EnCana Corp. has seen the future of natural gas in Western Canada and it is coalbed methane (CBM).

The company plans to spend an estimated $90 million on its CBM program for 2004, which will include drilling 300 wells and boosting production to about 30 million cubic feet per day by the end of next year.

EnCana expects to increase natural gas production from coal seams to more than 200 million cu ft/d over the next five years, chief operating officer Randy Eresman says.

The company’s CBM production costs are among the lowest in the industry. That’s because EnCana’s 700,000 acres of royalty-free lands in southern Alberta already contain a huge network of wellbores, plants and pipelines that were built to extract conventional shallow gas. By using a combination of new and existing wells, EnCana can process and transport its added CBM production through these existing facilities.

The expanded program builds on the success of EnCana’s demonstration CBM project north of Strathmore, where production is about three million cu ft/d from 35 wells.

It’s a smart, forward-thinking move. Conventional gas production in the Western Canadian Sedimentary Basin is declining. But the basin holds more than 500 trillion cubic feet of potential CBM reserves – almost all of it untapped.

IN ROYALTIES WE TRUST

Penn West Petroleum Ltd.’s decision to continue operating as a traditional producer rather than jump on the royalty trust bandwagon will cost the company money, no matter how you count it.

Instead of investing cash flow in exploring for oil and gas, many former producers converted to a trust – avoiding dual taxation by distributing profits directly to trust unit holders. Firms going the trust route include Enerplus Resources Fund, Pengrowth Energy Trust, PrimeWest Energy Trust, NCE Petrofund Corp., and Provident Energy Trust.

Penn West’s share price had been climbing in expectation of it converting into what would have been Canada’s largest energy trust. Instead, the firm decided last week that operating as a traditional producer could yield a greater return for shareholders in the long run.

In response, some analysts immediately cut their 52-week target price for the company’s shares. But it’s the longer-term cost of Penn West’s decision that will be more significant to its cash flow.

The day before announcing its decision to not convert to a trust, Penn West declared a special $1.50-a-share dividend. The company also said that, for the first time, it will start issuing a regular quarterly dividend, beginning at 12.5 cents a share to be paid January 2.

Penn West and other producers, such as Husky Energy Inc. which also recently paid out a special dividend, are realizing that to keep investors, they’ll have to reward them with the ready cash distributions that make royalty trusts so attractive.

POWER TO THE PEOPLE

The Alberta Energy and Utilities Board (EUB) has opened the door to more than 250,000 Calgarians saying “Yea” or “Nay” to six new sour-gas wells close to their backyards.

The EUB decided to grant official intervener standing in a public hearing to anyone who lives within a 15-kilometre radius of the new wells that Compton Petroleum Corp. wants to drill.

The wells’ proposed location is about one kilometre from the city limits, which means about one-quarter of a million residents in southeast Calgary would qualify as interveners. They have the right to hire experts and make presentations at the hearing, at Compton’s expense.

But the EUB, in a pre-hearing decision, warns it won’t look kindly on 250,000 people showing up at the hearing, scheduled for March 30, 2004. EUB rules require parties with similar concerns to get together and hire the same experts and make joint presentations.

The biggest concern is that an accident while drilling the sour wells, which will contain nearly 37-per-cent poisonous hydrogen sulphide, would potentially expose one-quarter of the city to toxic emissions.

Compton’s emergency response plan includes a triple back-up system to set fire to any well leak or blowout. This would convert the H2S to sulphur dioxide, which is more readily dispersed in the air – greatly reducing the risk.

The pricetag for the ignition system will be cheap compared with the costs for a long line of residents already gearing up to have their say at next spring’s hearing.

COURT BACKS EUB

Meanwhile, natural gas producers have lost one prong of their two-pronged legal challenge to the EUB over the regulator’s decision to permanently shut down 938 gas wells in the Athabasca oilsands.

Court of Queen’s Bench Justice Stephen Hillier, in refusing to quash the EUB’s decision, said the producers must seek redress in the Alberta Court of Appeal, because the higher court is familiar with the issue.

Paramount Energy Trust – the firm with the most gas production to lose because of the EUB decision – and other producers, including BP Canada Energy Co., Canadian Natural Resources Ltd. and Devon Canada Corp., will now focus on their application to appeal before the Alberta Court of Appeal. A decision is expected in December.

The EUB argues that continued gas production from the wells will decrease reservoir pressure and hamper future extraction of higher-value bitumen.

Instead of challenging gas producers’ arguments that have kept 600 of the 938 wells in the Athabasca region operating, oilsands players Petro-Canada, Imperial Oil Ltd., Nexen Inc. ConocoPhillips Canada and Japan Canada Oil Sands Ltd. are so far waiting to see what a joint EUB-industry geological study of the region shows.

A geological “verdict” on all the wells is expected by April 1 next year.

Oilpatch Opinion’s prediction: By next spring, an Alberta Energy formula to compensate the gas producers for their lost production will be in place. And this dispute will disappear like so many gas bubbles into the tarsands.

Meanwhile, Canadian Hydro Developers Inc. says it will likely abandon its proposed $200-million, 80-megawatt “run-of-river” hydroelectric project on the Peace River if regulators don’t grant the proposed development a new hearing.

The Calgary-based renewable energy developer confirmed last week it has requested a formal review by a joint EUB-Natural Resources Conservation Board panel of its decision in March not to approve the project.

Canadian Hydro says it has since obtained an agreement-in-principle with the Town of Peace River to address the town’s concerns about flooding due to the six-metre-high, power-generating weir across the Peace River.

If regulators spurn the request to reconsider the project, the company plans to write off about $5 million spent in pre-development costs.