By Julie Green Shale gas is transforming not only northeastern British Columbia, but the entire world of natural gas production, transportation and consumption. It has implications for the southwestern corner of the NWT, too, and perhaps for the Mackenzie Gas Project.

Just two years ago, the town of Fort Nelson in northeastern British Columbia confronted a bleak future. Two saw mills, the town’s biggest employers, closed, leaving 565 people out of work. Spectra Energy was looking at winding down its gas processing plant, as conventional sources of natural gas in the area continued to dwindle. Some families moved away, while others worried they’d be next unless new jobs miraculously appeared. It’s a story that’s been repeated in communities across the country at various times.

This time, the miracle happened.

Today Fort Nelson, with a population of 4,500, is booming. “People who want jobs have them, and they pay better than the saw mills did,” says Bill Streeper, mayor of the municipality. There are new hotels and fleets of trucks. Council has even approved a business license for an escort service. In fact, Fort Nelson faces development of such breakneck speed and unprecedented size, some wonder if the town has the ability to keep up. Fort Nelson has a tiger by the tail, and that tiger is shale gas.

Shale gas is described by the industry as an unconventional gas (along with tight gas and coal bed methane), but it burns the same and sells for the same price as natural gas from a conventional reservoir. Trillions of cubic feet of shale gas are locked thousands of feet deep in the rock north of Fort Nelson in the Horn River basin. New technology has improved exploration results so energy companies have flocked to northeastern British Columbia in the last few years.

The 15 members of the Horn River producers group include industry heavyweights – and some of the same players as the Mackenzie Gas Project, including Imperial Oil, Exxon Mobil and ConocoPhillips. Together the group has spent more than $2-billion to buy rights to land, and they’re spending billions more figuring what resources they have. The estimate right now for the Horn River basin falls somewhere between 500 and 600 TCF, a staggering amount when you consider the three anchor fields for the Mackenzie Gas Project contain an estimated six TCF. Even if the confirmed resource is a quarter of that total, Horn River is home to one of the biggest shale gas deposits in North America. Along with the Montney play near Fort St. John, shale gas is set to double B.C.’s natural gas output in the next ten years.

“I’ve never seen anything like it,” says Duane Rae, Spectra Energy’s vice-president of field services, reflecting on his 26 years in the energy business. “It’s nothing short of phenomenal.” Spectra and its corporate predecessors have been processing conventional sources of natural gas at its Fort Nelson North plant since the 1950s. Now it’s set to invest $1-billion in the area over the next couple of years to reconfigure pipelines and add compression in order to process shale gas in bigger quantities.

The company’s Fort Nelson North plant will be working at full capacity of a billion cubic feet per day by the end of 2011. The plant is “perfectly suited to processing shale gas because the quality is comparable to conventional natural gas,” says Rae. Spectra also has National Energy Board approval to construct a brand new plant at Cabin Lake, in the heart of the Horn River gas play 70 kilometres northeast of Fort Nelson. It will process 250 million cubic feet of gas per day starting in the spring of 2012.

EnCana Corp. is also in on the ground floor. Construction is underway on phase one of EnCana’s Cabin Gas Plant, located 15 kilometres away from Spectra’s new plant. When both phases are complete, EnCana’s plant will be one of the biggest gas processing plants on the continent. EnCana is making an initial investment of $400-million to $500-million in phase one, set to open in the fall of 2012. At full capacity, the Cabin Gas Plant will produce another 800 million cubic feet of natural gas a day, a little less than the reserves committed to the beleaguered Mackenzie Gas Project in the NWT.

TransCanada Pipelines has checked out the Horn River and put its money on the table, acquiring 83 kilometres of pipe from EnCana, and building another 72 kilometres of its own pipe to get the gas into the grid. The $307-million Ekwan pipeline will go into service in 2012. “We’re not overly bullish – we leave the hype to producers,” says TransCanada’s John Van Der Put, before conceding the company has revised its outlook of gas production from northeastern B.C. “There’s a significant potential supply source in the Horn River Basin and construction costs are relatively cheap,” he says.

