CE Portfolio holdings ARC Energy Trust (TSX: AET-U, OTC: AETUF) and Advantage Energy Income Fund (TSX: AVN-U, NYSE: AAV) each have taken extraordinary steps in recent months to make sure they have sufficient cash right now to invest for the future. Much of that future, for both companies, is focused on the Montney Shale Formation.

Montney’s geology is complex with varying reservoir characteristics and quality. But the magnitude of the prize is potentially enormous. EnCana (TSX: ECA, NYSE: ECA), for example, estimates it has 60 trillion cubic feet of original gas in place on its Montney lands alone, in the same ballpark with its south-of-the-border shale plays, Barnett, Piceance and Haynesville.

The Montney consists of four distinct “intervals of pay:” Upper, Middle, Middle Lower and Lower. The most prolific are the Upper and Lower intervals. The Upper interval has 90 percent of the existing wells, though the lower Montney, with 10 percent of the wells, is beginning to experience significant growth. Montney is estimated to hold approximately 28 percent of the proven gas reserves in Canada.

The world’s most common sedimentary rock, shale is typically rich in methane-generating organic carbon but it’s also dogged by ultra-low permeability. The Montney play is a blend of low-permeability sandstone, siltstone, and shale intervals that sprawls across Peace River farmlands to the foothills well to the west of Fort St. John. The lower horizons within the Montney have more shale.

Although difficult to exploit, tight gas resources are huge. Provincial government studies that peg British Columbia’s shale gas potential between 250 trillion cubic feet (tcf) and 1,000 tcf.

Commercially successful shale development dates back to the late 1990s. In the Fort Worth area of Texas, a junior producer combined horizontal drilling and improved hydraulic fracturing techniques to literally crack open the Barnett shale formation. Nicknamed the “King of Shales” and considered by many to be the largest onshore gas field in the US, the Barnett shale is now yielding more than 1 tcf annually. The gas resource is commonly estimated at 30 tcf.

ARC Energy Trust began breaking open the Upper Montney formation in 2003, but development only took off after it drilled the play’s first multiple-stage frac horizontal well in July 2005. With a lateral reach of 1,500 meters and five fracs along its length, the pioneering well cost CAD7.9 million and is still producing 1.6 million cubic feet per day (mmcf/d). In contrast, ARC recently drilled a 1,900 meter horizontal leg, fraced it eight times, spent CAD5 million, and achieved initial production of 8 mmcf/d. The company reported finding and development costs of about CAD10 per barrel of oil equivalent (boe) at Dawson, a netback of about CAD40 per boe, and total production of about 5 billion cubic feet (bcf), nearly 1 million boe, for each well.

In terms of exploration, tight gas is more comparable to oil sands than to conventional oil and gas. The resource is pretty much known to be there in very large quantities, but the challenge is extracting the gas at an economic cost. The fundamental solution to that problem is coming through multiple hydraulic fracturing of long horizontal wellbores.

But every major shale formation is geologically distinct. Techniques that work well in the Barnett, for example, provide no more than a starting point for northeastern British Columbia or Northwestern Alberta. A lot of expensive fine-tuning must be done in each area. Under ideal circumstances a shale gas producer can drill a handful of wells on its extensive acreage, determine what production methods work best, and proceed to drill dozens, even hundreds, of additional well bores with similar results.

The Montney trend is more than 300 kilometers long and 280 kilometers wide, with varying reservoir characteristics and quality. Its geological variety in turn leads to different production type curves, recoveries, and costs per well.

ARC Energy, one of the largest, most efficient oil and gas producer trusts, has trimmed its distribution by 40 percent since September 2008. The additional cash saved on the monthly payout, combined with its solid balance sheet, will allow ARC to move aggressively from building its Montney assets to exploiting them. The trust actually boosted its 2009 capital expenditure forecast in the late fall of 2008, even as the global economy and financial system seemed to be falling apart.

Advantage, keen on making a quick dent in its forecast CAD2.5 billion long-term capital expenditure on the Montney, announced its intention to immediately convert to a corporation (subject to unitholder approval) and suspended its distribution this month. EnCana, a new addition to the Canadian Edge coverage universe, has devoted considerable resources to its projects in the Montney.

And it’s now one of the largest economically viable resource plays in North America. Long been known to hold abundant resources, how to extract natural gas from shale formations in a cost-effective manner has been the problem. But new drilling techniques have advanced to the point where drilling tight gas plays is more economic.

Companies drill vertical wells in the Montney formation and then drill across, or horizontally. In most cases, drilling a horizontal well can net you up to five times more natural gas then a vertical well. The cost of drilling a horizontal well is a little more than double that of a vertical well, but in most cases going sideways can you get you up to five times more gas.

New fracturing techniques have also helped make shale plays more economic. Companies shoot millions of gallons of water with the combination of sand at high pressures at the shale rock, causing it to fracture. In most shale formations, an eight- to 12-stage fracturing program is used to get at the natural gas, a process that took 60 to 75 days in the 1980s but now gets done in 30 to 45.

In this period of uncertainty, companies have to make difficult short-term decisions that could lead to down-the-road cash flow. ARC Energy’s and Advantage Energy’s recent moves have been entirely focused on long-term sustainability.