THE WALL STREET JOURNAL

Exploration Push in British Columbia’s Horn River Basin Produces Encouraging Results

JULY 10, 2009

By RUSSELL GOLD

HOUSTON — Exxon Mobil Corp. has been scouring the globe for natural gas locked inside shale formations, and said it thinks it may have a world-class find in Canada.

In an interview with The Wall Street Journal, Tim Cejka, Exxon’s head of global exploration, said the company has been bullish on shale-gas exploration since 2003, locating promising gas-bearing rock formations and snapping up leases on them.

Exxon is most encouraged by the exploration of 250,000 acres it has leased in the Horn River Basin, in northern British Columbia. Mr. Cejka said results from the first four wells lead the company to conclude that each well will produce between 16 million and 18 million cubic feet of gas a day.

That’s five times the size of average wells in Texas’s Barnett shale and comparable to big wells in Louisiana’s Haynesville shale, two major shale-gas fields that already have moved the U.S. natural-gas market from scarcity to abundance.

Though Exxon is better known as the nation’s largest oil company, “We are really interested in shale gas,” Mr. Cejka said, detailing the company’s push into the energy-exploration business, which was once dominated by scrappy independent companies.

Given that the world is awash with natural gas already, the addition of still more gas from shale fields in Canada and Europe could further depress prices, especially as industrial demand continues to stagnate amid the global economic downturn. But Exxon is taking a longer view.

“The industry is going to have to bring on oil, gas, coal, nuclear, hydro, wind and solar to meet the world’s energy demand,” Mr. Cejka said. “The economies of the world will come back. Demand will grow again. We are going to be there for the next 20, 30, 40, 50 years.”

Other energy companies also are excited about the Horn River field. “This may be the best shale play in North America,” said Michael Graham, an executive vice president at EnCana Corp., a Calgary company that already has a big Horn River presence. Mr. Graham said EnCana’s latest wells are approaching Exxon’s in terms of initial production.

Exxon’s Mr. Cejka said that his company also has pieced together substantial leases in prospective shale-gas formations in Germany, Hungary and Poland, and is still adding acreage. Tests on two wells in Hungary, where Exxon and partners hold 400,000 acres, are expected this year. It will be the first time the shale there has been tested.

“Depending on how that goes, we’ll either be patting ourselves on the back or walking away,” Mr. Cejka said.

The company also plans 10 wells on 750,000 acres it holds in northern German’s Lower Saxony Basin this year to better study the geology.

Exxon is interested in all these projects because the amount of gas trapped in shales is enormous. The company estimates there are one quadrillion cubic feet of shale gas world-wide, equal to about a decade’s worth of global natural-gas demand, though not all of that is currently recoverable.

Shale gas is one of the “unconventional” gases that are trapped in dense rocks, rather than in porous rocks that form underground reservoirs. To reach it, energy companies must crack the rocks open by injecting them with high-pressure liquids. Improvements over the past few years in the technology to fracture dense rocks and drill vertical wells that turn and run horizontally underground have made it possible to develop unconventional gas.

Before the emergence of the Barnett and other shales, the industry expected the U.S. to become a big net importer of gas by 2009. Instead, the U.S. faces a glut that has driven natural-gas prices below $3.50 per million British thermal units, down 39% this year, and kept imports of liquefied natural gas at anemic levels.

Earlier this decade, companies such as Devon Energy Corp. and Chesapeake Energy Corp., both based in Oklahoma City, were among the first to use the shale-gas extraction technique. Their success spawned a host of imitators and competition for acreage in Louisiana, Arkansas, Texas, Pennsylvania and elsewhere.

Rather than compete with these smaller exploration companies, Exxon began looking for shale formations that were outside the U.S., but near major energy markets. The strategy set it apart from its big globe-trotting competitors, which built up unconventional-gas reserves through acquisition. BP PLC, for instance, spent $3.65 billion on a pair of deals with Chesapeake. Royal Dutch Shell PLC spent $6 billion to acquire Canadian Duvernay Oil Corp. and its acreage in a prospective unconventional-gas formation.

So far, companies are drilling for shale gas only in North America and to a lesser extent in eastern Australia, said Rhodri Thomas, head of consulting firm Wood Mackenzie, in Edinburgh, Scotland.

“Where we’ve successfully developed these, the volume of the resource has changed the gas market dramatically,” he said. “The question is: Where else could this happen?”

Write to Russell Gold at [email protected]

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