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Devon hits some potholes as it blazes new trails in Canada U.S. giant sells off and writes down some northern assets, but notches gas and heavy oil drilling successes, gears up for Arctic push; concerned about gaining access to proposed Mackenzie gasline, despite moves by producers to hold open season Gary Park PNA Canadian Correspondent
It helps to be big as Devon Energy Corp. has discovered from its northward push into Canada. The Oklahoma City-based company created Devon Canada Corp. out of two major shopping trips north of the 49th parallel, buying Northstar Energy Corp. for C$1.2 billion in 1998 and Anderson Exploration Ltd. for C$7.1 billion in equity and debt last year, with combined gas reserves alone of more than 4 trillion cubic feet, plus 8 million net undeveloped acres, including the largest single land-holding in northern Canada of 2 million acres.
So far, so good.
But the last four months have seen the parent company unload US$935 million worth of North American assets, about one-third or 45 million barrels of reserves estimated to have occurred in Canada, to reduce debt piled up from its purchases of Anderson and Mitchell Energy & Development Corp.
While making those adjustments, Devon was sideswiped by a collapse of Canadian natural gas prices late in the second quarter, which forced it to take a US$371 million after-tax writedown of its Maple Leaf assets.
Full plate of drilling plans Regardless of those blips, Devon Canada has a full plate of drilling plans, with the Arctic moving higher on the list, and is now joining the ranks of oil sands operators.
Devon Chief Executive Officer Larry Nichols said Aug. 1 that despite record production and revenues for the three months, including an average volume of 2.2 billion cubic feet per day of gas and 128,500 barrels per day of oil, Canadian gas prices were a “disappointment.”
Vince White, Devon’s vice president of communications and investor relations, said the price weakness included maintenance and breakdowns on the TransCanada PipeLines Ltd. pipeline, low demand in the western United States, mild weather and unusually high levels of hydroelectric power availability.
With “all of these stars aligning,” the AECO hub price actually dropped below US$1 per thousand cubic feet, although Devon’s average realized price for all gas sales in the quarter was US$2.83 per thousand cubic feet.
Quarterly Canadian production was 784.3 million cubic feet per day of gas, 44,100 barrels per day of oil and 14,500 barrels per day of natural gas liquids.
Second quarter: 130 wells drilled White said Devon drilled 130 wells in Canada during the second quarter for an 80 percent success rate and has completed another 92 in July , with the success rate reaching about 95 percent.
Progress has been made in the Grizzly Valley area in the Foothills along the Alberta-British Columbia border, where an agreement with Duke Energy Corp. will help get gas to market, starting at a net 15 million cubic feet per day around mid-December.
In partnership with BP Canada Energy Co. Devon has been targeting a Deep Permian prospect in the same area where Talisman Energy Inc. made its recent significant Monkman discovery.
White said Devon has made previous discoveries in the same area and the same formation, adding: “We believe that our acreage in this area has gross unrisked reserve potential of (one) trillion cubic feet or more,” matching the Talisman projection.
Since the Anderson deal, Devon Canada president and chief executive officer John Richels has described as “high-potential” Anderson’s 500,000 net undeveloped areas in the Foothills region, rating gas prospects at 50 bcf to 200 bcf in estimated reserves.
Northern lands highly rated The highly rated northern Canadian exploration lands — with 2 million acres in the Mackenzie Delta, Beaufort Sea, Norman Wells and other parts of the Northwest Territories — have also moved into the spotlight, with Devon Canada outlining exploration plans for its four leases in a July 26 filing with the National Energy Board.
The company said it plans to finalize drilling locations after a two-year, three-dimensional marine seismic program is completed this summer, with hopes of spudding the first well during the 2004-05 winter.
When it acquired the four licenses in August 2000, Devon Canada committed to drill one well in each license within five years — a timetable it now says may be too short.
It says discussions have been started with Indian and Northern Affairs Canada, which issued the licenses, to review those commitments.
If the first well proceeds in 2004-05, Devon Canada says future wells will be drilled during consecutive winter seasons, with the primary objective of finding natural gas, which comprises 70 percent of the company’s Canadian production.
Five of the drilling targets are in a western exploration block and five in an eastern block, with all but one located in shallow offshore waters. The most remote is 80 miles from Tuktoyaktuk, Northwest Territories.
Western targets range from 8,200 feet to 18,040 feet in 27 feet to 40 feet of water, while the eastern targets range from 11,480 feet to 13,120 feet in 22 feet to 36 feet of water.
The company said it plans to confine drilling activities to the landfast ice regime during the winter to avoid potential well control problems and oil spills during the open water season.
Provided Devon Canada is able to proceed with its project it will signal one of the major exploration advances in a region where 89 offshore wells were completed in the 1970s and 1980s before activities were suspended.
But the company has underlined the long-term nature of the Delta. Speaking to a North American natural gas conference in the spring, Devon Canada frontiers Vice President Michel Scott said the high Arctic is beyond the reach of infrastructure that would allow significant activity for several more years, regardless of the gas discovery on the Delta earlier this year with Petro-Canada.
Pipeline access a concern Although the Delta is the high-profile region in the Canadian Arctic, he said producers are worried about gaining access to the proposed Mackenzie Valley pipeline, despite moves by the Mackenzie Delta Producers Group of Imperial Oil Ltd., Shell Canada Ltd., ExxonMobil Canada and Conoco Canada Ltd. to hold a non-binding open season for producers outside the consortium. (See related story on page 1.)
However, Scott said a pipeline from the Delta would not only stir interest in that region — the gas reserves are currently estimated at 9 trillion cubic feet, with a potential 53 trillion cubic feet remaining to be discovered — but could extend interest to the Arctic Archipelago, where 160 wells have discovered about 14 trillion cubic feet before drilling was suspended in 1987.
To diversify its Canadian holdings, Devon Canada has turned to Alberta’s oil sands, disclosing preliminary plans on August 6 for a C$400 million heavy oil scheme, which it hopes to bring on stream at 35,000 barrels per day in 2007.
The company said in a public notice that it is now evaluating the feasibility of a commercial-scale development after two years of delineation wells and seismic.
It plans to use steam-assisted gravity to extract bitumen from its Jackfish lease, 70 miles south of Fort McMurray, having already acquired SAGD experience as majority owner and operator of the Dover oil sands SAGD test plant north of Fort McMurray.
Richels said that as production of conventional crude declines in the Western Canada Sedimentary Basin companies have no choice but to switch to heavier crudes to sustain output levels.
He said more tests will be conducted this year to establish the reserves at the Jackfish site, where Devon Canada has a 100 percent working interest, adding “we wouldn’t be taking this next step if we weren’t optimistic about what we have found.”
Other companies with SAGD projects under way or proposed include Petro-Canada, Conoco Canada, OPTI Canada Inc./Nexen Inc. and Japan-Canada Oil Sands Ltd.
Editor’s note: Devon Energy Corp. is a 5 percent partner in the Cosmopolitan unit near Nikiski in Alaska’s Lower Cook Inlet with operator Phillips Alaska Inc. (70 percent) and Forest Oil Corp. (25 percent)
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