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Vol. 12, No. 42 Week of October 21, 2007
Providing coverage of Alaska and northern Canada's oil and gas industry

Beaufort find is oil, not gas

Devon Canada gas hunt yields oil; company seeks partners; oil poses challenges

By Gary Park

For Petroleum News

Devon Canada has posted the first oil find in the Canadian Beaufort Sea in 25 years — a twist of fortune for the company which had been hoping for trillions of cubic feet of gas to spur progress on the Mackenzie Gas Project.

“We had expected gas, so we are somewhat surprised, but this is a lot better than just water,” Dennis Johnston, Devon Canada’s frontier exploration manager, told Petroleum News.

The National Energy Board has issued a declaration of a significant discovery covering about 37,000 acres — the largest such designation awarded for the region.

Devon Canada, 100 percent owner of the Paktoa C-60 discovery well drilled in 2006, estimates the recoverable oil at 240 million barrels. But the company has no plans or means to bring the oil into production.

The Significant Discovery designation, reflecting a “common reality” that a discovery may not be sufficiently economic in size or location to be developed immediately, effectively gives Devon Canada indefinite tenure, allowing it time to make further discoveries or develop new infrastructure.

Devon needs time

For now, Johnston said Devon Canada needs more time to weigh its options before deciding what to do next.

He said the economic, environmental and regulatory challenges of oil development in the Beaufort have to be evaluated, given the fact that the closest liquids pipeline in the Northwest Territories ends at Norman Wells in the Central Mackenzie Valley.

However, the MGP plans allow for a possible twin gas liquids pipeline from the Mackenzie Delta to Norman Wells, with Calgary-based Enbridge seen as the logical operator.

Enbridge’s existing pipeline from Norman Wells to Zama in northwestern Alberta has about 20,000 barrels per day of unused capacity.

Without referring directly to Enbridge, Johnston said he would “love to see a Calgary-based company extend a pipeline to the Delta.”

Otherwise, he said oil is “a lot messier” to contemplate bringing on-stream in the Beaufort, given concerns about the fragile environment and marine life.

Johnston said Devon Canada, as it has been for some time, is ready to involve partners in the Beaufort

The declaration of a significant discovery covers Exploration License 420, created from a 2002 Department of Indian Affairs and Northern Development approval for Devon Canada to consolidate four ELs, which meant the company had to drill four wells to meet its work commitment of C$224 million and retain its exploration rights.

Johnston said Devon Canada “will not drill another 100 percent well” in the EL. The Paktoa well cost about C$60 million.

As a result, he said, the balance of the EL will expire and Devon Canada will honor its commitment to pay a percentage of the work deposit, minus any allowable expenditures.

Discovery could be shift

The Beaufort oil discovery represents a turning back of the clock in Canada’s North and could be a shift in the dynamics of the region.

During the height of an exploration boom in the 1970s and 1980s, when drilling was supported by billions of dollars in federal government incentives, companies were chasing oil, but many found gas at a time when prices were so low that development was uneconomic.

Johnston said other companies are now likely to be chasing oil because, as Devon Canada has learned “the hard way,” the area is oil prone, with an estimated 840 million barrels of recoverable oil in large nearby fields. The Geological Survey of Canada believes the onshore and offshore region has 1.3 billion barrels of oil and 13 trillion cubic feet of gas from 194 exploration wells and 49 declarations of a significant discovery.

The Paktoa well is about 20 miles south of the 1979 Tarsiut discovery, estimated at 150 million barrels of oil and 29 billion cubic feet of gas, and about 60 miles southwest of Amauligak, which has an estimated 350 million barrels of oil and 1.3 trillion cubic feet of gas.

A 1984 discovery by Gulf Canada Resources, since absorbed into ConocoPhillips Canada, Amauligak carries a 25-year production license issued in 1989 that has never been activated because there is no means to get the oil to market.

EL 420 is also south of an EL acquired in the summer by a joint venture of Imperial Oil and ExxonMobil Canada.

It covers 508,000 acres and a work commitment of C$585 million, which requires combined spending of about C$146 million within five years to gain a four-year extension, while Chevron Canada bid C$1 million for an EL just west of Devon.

Imperial has declined to talk about its plans, beyond insisting the bid was “separate and independent” from the MGP and would be approached in its “own right.”

Company spokesman Pius Rolheiser told Petroleum News exploration planning is at a “very preliminary stage,” although no activities are scheduled for this winter.”

He said the normal procedure would be to acquire some seismic prior to drilling.

Pending firmer guidance from Imperial, some analysts have speculated the objective could be oil because of the history of significant finds in that portion of the Beaufort.

There is also support for the idea that any oil produced in the Beaufort could find its way to market through the trans-Alaska oil pipeline rather than a new pipeline along the Mackenzie Valley.

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