Unconventional resources such as heavy oil and coalbed methane (CBM), and new recovery options for conventional oil are luring Canadian dollars away from high-risk overseas ventures.

According to the Canadian Association of Petroleum Producers (CAPP), Canadian explorers and producers (E&Ps) are spending less money abroad than in past years.

While foreign expenditures jumped to $7.1 billion in 2003 from $4.1 billion in 2002, the number sank in 2004 to $6.8 billion and is expected to drop below $6 billion this year.

"I think companies like EnCana ... are saying: 'You know, I think there may be a lot more future in Alberta and Western Canada than maybe was our assessment five years ago,' " says Robert Mansell, managing director of the University of Calgary's Institute for Sustainable Energy, Environment and Economy.

Last year, EnCana began making moves to get out of Ecuador, the Gulf of Mexico and the North Sea - where it sold its interests to Nexen Inc. - to focus more on onshore North America.

EnCana recently told Business Edge that the company will centre on "resources plays" such as CBM, tight gas and oilsands in an effort to accrue established reserves that can be produced at lower costs, such as the Horseshoe Canyon CBM play or tight-gas production in the U.S. Rocky Mountain region.

Mansell believes this is a smart move on EnCana's part, because it gives the company the ability to generate revenue from low-risk, low-decline reserves while using an almost mass- production method of drilling wells.

"I think the successful companies will have more of a manufacturing mentality: Perfect it, replicate it, replicate it, replicate it," by intensively drilling core areas such as eastern Alberta, he says.

Capital investment on conventional oil and gas in Western Canada, meanwhile, grew to $22.9 billion last year from $21.4 billion in 2003, and is forecast to rise again in 2005 to $24.6 billion. Investment in oilsands is anticipated to jump to $8.5 billion this year from about $5.8 billion in 2004.

Greg Stringham, CAPP vice-president of markets and fiscal policy, believes that while some oil companies such as Nexen and Talisman Energy thrive on navigating the waters of international oil and gas, others have not.

"A good example is in the '90s when (Canadian) companies saw great opportunities in Russia at a point in time when the political and economic risks of being able to get cashflow in and out was so big that they moved away from it," Stringham says.

Mansell points to other factors prompting Canadian E&Ps to stick closer to home.

Soaring oil and gas prices mean companies no longer need the "big elephant" plays to be profitable. Improvements in enhanced recovery technologies - such as carbon dioxide flooding - mean that conventional oil reserves become more appealing as average recovery rates can be boosted from about 27 per cent to more than 50 per cent.

"That's a huge amount - a one-per-cent increase in recoverability translates into over 600 million barrels" of additional producible reserves, Mansell says.

As well, it is becoming more difficult to attract geologists, engineers and other professionals to places such as the Middle East where security risks abound. "That's increasingly a problem internationally; there's already a problem here because we have an aging workforce in the industry," Mansell adds.

Risky or not, though, foreign oil and gas operations still put the crackers in the soup for some of Canada's most successful E&Ps.

While Nexen is investing heavily in the Canadian oilsands in the Long Lake project - expected to net the company 30,000 barrels per day (b/d) when it begins production in 2007 - only about 80,000 barrels of oil equivalent per day (boe/d) of its 250,000 boe/d of oil and gas production comes from Canadian fields. The remainder comes from its international operations.

The Middle Eastern country of Yemen represents Nexen's most important international area of operation, producing 100,000 b/d of crude oil. The E&P is also looking to expand its activities elsewhere in the volatile region.

"I don't think you can necessarily shy away from some of the more difficult areas in the world," says Nexen spokesman Grant Dreger. "Unfortunately, God didn't just put oil reserves in stable areas."

Not all international operations are fraught with peril. Nexen significantly increased its North Sea holdings last year while it continues its operations in the Gulf of Mexico. Both regions offer similar political and economic regimes as those found in Canada.

Nexen plans to boost its overall 2005 capital spending to about $2.5 billion from just over $1.6 billion in 2004. Much of this increase can be attributed to Long Lake, but also to international activity in the North Sea and the Gulf of Mexico.

About 50 per cent of Talisman's production is sourced overseas. Exploration and development spending is expected to reach $3.1 billion, of which half will go toward North American operations and the rest to its overseas activities - including more than $1 billion in the North Sea.

The company makes no apologies for globetrotting.

"We think there is a wider range of opportunities in the world rather than here ... there are opportunities in the oilsands and other things, but we feel the international arena offers the highest return for our shareholders," says Talisman president and CEO Jim Buckee.

Other Canadian majors maintaining international business include Petro-Canada, which purchased a position in the North Sea Buzzard project that is expected to add peak production of 60,000 b/d by 2007. The company is also pursuing other business development opportunities such as Middle East oil and liquefied natural gas supplies.

Canadian Natural Resources, meanwhile, continues to chase opportunities abroad despite tackling the $10.8-billion Horizon project; roughly 20 per cent of the 550,000-boe/d or more it expects to produce in 2005 will come from abroad, mostly from the North Sea but also from West Africa.

It's not just the big boys who are cashing in. Centurion Energy International has enjoyed success with its projects in Egypt and Tunisia where it produces about 21,000 boe/d. The junior's stock has soared from about $3 per share a year ago to about $16 today.

"Being a junior working overseas doesn't give us an advantage," says president and CEO Said Arrata. "On the contrary, it's a challenge."

What gives Centurion its edge, says Arrata, is the company's experience with overseas activities and its knowledge of the region and language. Almost all of Centurion's management speak two or three languages, including Arabic, the chief language where it operates.

Centurion plans to almost triple its capital spending in 2005 to the tune of $180 million from about $65 million.

The company also looks to expand to other geographic areas, namely Libya where it is bidding for exploration rights, and offshore Sao Tome and Principe in West Africa.

(John Ludwick can be reached at ludwick@businessedge.ca)