000 acres in PEI controlled by <$iRally Energy Corp. > and has a 15% stake, with an option to take another 10%, in 220,000 acres in Nova Scotia, controlled by <$iConsolidated Beacon Resources Ltd. > The latter two firms are based in Calgary. Corridor, Osprey and Rally are typical of many of the small players which rely on partnerships to defray costs and reduce risks, which is why the various companies sometimes appear to have more links than a sausage factory. The web of connections should make it easier to coordinate programs to obtain cheaper prices from contractors, says John McLeod, Rally's chief executive. McLeod and Ernie Pratt, Rally's vice president of exploration, were instrumental in <$iArakis Energy Corp. >'s initial successful exploration efforts in Sudan in the early 1990s. The veteran executives say some of the logistical challenges of operating in eastern Canada are similar to those experienced overseas. There is a lack of equipment and services, translating into higher drilling costs than in conventional areas. McLeod estimates what would be a C$400,000 well in western Canada may cost C$750,000 on the other side of the country. But providing a lot of benefits are the proximity to consumers on both sides of the border, the lack of language, currency and cultural barriers, and the ease of assembling large tracts of exploratory acreage from provincial governments, they say. "People are doing things in New Brunswick, Nova Scotia, Newfoundland and Prince Edward Island. We're talking about an oil province developing here," Pratt says. "Do I have to send back to Alberta for services and supply? No, they are there somewhere because somebody is using them." Oil and gas exploration is not new in eastern Canada, where natural seeps have been known for decades or even hundreds of years. Stoney Creek was a commercial oil and gas field in New Brunswick in the early 1900s. The discovery of Hibernia and other fields in the 1960s and 1970s encouraged a handful of onshore wells to be drilled in recent decades but there was no commercial success until Corridor and PCS began their venture. But McLeod says most eyes were focused on big prizes-thought to be contained in the deeper horizons. Drillers either ignored uphole formations or heavy muds impaired the testing and productivity of shallower zones. Rally is looking for gas on PEI at less than 2,000 meters (about 6,600 feet) with targets in the Cable Head, Green Gable and Mabou Group formations. It hopes to make a discovery similar to the East Point E-49 well, an offshore hole drilled in the early 1970s by Hudson's Bay Oil & Gas. "They were drilling deep for oil and were essentially forced to come back up and test a shallower zone. In the same zones we're looking at, they got 5.5 million cubic feet of gas per day on DST and they mapped a 77-billion-cubic-foot pool," he says. "We're hoping to find something like that onshore. We're seeing a lot of structure in here, so there really is the potential to develop this kind of stuff onshore." Pratt says studies indicate porosity of 5% and 20%, depending on depth. Permeability, which also decreases with depth, generally ranges from 0.1 to 10 millidarcies. He says these figures put eastern-coast shallow-gas plays well within parameters for commercial projects in western Canada or the southern states. The 77 billion cubic feet found offshore PEI on top of a salt dome almost three decades ago has Rally hoping to find accumulations of 50 Bcf on similar features on its acreage. "We have lots of structuring, that's not going to be the problem," Pratt says. "We've got basin edges, salt structuring, faulting and we're going to have things happening stratigraphically. All those parts of the equation that go with a good reservoir are in this area." The ski-jumper plunge in gas prices during the past year has slowed some activity, but most executives say their firms remain committed to developing their projects. Another challenge of operating in the east, particularly in PEI, is its scenic beauty. The island protects its reputation as the home of Anne of Green Gables, a beloved literary heroine firmly rooted in real landmarks. While residents, politicians and government officials are supportive of industry activities, Columbia's Spady says his firm is cognizant of the need to set high environmental standards. For example, the firm conducted a seismic survey last year where walking the line and hand-drilling the dynamite holes enabled Columbia not having to cut a single tree on a major forestry company's lands. New Brunswick has an extensive system of private woodlots and forestry is a major industry. "It's a new jurisdiction and we're working very hard to take the highest possible path. We know that the ruts we leave [figuratively] are going to be followed so we're trying to take the best approach we can," he says. "People here have not seen the modern oil and gas industry, therefore our methods and manners will be the benchmark in their minds. We strive to operate with a minimal environmental impact" If any firms make commercial discoveries, finding markets and distribution infrastructure are barriers still to be cleared. PEI and Newfoundland have no gas pipelines. New Brunswick has granted a franchise to a unit of Enbridge Inc., which is slowly rolling out service. A spur off Maritimes & Northeast Pipeline's system brings gas to Halifax but Nova Scotia has little beyond this as <$iSempra Energy > has withdrawn its C$1-billion proposal to build a distribution system. Watching the petroleum companies with a lot of interest are the various