By Brenda Bouw – 7 hours ago

VANCOUVER, B.C. — An oversupply of natural gas and weak prices have not deterred investors from snapping up rights to drill and explore in the hot Horn River shale rock basin in British Columbia, betting the commodity will soon recover.

Oil and gas companies continue to clamour for a piece of the action at Horn River in the northeastern corner of the province, an area hailed as the largest shale-based natural gas play in Canada.

A recent monthly sale of land rights netted the B.C. government more than $178 million in the Horn River area alone, which is triple total sales for the past five months and the ninth-largest monthly tally in history.

B.C. had been hauling in record sales for months from Horn River and its nearby Montney formation, until the recession caused some energy companies to pull back their spending.

While the price of oil has been climbing steadily in recent months, natural gas prices have stayed weak due to a glut of new gas supply coming from unconventional gas sources such as the shale plays.

The United States has a total resource base of 1,836 trillion cubic feet, according to a recent report by the Potential Gas Committee, the highest resource evaluation in the committee's 44-year history.

It's the large Barnett and Haynesville shale formations in Texas that are behind the surge, with Horn River still in its early stages of development.

The resource report came alongside another report showing natural gas storage is about 32 per cent above last year's level as of mid-June, according to the U.S. Energy Information Administration.

In a visit to Calgary last week, Texas oilman T. Boone Pickens predicted a rebound to about US$7 for 1,000 cubic feet next year, nearly double today's price of around US$4.

Pickens touts natural gas as a way to help reduce U.S. dependence on foreign oil and cut emissions that lead to global warming, since natural gas emits about half of the heat-trapping greenhouse gas than coal.

Such outlooks are believed to be partially behind the recent surprise investment resurgence in the Horn River basin.

B.C. Energy Minister Blair Lekstrom said the June sale results show investor confidence is returning.

"What it really tells me is that there is significant investor confidence in B.C.," Lekstrom said, adding that the risk is low and government incentives to invest in the area are high.

Imperial Oil Ltd. (TSX:IMO) and its parent Exxon Mobil Corp. (NYSE:XOM) were buyers in the June land rights sale, adding to their current holdings in Horn River.

"We regard it as a highly prospective area which has a lot of potential," said Imperial Oil spokesman Pius Rolheiser.

"We are looking to the potential in the Horn River basin to strengthen and expand our position as a gas producer."

As for the glut on the gas market, Rolheiser said they have a "long-term view" on the investment.

Horn River has an estimated 250 trillion cubic feet of natural gas in the formation. Experts predict up to 20 per cent of it is recoverable.

Natural gas is extracted from the shale rock by either horizontal drilling or fracturing wells.

Shale gas production was long considered too expensive until new technologies were developed in recently years to tap into the hard-to-access resource at lower costs.

That, coupled with the maturing sources for conventional gas, has led to increased interest in newly discovered areas such as Horn River.

Calgary-based EnCana Corp. (TSX:ECA) discovered the Horn River natural gas play in 2003 and is believed to be the largest landholder in the area along with its partner, U.S. oil and gas giant Apache Corp. (NYSE: APA).

While the companies have reduced drilling this year, EnCana said it has adopted a "more efficient" approach to production by increasing the number of well fractures.

"We're working hard to bring our costs (down) and if we do, we think the Horn River can compete nicely in our portfolio," EnCana executive vice-president Michael Graham told investors during a recent conference call.

Nexen Inc (TSX:NXY), a major Calgary company with oil operations in Yemen and the Gulf of Mexico and an oilsands business in Canada, also has a big investment in the Horn River basin, recently calling it a "world class play."

Tim Thomas, a senior vice-president at Nexen, told investors at a recent meeting that Horn River is "low risk" and "provides steady cash flow."

"We recognize the impact of current gas prices but what we want to do is maintain optionality," Thomas said, adding the company is working to reduce costs and "control our pace of investments."

Other large oil and gas companies with an investment in Horn River include Talisman Energy Inc. (TSX:TLM) and Canadian Natural Resources Ltd. (TSX:CNQ) as well as U.S. producer EOG Resources Inc. (NYSE:EOG).

Calgary-based Questerre Energy Corp. (TSX:QEC) is one of many juniors with a presence in the Horn River area, having recently expanded its holdings in the area.

"We now have a great toe-hold in this highly prospective area," said its president and CEO Michael Binnion.

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