With all this new work approved and construction underway, there’s a noticeable impact on Fort Nelson. “We have a challenge a lot of communities would like,” says Mayor Streeper. The community needs more housing and other infrastructure to accommodate the people who will take the thousands of new jobs coming to the town. But predictably, not everyone is as happy as the mayor with the onset of the shale boom.

Kathi Dickie is chief of the 800-member Fort Nelson First Nation, a mixture of Slavey and Cree speaking people who belong to Treaty 8. About half the members live on a reserve located seven kilometres south of the town. The Horn River shales lie in the heart of First Nation’s traditional territory and the muskeg and boreal forest there is home to moose, boreal caribou, fur-bearers and berries. Dickie is a former teacher who acknowledges that shale gas has created jobs and business opportunities. But she’s worried about the pace of development. Dickie would like to see a regional land use plan in place before development goes further, a request that echoes Deh Cho First Nations demands of the Mackenzie Gas Project. So far she’s had no luck getting the provincial government to commit the money. “They tell me the cupboard is bare,” she says.

Meanwhile, energy companies have been actively courting the band to get them onside. “They come in with a smiley face, give out ball caps and water bottles, and they hope that’s all they have to do,” Dickie says. “When we push back, they balk. I better not say any more than that.” Yet in mid-April, Dickie signed an agreement with Spectra. “It’s more than an impact-benefit agreement,” says Spectra’s Duane Rae. “It formalizes the relationship we already have and talks about how we’re going to continue working together.” The band is working on similar agreements with TransCanada and EnCana.

Dickie has a list of substantial fears about shale development and water is at the top. In order to free gas trapped in the shale, rigs use vast quantities of water for drilling, as much as 20 million litres per well. One exploration company took some band members to see shale gas development at the Barnett Shale in Texas. “What they saw shocked them,” Dickie says. “They were sucking water from anywhere and everywhere and we just don’t know what impact that will have here.”

Then there’s the potential for exploration and development to create a checkerboard of the land with seismic lines, roads and well sites. “The landscape is getting totally cut up and wildlife habitat is being fragmented,” Dickie says. Even though exploration companies are drilling as many as 20 wells from one pad to reduce harmful effects, they’re drilling thousands of wells. And Dickie is also worried about the volume of carbon dioxide emissions the new plants will vent, degrading air quality and contributing to climate change.

Oliver Hendrickson of the Pembina Institute has the same list of concerns about whether shale gas development in northeastern British Columbia is sustainable. “There’s no baseline data about how much water is available, about the effect of trucking water in for drilling, or what chemicals are in the drilling fluid,” Hendrickson says. In his mind there’s a regulatory gap, and given the fact that Horn River is one of the biggest shale gas plays on the continent, “now is the time pause and review what regulators need to do to keep up.” Hendrickson applauds the decision by the Environmental Protection Agency in the U.S. in March to study the effects on drinking water of using hydraulic fracturing to get at shale gas.

As energy companies look for alternatives to reduce their fresh water use, such as recycling water or using saline or brackish water from deep aquifers, the environmental issue at the forefront of northeastern B.C.’s shale gas development is greenhouse gas emissions. EnCana’s Cabin Gas Plant is set to become one of the largest emitters of carbon dioxide in the province, venting 2.2 million tonnes of C02 a year. “That’s equivalent to putting an additional 450,000 cars on the road,” according to Pembina’s Hendrickson. Spectra Energy will emit a further three million tonnes of C02 from its two plants when they are in full production. In a province with a carbon tax and specific GHG reduction targets, environmentalists are using emissions from the new gas processing plants as a stick to beat the provincial government. Premier Gordon Campbell has said the targets are still the same and points to the billions of dollars of benefits of shale gas development for the province.

“We’re cognizant of this issue and we’re looking for ways to minimize our greenhouse gas emissions,” says Alan Boras, EnCana’s vice-president of media relations. He says the Cabin Gas Plant will be “carbon capture ready.” But there are no specific plans in place yet to sequester the C02 it will produce instead of venting it.