provincial governments, which stand to gain from direct and indirect jobs as well as royalties. New Brunswick consulted with industry players last year when it amended and updated its land tenure system, partially in the hope of encouraging activity. "The competition is not from other Canadian provinces," says Don Barnett, assistant deputy minister of New Brunswick's mining and energy department. "It's just trying to attract an industry into a frontier area." He says the province, along with its eastern neighbors, needs to diversify its energy mix. Six New England states and the five eastern Canadian provinces (the four Atlantic provinces plus Quebec) agreed in August 2001 to stabilize greenhouse gas emissions by 2010 and reduce them 10% by 2020. The environmental goal will not be met unless more gas is used, Barnett says. In addition, new industry is reluctant to locate in a region where gas is not part of the energy portfolio. The Atlantic provinces, while important historically, have in recent decades not performed well economically. The explosion in offshore projects, such as Hibernia and Terra Nova, has helped transformed the economy of Newfoundland; analysts predict it will turn in one of the best performances of all provinces this year. The economic resurgence has revived the morale of residents of St. John's, Newfoundland. Osprey's Malone says successful onshore plays could result in the same in other parts of eastern Canada. "St. John's has been strutting since Hibernia and I think the rest of the Maritimes is starting to benefit from the influx of technologically advanced service companies, who bring people with them," he says. "I think the economic impact [from onshore activity] will be very significant during the next number of years." Not everyone is as bullish. Robert Meneley, a former exploration vice president with <$iPetro-Canada >, was chief analyst on a committee that last fall released its assessment of potential gas plays in Canada. There was not enough information available to make an informed estimate of Atlantic Canada's onshore gas reserves, but Meneley does not foresee the region as having a big impact on supply-demand fundamentals. "The results during the years have not been very spectacular. The presence of the [Maritimes & Northeast] pipeline does make it much more feasible to put small developments on production. The few discoveries that have been made are pretty mediocre, so you really don't have much of a basis to say that you've got any rip-roaring exploration promise developing." He says the geological formations under the forested hills and cultivated valleys are much older and substantially different in composition from the prolific rocks that yield Hibernia's and Sable Island's substantial daily volumes. He believes the eastern onshore play will not be the stuff of legends and will be limited mainly to small companies. "Corridor and other firms playing it can make some good money, but it's not going to be significant in terms of gas supply for North America," says Meneley, who is president of consulting firm <$iMeneley Enterprises Ltd. > Certainly Miller of Corridor expects healthy profits from his firm's eastern ventures. Maritimes & Northeast is planning to expand its line to handle <$iPanCanadian Energy Corp. >'s Panuke gas discovery offshore Nova Scotia as well as increased volumes from Sable Island. If sufficient reserves justify building a lateral to tie into the mainline, Corridor could receive a price close to the Henry Hub benchmark for its output, the president says. "To get close to Henry Hub prices is pretty good. A long-term average of C$5 or C$6 per thousand cubic feet is a reasonable expectation and that would compete with offshore liquefied natural gas." When it comes to the investment community, opinions vary. Osprey's Malone says his experience shows Calgary-based analysts are fairly skeptical while number-crunchers in Toronto and New York tend to be more open-minded. "There aren't a lot of believers in Alberta that there is anything to be found onshore east of Manitoba. The people in Toronto and New York-the U.S. market in general-are a bit more optimistic and a bit more excited about our involvement in the East Coast." He says the slowdown in the North American economy, exacerbated by the September 11 tragedy, is cooling exploration and development programs. Osprey, for example, is still waiting to hear from its partners on how many wells will be drilled this year on concessions in PEI and Nova Scotia. But the executive says the news isn't all bad. "On the bright side, at current price levels the service industry is not quite as expensive as it was a year ago," he says. "A year ago you had to stand in line and wait for things where as now you can actually negotiate with people." In the end, as with all energy plays, the brave words of executives and government officials will be measured by one critical yardstick-commercial success. If Corridor and EOG, in particular, cannot replicate the success found in the U.S. in producing tight gas seams, then it's likely Canada's onshore East Coast petroleum industry will never mature out of its infancy. "We're still short of critical mass," comments Barnett of the New Brunswick mining and energy department. "We've got the people now, and what they need to keep this thing growing is commercial discoveries. That's the part that we're hoping will come to fruition. "People are starting to take note that the potential is here, but we need further exploration and discoveries."
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