UPDATE 1-Shell scraps drilling plan in contested Canadian area

Tue Dec 18, 2012 8:47pm GMT

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* Shell to focus on larger shale plays

* To build water recycling plant using royalty credits

* 4-year moratorium was due to end

By Jeffrey Jones

CALGARY, Alberta, Dec 18 (Reuters) - Royal Dutch Shell Plc has scrapped plans for a coalbed methane gas project near Canada's Pacific Coast in the face of local opposition and weak natural gas prices, ending an eight-year battle over development, the company and the British Columbia government said on Tuesday.

In addition, the provincial oil and gas authority said it will not issue any more drilling rights in the Klappan area, which the local aboriginal community had identified as having special cultural and spiritual significance.

Shell agreed to relinquish its land tenures in the region, which became known as the Sacred Headwaters, and with C$20 million ($20.3 million) of royalty credits, will build a water recycling plant at a gas field in Northeast British Columbia known as Gundy.

The company had spent C$30 million on drilling, an access road and other items at Klappan, spokesman David Williams said. It has also begun reclamation.

An official with the Tahltan First Nation acknowledged Shell for giving up its drilling plans.

"It is a place of tremendous cultural, spiritual, historic and social importance," Annita McPhee, president of the Tahltan Central Council, said in a statement. "Our people do not want to see it developed, and we look forward to working with B.C. on achieving permanent protection of the Klappan."

The oil major had drilled three exploration wells in the region, which includes the Stikine, Nass and Skeena rivers.

Coalbed methane development often brings with it large volumes of associated water. Shell's plans, announced in 2004, had alarmed native groups and environmental groups, including the Skeena Watershed Conservation Coalition, who feared it would harm the salmon-bearing rivers.

Following protests, the government in 2008 imposed a moratorium on development that was due to expire on Tuesday.

Shell said large shale gas discoveries in the Montney regions of Northeastern British Columbia have been a much bigger focus in recent years, especially as prices for dry natural gas slumped, making coalbed methane development unprofitable.

"Close relations with aboriginal communities are important to our many business opportunities in British Columbia, and we are pleased to have found common ground on our petroleum and natural-gas tenure in the Klappan," Shell Canada President Lorraine Mitchelmore said. "We now focus on growth opportunities with better commercial and geological prospects in Northeast British Columbia."

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