As Alberta’s two-year-old coalbed methane (CBM) industry starts to expand, developers are out to prove that they can protect the environment and their profit margins.

When it comes to water quality and quantity, developers have quick answers; but when it comes to profitability, several riddles remain unsolved.

Mike Gatens, chairman of the Canadian Society for Unconventional Gas (CSUG), said coalbed methane developers hope to deliver a clear message to skeptical environmentalists, land owners and other parties. “We’re not lying to you,” said Gatens. “We’re telling the truth.”

Last week, the CSUG held coalbed methane site tours for environmentalists, land owners, media and other groups, aiming to show that developers will operate with care for the environment.

Larry MacDougal photo, Business Edge
EnCana coal-bed methane operation near Calgary .

“One thing I’m hearing from these groups is they’re not anti-development,” said Gatens. “They’re anti-irresponsible development.”

Excess water production at coalbed methane wells in Wyoming’s Powder River Basin has sparked concerns about the quality and quantity of water in Alberta coalbed methane wells. As a result, U.S. activists will stage a public speaking tour in the province this month, and one Alberta group – Rimbey and District Area Clean Air People (RADCAP) – has asked the province for a moratorium on further coalbed methane development until there are environmental assessments and public hearings.

However, the provincial government, which allows coalbed methane development within existing regulations covering natural gas, is not expected to deliver guidelines on CBM activity until 2004.

Gatens and other Alberta coalbed methane developers insist that each coalbed’s geological composition is unique, and Alberta’s wells will not produce as much water as those in the Powder River Basin, where some coalbeds are above ground.

“If you do your homework, you will find we have nothing really remotely like that (Powder River Basin situation) here,” said Gatens, also the chairman and CEO of MGV Energy Inc., which is operating 200 coalbed methane wells in Alberta this year and expects to drill another 200 next year.

The West Virginia native, who since 1980 has spent his career developing coalbed methane projects, said people need to understand that in Canada, most coalbed methane wells produce either no water or salt water.

“We have no impact on the fresh water aquifer,” said Gatens.

Contending that a coalbed methane well is comparable to a sour gas well – in other words, easily within environmental standards – Gatens said provincial regulations and public reporting requirements will ensure that companies act responsibly and share their information.

He said dry coalbeds could help the industry “get off its feet” until more is known about them and they produce more gas, or larger wells that contain water can be developed.

Dry coalbeds are believed to be smaller, harder to develop (because of low air pressure) and less profitable than wells that contain some water.

Next question: When will coalbed methane start generating the billions of dollars in revenue and thousands of jobs that industry insiders have predicted?

Gatens likened Canada’s coalbed methane industry to its U.S. counterpart in the 1970s. There was zero production in the U.S. then, he said, but American coalbed methane production now matches all of Canada’s oil and gas production combined.

Ken Sinclair, vice-president of Spirit Energy Corp., compared the coalbed methane industry to Canada’s early energy industry, noting questions surrounding that industry have given way to billions in profits.

“It’s a new industry in Canada that will expand,” said Sinclair, whose exploration company hopes to begin production within two years.

Various Alberta oil and gas companies, including Nexen Inc., Burlington Resources Inc., Talisman Energy Inc. and Penn West Petroleum Inc., have launched more than 30 pilot projects on 19.5 trillion cubic feet of coalbed methane. But only two – MGV Energy and EnCana – have begun production.

“Coalbed methane production profiles are still trying to be done here in Western Canada, but there still hasn’t been enough work done,” said Sinclair.

According to Gatens, each coalbed methane well has a $250,000 startup price, all costs included. Developers are using conventional (vertical) drilling practices, but they say they need new tools, techniques and technology to maximize coal- bed methane returns.

Garth Sloan, vice-president of Calgary-based Calver Resources, said: “People will tell you they’re doing great, but they’re not producing the gas.”

He said developers want to spend time doing research before ramping up production, but that’s difficult when shareholders are demanding quick results.

“They’ve only got another year or two to prove themselves,” predicted Sloan of coalbed methane developers.

He said companies have not produced enough coalbed methane to justify high land costs.

“People have been spending a lot of money on coalbed land, put it that way – more than the economics would support,” said Sloan. “That’s not the way to do CBM.”

Sloan said land prices have ranged from $200-500 per hectare.

“We haven’t been out drilling wells right now because the land is so high. Less than $100 would be better, because you need so much more land,” said Sloan, adding coalbed methane developers require more wells than conventional gas developers in the early testing and production stages.

Tom Rozak, president of RXO Energy Inc., said the province and land-rights holders should consider taking less in coalbed methane royalties than conventional gas royalties.

“If you try to do a land deal with CBM versus a conventional deal, it just won’t work,” said Rozak.

“It just doesn’t make sense.”

Rozak said a conventional well is like a lottery that pays off quickly, while a coalbed methane well is like an annuity that grows over the long term.

“You’re better off taking a little bit less (for land) for a longer period of time,” said Rozak.

Yet, despite the uncertainty about profitability, coalbed methane developers are optimistic because of high gas prices and exploding demand in the United States.

Rozak said everybody in the industry is probably “making good progress” but success will still take time.

“Because it’s so new, everybody is really tight-lipped about it,” said Rozak.

“It’s all very hush-hush still.”