Spectra is taking a more aggressive approach. “We’re already capturing C02 in our [Fort Nelson North] plant,” says Rae. “We just need a place to put it.” Spectra has been studying the feasibility of carbon capture and storage in the Horn River basin, matching a $3.4-million grant from the province with its own money, along with an undisclosed amount from the government of Canada.

Drilling and testing has revealed a deep, saline aquifer that might be just the place for storing carbon, according to Rae. But there’s no business case for disposing of it right now, since there is no certainty about what carbon is worth. “We need customers to invest in sequestering C02,” says Gary Weilinger, Spectra’s executive in charge of the feasibility study. That’s not likely to happen until governments get serious about reducing C02 emissions. Depending on the plant’s final design, due in July next year, some of the C02 will still be vented. “It’s a question of scale and scope,” Weilinger says.

Energy companies are leery about adding carbon disposal to their costs. It’s expensive to operate at the end of the road in a remote corner of the province, especially with gas selling in the $4 per thousand cubic feet range. “Costs have come down from $9 to less than $6, and the amount of resource is going up,” says Kevin Heffernan of the Canadian Society for Unconventional Gas, an industry lobby group. But there’s still a gap. “The question is how much gas can be recovered at various price thresholds,” he says. At current prices and with existing technology, just 20 per cent of shale gas reserves are recoverable.

Meanwhile, Canada’s largest natural gas company isn’t worried about low gas prices today. “We see the Horn River shale gas as very competitive,” says EnCana’s Alan Boras. The company’s goal is to double production and emerge as one of the lowest cost producers. Boras says 60 per cent of Horn River’s future production has been sold for $6 per thousand cubic feet in the expectation that prices will go up.

The B.C. government has also helped to sweeten the pot by reducing corporate taxes and royalties. Its “Net Profit Royalty Program” allows producers to pay lower royalty rates during the initial stages of development in exchange for higher rates later on when capital investment costs have been paid. The “Infrastructure Credit Royalty Program” allows companies to deduct 50 per cent of the cost of building roads and pipelines. The provincial government’s approach sits well with producers like EnCana. “The BC government has created the conditions to make it very competitive,” says Boras, “with favourable royalty rates and support for infrastructure development.”

Could shale gas make the same kind of splash in the NWT? It’s possible, according to the author of a new study of the territories’ unconventional gas potential. The Horn River basin extends into the Fort Liard area. “There’s potential for very rich shale gas resources throughout the Mackenzie Corridor,” writes Brad Hayes of the consulting firm Petrel Robertson. Of course more work needs to be done to test the scope and viability of shale gas North of 60. But the biggest obstacles are those that have buckled the Mackenzie Gas Project. “It is speculated that the lack of activity is driven more by regulatory and political difficulties than technical factors,” Hayes writes.

And what of the impact of shale gas on the Mackenzie Gas Project? Will it lower gas prices to the point that the MGP becomes even less attractive to the proponents? “Shale gas is widely considered to be a ‘game changer’ in the North American natural gas industry,” Hayes says. Shale gas production is less than 10 per cent of the continent’s total gas production now, a number that’s expected to double in the next ten years, according to the Canadian Society for Unconventional Gas. That number may become larger but there’s a question about how durable shale gas wells are because of their relatively short production history.

The good news for the Mackenzie Gas Project is that, because of the voracious appetite for natural gas in North America (projected to be 80 billion cubic feet a day in 2020) there’s room for the Delta’s six trillion cubic feet of reserves as well. Imperial Oil recently told the National Energy Board that volumes of shale gas are beside the point when it comes to deciding whether the Mackenzie Gas Project is economic. Meanwhile, Imperial Oil and Exxon Mobil Canada have amassed the largest land holdings in the Horn River basin, at more than 300,000 acres, just in case.

Meanwhile, in Fort Nelson, the tiger is roaring. “The Horn River has given us something we don’t know if we want,” says Judith Kenyon, a 40-year resident of the town who edits the local paper. “We’re grappling with an unknown future. People are concerned about the magnitude and long term effects of shale development,” she says. “We just don’t want to end up with development happening beside us instead of including us.”