Encana Corporation, whose name is an acronym for ENergy, CANada, and Alberta, is a natural gas company based in Calgary with five major natural gas operations in Canada: Bighorn, Coalbed Methane, Cutbank Ridge, Greater Sierra in western Canada, and Deep Panuke, an offshore project in Nova Scotia.

Encana’s revenues f luctuate due to volatile prices for natural gas, the winter temperature in North America, the exchange rate, and the cost and uncertainty of drilling. On top of this, the gas reserves in existing wells are being continuously depleted, so that acquisition of new reserves is essential. Encana owns 4.1 million hectares in western Canada, of which 1.8 million are undeveloped, so it has plenty of scope to explore new sites. Another approach, which we will focus on, is to use improved technology to better exploit existing reserves. 

Coalbed methane (CBM) is notoriously difficult to make money on in Alberta, but there’s plenty of it there in a region called the Manville. The methane (natural gas) is trapped over 1000 metres below the surface in very narrow coal seams only about 10 metres thick. It’s therefore necessary to drill vertically deep under the ground and then turn the drill horizontally to follow a coal seam that often undulates up and down. With a conventional drill, it’s tough to be that precise, and only about 60% of the methane can be extracted; moreover, there’s a 10% chance that the well will be a total failure and produce nothing at all. Advanced drills have sensors that allow them to transmit data to the operator indicating how close they are to the seam boundary. This technique, known as logging while drilling (LWD), allows the operator to follow the seam more accurately, reducing the chance of total failure to 1%. It extracts 90% of the methane but costs $31,000 per day, compared with $21,000 for conventional drilling. LWD is also faster than conventional drilling, taking four instead of five days to complete a CBM well, on average. Additional engineering costs are $120,000 per well for either type of drill.

Taking a CBM operation with estimated volume of 80 MMcf (million cubic feet) of natural gas and a price of $4/Mcf (thousand cubic feet), would you drill? And, if so, would you use a conventional drill or LWD? The price of natural gas f luctuates widely. Suppose projected price is $3/Mcf with a probability of 0.6, $4/Mcf with a probability of 0.3, and $5/Mcf with a probability of 0.1—does that affect your decision? Estimating the total volume of natural gas in a CBM operation is also uncertain. Suppose the estimated volume is between 50 and 70 Mcf with a probability of 0.3, between 70 and 90 Mcf with a probability of 0.5, and between 90 and 160 Mcf with a probability of 0.2. Combined with the uncertainty in price, does that affect your decision?