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Is Canadian Shale Gas Worth $35 Billion?

Shale gas in western Canada is at the epicenter of the energy world this week.

Excitement from energy investors over northern shale comes after Malaysian petro-major Petronas last week announced a massive investment here--$35 billion to build a liquefied natural gas (LNG) facility in the province of British Columbia. The deal is so big, it represents the largest foreign direct investment in Canada’s history.

But the promise of natural gas riches here appears to justify the spend. Gas wells drilled into shale plays like the Notikewin, Montney and Horn River in northeastern British Columbia have yielded massive discoveries—some testing at towering rates up to 24.5 million cubic feet per day, along with valuable natural gas liquids.

Tests like that are as good as any results coming out of even the hottest U.S. shale plays, such as the Marcellus.

It’s these rosy results that enticed Petronas to pay $6 billion for British Columbia-focused gas producer Progress Energy Resources in late 2012. Petronas is now making these gas fields the backbone for supply to its massive LNG development—which will ship gas across the Pacific to high-value markets in Asia and possibly beyond.

These are huge investments. But will Canada’s shales live up to their promise? After all, these plays are in their infancy. What do we really know about the economics of shale production here?

To find out, let’s take a look at some of the leading gas producers in British Columbia. And see what their financial performance tells us about just how good Canadian shale really is.

Big Profits On Tap?

A mere glance at some of the metrics around Canadian shale production suggests high-return potential.

As mentioned above, test rates from wells in these new plays have been spectacular. Shale gas producers like Bellatrix Exploration (TSX: BXE) report that horizontal wells in the company’s Notikewin/Fahler play area enjoy average initial production rates of 9.5 million cubic feet per day. That’s competitive with any of North America’s shales.

The other point of note is that drilling costs appear very manageable. Bellatrix reports that the company’s costs for a horizontal well run about $4.6 million. Considering the large initial production figures, that should mean rapid paybacks and significant profits.

But the real proof is in the financial performance of Canadian producers.…




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