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Old Alberta frontier gets new life Liquids-rich Duvernay shale play underpins land grab in exploratory play; horizontal drilling, multistage fracturing the drivers Gary Park For Petroleum News
The source rock that launched Alberta’s petroleum industry in 1947 is making a comeback, powered by the technology twins — horizontal drilling and multistage hydraulic fracturing.
Despite its steep exploration costs and largely unproven results, the Duvernay shale lies about 6,500 feet below the surface, covering a broad span across central and northwestern Alberta, underlying 10 other rock zones that contain commercial quantities of natural gas.
Over the past year, companies have gambled hundreds of millions of dollars at land sales rounding up exploration rights, although there is no conclusive proof yet that anyone has drilled a well that can deliver an acceptable profit.
Early results, according to CIBC World Markets, include initial flow rates of 2.1 million and 5.2 million cubic feet per day from two Celtic Exploration wells, with a liquids content of about 75 barrels per million cubic feet from both wells, although the second well cost about C$17.5 million to drill and complete.
However, the level of industry confidence in the play has soared, peaking in June when about C$330 million of winning bids were made for Duvernay leases, contributing to a single-auction record of C$842 million for the Alberta government.
And analysts are hinting there could be more to come on Aug. 24 when the province offers 704,000 acres — about 35,000 acres more than the benchmark June sale — heavily loaded in favor of deep formations.
The postings include about 640,000 acres in the Kaybob region, where most drilling into the Duvernay has taken place.
‘Hold on to your hats’ CIBC World Markets analyst Jeremy Kaliel — who has estimated the new drilling and completion techniques could bring another 77 billion barrels of liquids to the surface in North America — has rated the Duvernay as “flavor of the month” because of the oil-rich nature of the shale.
“Hold on to your hats,” he said, suggesting the upcoming sale could see companies lock up most of the prospective acreage and that by either late 2011 or early 2012 the buzz over land speculation could move to actual drilling results.
Canadian Discovery, a geosciences company, estimated that the C$672 million spent in the Alberta government’s first July land sale averaged about C$2,500 per acre, compared with C$1,600 last December.
“It’s an impressive amount of money to spend on what is really an exploratory play,” said Neil Watson, consulting services director at Canadian Discovery.
“But there’s lots of reasons to have faith in it,” he said, noting Duvernay shares geological characteristics with British Columbia’s prolific Horn River basin.
It also helps that Duvernay is in the midst of a region that has abundant pipelines and other infrastructure.
Watson said those who think gas prices will rebound in the “next few years will look pretty smart it they get the lion’s share of land that will be a major play.”
Most hotspots acquired The bidding has now reached the point where most of the hotspots have been acquired and more companies are lifting the curtain of secrecy around their involvement in the Duvernay.
In particular, Encana, Talisman Energy, Canadian Natural Resources, Royal Dutch Shell, Trilogy Energy, Celtic Exploration, Athabasca Oil Sands, Daylight Energy, Tourmaline Oil, Bonavista Energy, Angle Energy and Yoho Resources are ranked among those active in the region, which is embraced by Deep basin, a liquids-rich tight gas formation on the eastern flank of the Canadian Rockies, where preliminary estimates rate potential gas resources at 400 trillion cubic feet.
“This is not a mom and pop thing,” TD Newcrest analyst Roger Serin said of the Duvernay. “This is a big boy thing.”
Encana has disclosed it spent US$300 million in the first quarter for Duvernay rights, with Mike Graham, president of Encana’s Canadian division, telling analysts “we’re excited about results from the Duvernay,” comparing the play to the Eagle Ford shale in south Texas.
Encana: liquids significant Encana CEO Randy Eresman had previously startled investors at his company’s annual meeting by suggesting Encana could give away its Duvernay gas and still make money on the liquids.
The Duvernay underpins Encana’s strategy of shifting into liquids-rich gas plays from dry gas rather than waiting at least another two years for gas prices to achieve its forecast target of US$4-$5 per thousand cubic feet.
Talisman reported in July it laid out US$510 million in the second quarter for 360,000 net acres, paying at an average US$2,000 per acre, or about US$500 per acre more than Encana paid, reinforcing its view that there is a “first mover advantage.”
Daylight has also stepped forward, reporting it has spent C$100 million at land sales to build its Duvernay portfolio to almost 130,000 acres and plans a four-well pilot project in the first quarter of 2012.
Canadian Natural Resources, Canada’s third largest gas producer, has joined the action, setting aside its policy over the last three years of shutting in production and limiting drilling to lease retention in the belief that a gas price rebound is two to seven years away.
It has scheduled 15 wells this year in the Deep basin, raising its gas spending by 8 percent this year to C$750 million.
The company said it also is moving to horizontal drilling and multistage hydraulic fracturing in Deep basin’s tighter, thicker reservoirs because vertical wells have accessed only limited reserves.
Cam Kramer, Canadian Natural’s senior vice president of gas operations, said that although the play is “still in its relative infancy, there’s promise that technology will unlock significant value on our lands.”
Talisman: liquids-rich shale Talisman CEO John Manzoni said his company believes Duvernay “will prove to be a liquids-rich shale play and some of the industry activity in the area so far has proven to be encouraging in that regard.”
The company is taking a measured approach, starting out with two wells this year that it is prepared to scale up depending on results.
Robert Spitzer, Apache Canada’s exploration vice president, cautioned that Duvernay is still in its early stages, given that the formation’s true value remains in doubt, noting that it takes more than a couple of years to develop shale plays.
The extensive Cardium formation, the shallowest of Deep basin’s plays at about 6,400 feet, is also attracting companies that say the basin’s liquids-rich gas offers comparable returns to crude programs.
“There’s so much focus on the Cardium oil and so very little on the Cardium liquids-rich gas,” said Darren Gee, CEO of Peyto Exploration & Development, which is spending about C$100 million this year on its Cardium gas program.
“But we’re getting more productive wells in the gas fairway at lower royalty rates and just as good a netback, if not better,” he said.
Gee said horizontal wells are yielding 90 barrels of liquids per million cubic feet at an average cost of C$5 million to drill, complete and tie in, while vertical wells are averaging 40-45 barrels per million cubic feet at an average cost of C$1.7 million.
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