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The Holy Grail of Gas Plays?

In a remote region of northeast British Columbia, natural gas explorers are grabbing acreage so fiercely that you'd think they had found the Promised Land.

The cause of this land rush is a shale formation that some have characterized as being analogous to the Fort Worth Basin's Barnett -- in terms of rock quality, anyway. The Canadian shale actually appears to contain significantly more gas in place per acre. Just look at EOG Resources' (NYSE: EOG  ) estimate of its net reserve potential in B.C. versus the Barnett: 6 trillion cubic feet (Tcf) over 140,000 net acres in the former, and 5 trillion-7.2 trillion cf over 650,000 net acres in the latter.

Fellow Barnett explorer Quicksilver Resources (NYSE: KWK  ) had alluded to its interest in this same region during its March analyst presentation. However, only after EOG blew the story wide open did Quicksilver decide to lay its own cards on the table today. It's snapped up 127,000 net contiguous acres in the Horn River Basin. Just as with EOG, Quicksilver is reporting tremendous shale thickness in excess of 500 feet, which is an important part of the gas-in-place equation.

With this announcement, Quicksilver leapfrogs Nexen (NYSE: NXY  ) , and I believe it becomes the fourth-largest leaseholder in the area, after joint venture partners EnCana (NYSE: ECA  ) and Apache (NYSE: APA  ) , with about 400,000 acres between them, and EOG. I've also mentioned that Devon Energy (NYSE: DVN  ) is active in the play.

There are a few reasons why I think energy investors shouldn't fall totally head over heels for the Horn River play. For one, this shale is deep, making drilling more expensive. Second, year-round drilling in northern Canada is precluded by weather conditions, so the pace of development can never be as furious as that seen in the Barnett. These are just two reasons to help explain why EOG is only modeling a 20% after-tax rate of return in the play. That'll pay the bills, but this isn't the Holy Grail of natural gas.

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