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Vol. 16, No. 24 Week of June 12, 2011
Providing coverage of Alaska and northern Canada's oil and gas industry

Conventional comeback

Technology, oil prices, Alberta royalties spur revival of Canada’s old oil fields

Gary Park

For Petroleum News

New-age technology in old-age fields is working wonders in Western Canada by ending a 10-year decline in conventional oil production that many had considered irreversible.

The potent combination of horizontal drilling and multistage fracturing, with high oil prices and favorable Alberta royalty changes in supporting roles, has taken center stage.

In updating its annual production forecast, the Canadian Association of Petroleum Producers said the output of medium and light oil should grow over the next five years, reaching 983,000 barrels per day by 2015 from 948,000 bpd in 2010.

That may not sound earth shaking until it’s compared with CAPP’s forecast last year that conventional output in 2015 would actually be 799,000 bpd — a turnaround of 184,000 bpd.

CAPP Vice President Greg Stringham said that if the trend continues his organization may extend the recovery beyond five years.

However, conventional heavy oil production misses out on the celebrations. It is forecast to slip to 353,000 bpd in 2015 from 375,000 bpd in 2010.

The anticipated growth of oil sands production, much of it dependent on the availability of pipeline capacity to the United States and possibly Asia, remains the key driving force in Canada’s production outlook over the 2010-15 period.

CAPP expects Canada’s total volumes will rise to 4.74 million bpd from 2.83 million bpd last year, an increase of 401,000 bpd (with conventional crude accounting for nearly half) from the target CAPP set last year.

Record land sale

The rapidly growing confidence across most of the oil sector boiled over June 1 when an Alberta government land sale fetched C$843 million, including C$106.5 million for a single parcel of 7,872 hectares (19,452 acres) in west-central Alberta.

The winning bids easily eclipsed Canada’s two benchmark sales — C$651.4 million at a February 2006 sale in Alberta that was driven by carbonates in the oil sands region and C$610 million in July 2008 as companies scrambled to round up unconventional gas prospects in British Columbia.

An Alberta government spokesman said six of the successful bids were among the top 10 all-time sales in the province, but most of the buyers have kept their identities confidential by operating through brokers.

Sales of leases and licenses covered 271,000 hectares at an average C$3,100 per hectare, compared with the first nine auctions of 2011 which raised C$1.8 billion for just over 2 million hectares at an average C$882, compared with the same point of 2010 when 1.3 million hectares were sold for C$783 million at an average $580.

Alberta Energy Minister Ron Liepert confessed he thought there had been a mistake when the latest numbers were presented to him.

He said the most significant result is the focus on conventional oil in the Cardium formation, which is competing for attention with the Viking formation also in Alberta and the Bakken and Lower Shaunavon plays in Saskatchewan.

Liepert said the records are also a payoff for changes to Alberta’s royalty structure that promote the use and deployment of new technologies.

Brad Hayes, president of Petrel Robertson Consulting, said he was amazed by the amount of land that sold for more than C$4,000 per acre, peaking at C$14,839 per hectare for 3,968 hectares purchased by Canadian Coastal Resources and C$14,103 per hectare for a 6,656 hectares picked up by Cavalier Land.

Focus on west-central Alberta

The focus was on the west-central portion of Alberta, where companies are targeting the Pembina oil field, Alberta’s most productive pool which has a 58-year commercial history.

Geoff Ready, an analyst with Haywood Securities, said the large packages covered Duvernay shale potential.

Alberta is now on course to surpass its 2010 land sales benchmark of C$2.39 billion and easily beat its budgeted C$1 billion for the 2011-12 fiscal year.

CAPP said the auction activity is evidence companies are deploying new technologies to exploit tight- or low-permeability reservoirs that were unsuited to or uneconomic using conventional drilling methods.

The auction results reinforce forecasts of more active drilling this summer than usual, with the Canadian Association of Oilwell Drilling Contractors raising its target for Western Canada this year to 13,128 wells, compared with the industry’s recent low of 8,278 wells in 2009.

However, E&P companies are cautioning that the increasing outlook for a lively summer could also see the industry try to cram four months of work into two, applying pressure on the rates and availability of horizontal rigs.

Lyle Whitmarsh, chief executive officer of Trinidad Drilling, Canada’s third-largest drilling contractor, told a conference call June 1 that 2011 has already exceeded his expectations.

He said strengthening conditions will “lead to further improvements in day rates, activity levels and further growth possibilities” for his company.

Crude exports projected to grow

In its 2010-15 production report, CAPP expects crude exports from Western Canada to the United States will to grow to 2.7 million bpd from a current 1.7 million bpd, assuming pipeline additions such as TransCanada’s Keystone XL are built and volumes from Venezuela and Mexico decline.

The anticipated growth in Canadian output over the next five years will go largely to the United States, with the PADD III (Gulf Coast) market receiving at least 380,000 bpd of Western Canada crude, compared with 119,100 bpd last year, which included 36,500 bpd by tankers from British Columbia and Atlantic Canada.

Crude from Western Canada is expected to grow to 348,600 bpd from last year’s 279,600 bpd in the Northern PADD II (Midwest) market and to about 1.2 million bpd from 874,500 bpd in Eastern PADD II.

In addition to accessing the U.S. Gulf Coast, CAPP, the industry’s major lobby organization, said Canadian exports could increase to California and Washington in response to shrinking volumes from California and Alaska, and possibly diversify into Asia by 2016.

CAPP said Canadian refineries that have access to Western Canadian crude have total refining capacity of just over 1 million bpd and processed 828,000 bpd in 2010. They are expected to handle 921,900 bpd in 2015.

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