Pouncing on new shale plays9/21/2012
From all leading indications, the Duvernay may be as big to Alberta as was the Leduc discoveries of the 1940s
No set formula or established process exists for energy firms to follow when trying to get in on a hot new resource play.
Success requires a delicate balance of speed and tact. Companies must be willing to move quickly but also exercise patience, and they must create detailed plans that can be abandoned on a moment’s notice.
It is, as NuVista Energy Ltd. chief executive Jonathan Wright said at the Peters and Co. conference in Toronto last week, “more of an art than a science.”
“One year ago our company embarked on a change in corporate strategy to transform NuVista during this challenging gas price environment,” Mr. Wright said. “That involved testing out exposure to new plays.”
The new play in this case was a shift to shale gas from conventional gas production.
The Calgary-based junior producer purchased land in the Wapiti region of the Alberta Montney, west of Edmonton and straddling the Alberta-British Columbia border. Today NuVista has four horizontal shale-gas wells producing in the region, with another three expected to come online soon, and optimism is growing among the company’s investors.
NuVista stock has grown by more than 25% during the past three months.
“There is a pronounced inflection point that occurs in these resource plays when a certain amount of de-risking has occurred and we feel Alberta Montney has hit that point,” Mr. Wright said.
More players getting involved is part of the reason behind his bullishness: Celtic Exploration Ltd. now has seven producing wells south of NuVista and to the north lie nearly two dozen wells controlled by majors such as Encana Corp., China’s Sinopec Ltd. and ConocoPhillips Co.’s Canadian division. However, broad-based interest alone does not make for a successful play.
The Duvernay liquids play, which lies directly to the southeast of the Alberta Montney, makes the point abundantly clear. Dozens of companies have flocked there since 2009, spending more than $3-billion on land and drilling about 34 wells to date. Yet opinions on the play’s potential remain dramatically different.
“From all leading indications, the Duvernay may be as big to Alberta as was the Leduc discoveries of the 1940s,” said Greg Niebergall, exploration manager at Yoho Resources Inc. “Early well results have confirmed the presence of liquids-rich area that spans a little over 320 kilometres, that is at least 30 kilometres wide from Kaybob in the north down to Ferrier in the south.”
Talk like that is premature at best, according to Gary McMurren, director of light oil at Athabasca Oil Corp.
“At the state we’re at in the Duvernay we are very much in the exploration phase, so to the question whether the Duvernay will be the next Eagle Ford shale, with certainty I can tell you that no one can answer that question here, nor anywhere, with any certainty,” Mr. McMurren said in his presentation to the conference.
Unlike the Eagle Ford play, which is concentrated in south Texas and has several hundred wells now in production, Mr. McMurren notes just a few dozen wells have been drilled in the Duvernay. Many of them have been operating for only a few months, he said.
“We have no idea how to do any analysis or declines on economics as we really are in the infancy of this play,” Mr. McMurren said.
New plays are at their riskiest when they are still in their infancy as the number of unknown variables is at its highest. Despite the heightened risk, that is usually the ideal time to strike, said Peter Hawkes, vice-president of exploration and geoscience at PetroBakken Energy Ltd.
“You have to get in early. You have to capture the resource,” Mr. Hawkes said. “You can do this through various means, land sales or asset or equipment acquisitions, but the key is you need to acquire your expertise and experience early and see if you can make it work.”
As the name suggests, PetroBakken was one of the first to move into the Bakken play that straddles the middle of Canada’s border with the United States and today it is the second-largest landowner in the region. Getting to a new play quickly means paying the lowest possible price for land because demand has not yet outpaced supply.
That is what happened when PetroBakken moved into the Cardium play about two years ago. In one section of the play, Mr. Hawkes said his Calgary-based company paid about $780,000 per block of land while others were paying $60-million for similar property.
The trick is deciding whether to dive into a new play head-first or simply walk away. In the past, PetroBakken has decided against pouncing on new plays even if they possess great potential.
“We actually had an opportunity to get into the shale play in Quebec, but at the time we thought [with] the risk exposure and the potential political regime we decided not to enter,” Mr. Hawkes said.
It turned out to be a smart move, as the Liberal government at the time in Quebec City imposed a moratorium on all shale-gas development shortly after PetroBakken backed out. On Thursday, the newly elected Parti Québécois government said it plans to impose a total ban on shale development in the province.
“We are also not in the Alberta Bakken [because] we were uncomfortable with the risk exposure and what it might do to our financial resources and I also wasn’t convinced that it will be a successful oil resource, at least to handle the type of development that we like to do,” Mr. Hawkes said.
His underlying message, that companies entering new and emerging plays must conduct their own risk-versus-reward analyses based on their own unique circumstances, is difficult to dispute. There are, however, certain factors that any company should consider.
“Critical in all new resource plays is the ingredient of reducing cost structure,” Nu-Vista’s Mr. Wright said. “And it is the little things that will get you there.”
The company plans to reduce the cost of drilling one well in the Montney from $5.5-million initially to $4.6-million.
“And we’ve seen some resource plays go as far as a 50% reduction in costs so we know it can be done,” Mr. Wright said.
Ensuring the proper shipping infrastructure is being planned along with continuing access to capital are other broadly applicable components Mr. Wright says should always be considered when planning a move into a new play. However, no component is more important than learning from past experience.
For in business, as in art, no process is ever fully perfected.
“We were able to leverage our knowledge from the Bakken to innovate in the Cardium [and] from there we will move onto our next play, which hopefully we can talk about a year from now,” PetroBakken’s Mr. Hawkes said.
“We will innovate, we will grow and we will compete.”