Wednesday, November 2, 2011

Oilweek Magazine: The Hot 5 Hottest Plays in Western Canada

Hydraulic fracturing treatment, Woodford Shale, Candian County,
Oklahoma, for which Halliburton provided 52,000 hhp.

Oct 2011

Source: Oilweek Magazine
The Hot 5

Producers chase oil and liquids in western Canada's hottest plays
by R.P. Stastny
Even with the prospect of wildly fluctuating oil prices in the future, oil is decidedly where many producers want to be at a time when vast stores of shale gas in North America continue to depress natural gas prices.

Murray Nunns, president and chief executive officer of Penn West Exploration, whose career spans 30 years in oil and gas, provides some of the context for today´s Canadian oilpatch activity.

"Oil development largely stopped in Alberta in the 1980s," he says. "Why did it stop? Number one was oil prices. The cost structure was high in Canada. The resource was difficult to access and the royalty structure was high on the front end when the production volumes were high, and dropped as the volumes decreased. Well, if you´re trying to repay capital investments, that´s about the worst possible scenario."

Today, by contrast, Alberta has a five per cent upfront royalty on the first 50,000, 60,000 or 70,000 barrels, depending on well specifics, and Saskatchewan has a zero per cent royalty on the first 38,000 barrels, allowing producers to pay out their wells quickly. Horizontal multi-frac technology has driven down costs structures, ("You can drill 12 or 14 vertical wells or you can drill one horizontal well with 14 fracs," Nunn says. "That´s about a 70 per cent reduction in costs."), oil prices are strong and regulatory provisions for the down-spacing of wells round out the list of key factors that launched today´s light oil boom.

In Alberta, oil well completions at the end of July rose to a 30-year high. Many of the traditional oil plays that put Alberta on the world map are seeing new drilling along their edges in tighter rock that didn´t readily surrender its cache of oil to older technology.

So not surprisingly, four out of Oilweek´s Top Five plays are oily: the Cardium, Beaverhill Lake, Saskatchewan´s Viking and Manitoba´s Spearfish.

Each play differs in its stage of development and how it fits into a company´s strategy. The Viking is well-mapped and pulls in small companies content to drill relatively shallow and relatively inexpensive wells. They are rewarded with modest production with good netbacks.

The same can be said of the Manitoba Spearfish, except it´s a bit deeper and more expensive to drill.

The Cardium is a deep and expensive to drill. Beaverhill Lake is even deeper, but both yield bigger volume wells. Penn West is "on the cusp of development" in the Cardium after more than a year of technical assessment work. Beaverhill Lake is still in predevelopment. These are impact plays for companies with deeper pockets such as Penn West, Crescent Point Energy Corp. and many others. Bread-and-butter Viking and Spearfish assets may also make up part of their diet, but it´s these deeper plays that will provide the meat-and-potatoes for growth.

For all the attention oil is getting, natural gas production is by no means dead in the Western Canadian Sedimentary Basin. Northeastern British Columbia´s Montney, traditionally among the top three most economic gas plays in North America, continues to turn out strong production, helped in parts by a natural gas liquids (NGLs) boost to its economics.

So the Montney rounds out this year´s Top Five.

The greater vision, as floated at shale gas conferences over the years, of a natural gas-fired economy in North America may well be around the corner. Natural gas-powered generation is a less carbon-intensive fuel source for power generation and its plants are cheaper to build. So utilities across North America are increasingly turning to natural gas turbines for additional capacity as well as end-of-life coal plant replacements.

In some jurisdictions such as California and Texas, natural gas-powered transportation is gaining as a clean-fuel alternative. In Canada, despite the best efforts of an association representing a well-established natural gas vehicle service and supply industry as well as Encana Corporation´s promotion of the concept, a natural gas highway infrastructure, which essential to wider natural gas vehicle adoption, is still a way off. In any case, natural gas as a transportation fuel is not expected to account for anything but a slim fraction of the demand for natural gas in the future.

Nonetheless, anticipating a day when natural gas prices will stabilize to more sustainable levels than they are now, producers with deep pockets, such as ExxonMobil Corporation., are taking advantage of counter-cyclical acquisitions in the Marcellus and Haynesville shale gas basins. Rather than following the crowd into oil and liquids-rich assets such as the Eagle Ford in southern Texas, where producers are paying up to $20,000 per acre, they know natural gas´s fortunes will inevitably come around. And when it does, this strategy will pay handsome dividends.


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