Unconventional here is the key word, as in the hard-to-reach and less-exploited geologic formations known collectively as unconventional gas: so-called tight-gas sands, shale gas, icelike gas hydrates, and most of all coalbed methane, or CBM. Development of CBM reserves could hardly be hotter right now, particularly in Canada, where unconventional sources still produce less than 10% of gas output, vs. about one-third south of the border. Greg Melchin, Alberta's Energy Minister, told me that more than 3,000 CBM wells have been drilled in his province during 2005, about as many as existed a year ago and roughly 15% of Alberta's total drilling in 2005.DEVELOPMENT OF unconventional sources of oil, such as Alberta's Athabasca tar sands, seemed a distant prospect just four years back. Since then, tar sands producers have flourished, with the likes of Suncor Energy () seeing their share prices quadruple in value. Are CBM producers on their way toward similar mega-gains? Doubtful, I would say, if only because many -- EnCana () and Quicksilver Resources (), for two -- already have seen their stocks jump in 2005 with the energy sector, up 69% and 79%, respectively. Also, for all of CBM's fast growth, it's still a small piece of most drillers' output.
Just the same, companies producing CBM in Canada look like a good bet to me, because they are in the early stages of exploiting this resource, whose long-term payoffs could stretch out over many years (table). Those companies -- and investors -- forgoing CBM figure to be disadvantaged. Research into extracting gas from coal has been going on for decades and was promoted in the U.S. via a tax credit passed in 1980. The recent surge in gas prices is pushing the industry. The Canadian Society for Unconventional Gas (CSUG) held its annual meeting in November, with more than 1,000 attendees, up from just 150 or so seven years ago.
Besides EnCana and Quicksilver, other big, public companies doing the most CBM development in Canada include Calgary-based Nexen () and Apache (), which is headquartered in Houston, CSUG President Mike Dawson told me. He expects 2006 will bring even more CBM drilling, with up to 5,000 new CBM wells. As with most resource-based stocks, these will be volatile because of fluctuations in the commodity prices. Worse yet, the near-term market for gas is linked inextricably to the weather, a huge imponderable. Opportunistic investors might find a chance to get into these stocks if this winter's weather is warmer than expected, taking natural gas stocks down seasonally.
In any case, the expertise in extracting unconventional gas that these companies have developed should serve long-term investors well. Melchin, Alberta's Energy Minister, noted that his province to date has produced some 130 trillion cubic feet of gas and counts an additional 100 trillion cubic feet in conventional reserves. Alberta's coalbed methane reserves are estimated at 500 trillion cubic feet. An auction for mineral rights there, set for Dec. 14, is shaping up as the biggest ever. While only a fraction of total CBM resources eventually will be extracted, it's hard to see CBM not being a big moneymaker. "The extent of the play," Melchin said, "is only beginning to be examined" -- and figures to ease our energy anxieties. By Robert Barker