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Canadian Drillers Enjoying Unconventional Boom

Participants in the Canadian energy industry are signaling that its switch of drilling targets to oil and natural gas liquids (NGL) will continue and accelerate.

Precision Drilling Corp. -- a barometer of field activity as Canada's biggest contractor -- is back in growth mode, telling shareholders it is building rigs on the strength of long commitments by producers to use the equipment for the field target change.

The action is concentrated in tight oil, where Canadians are importing techniques of deep horizontal drilling and multiple hydraulic fracturing (fracking) stages from the United States.

Precision is spending $514 million to build a dozen rigs capable of the new work this year and in early 2012, with new-build contracts from producers supporting all the fleet additions. While the majority of the equipment is destined for Canadian oil and liquids-rich gas fields, the company says its U.S. operations are also dining out on the same target switch in the U.S. and predicts it will generate orders for yet more new rigs.

"Across North America, approximately 70% of Precision's rigs working during the first quarter were drilling for oil or liquids-rich natural gas targets and over 80% were drilling complex horizontal or directional wells," the company told its stockholders in its latest financial statements. "In the U.S., Precision has redeployed approximately 25 rigs from dry gas plays, such as the Barnett and Haynesville shales, to oil and liquids-rich plays such as the Eagle Ford and Permian Basin."

In Canada, "drilling activity during the first quarter was at levels that haven't been reached for several years." The number of Precision rigs working in the western provinces jumped to an average of 139 during first-quarter 2011 from 106 in the last three months of 2010 and from 113 in the first three months of last year.

"Most of this increase was driven by unconventional horizontal drilling and completion techniques being applied to oil reservoirs in Western Canada," Precision said.

Exploration and production companies explain that the region is especially well suited to a large-scale change in drilling targets due to a long history of conservative regulation that kept wells spaced far apart, effectively preserving tight oil formations by ruling out tight well spacing allowed in other jurisdictions.

Pengrowth Energy Corp., for instance, is a prime beneficiary of the legacy. The producer said it has been able to "initiate a shift from its traditional 50/50 production split between oil and liquids and natural gas to a greater focus on oil and liquids production."

In first quarter financial statements released Thursday the Calgary company announced a 38%, $150 million increase in its 2011 budget to $550 million to accelerate drilling. Key targets include a notable case of well preserved oil properties in the Swan Hills region northwest of Edmonton, where deep and horizontal drilling accompanied by multiple frack stages is reviving activity in a field dating back to the 1950s and formerly believed to be suitable chiefly for development of leftover natural gas.

Another independent, home-grown Calgary producer, Penn West Exploration, confirmed that its focus is on "key light oil resources" in well known vintage Canadian formations called Cardium, Waskada, Viking and Northern Carbonate. "In these core areas we drilled 129 of our 153 net produceable wells in the quarter using state of the art horizontal drilling technology and multi stage completion techniques," the company said.

The 255-company Petroleum Services Association of Canada (PSAC) confirmed that Pengrowth and Penn West have plenty of company in their switch of priority from gas to liquids. The group's latest field activity forecast shows that the change is affecting the distribution of field activity in the western provinces.

Oil-rich Alberta is expected to experience 7.5% growth in drilling this year to 8,732 completed wells. In gas-prone British Columbia, activity is forecast to decline to 554 wells in 2011 from 649 in 2010.

PSAC's price projections, based on a canvass of analyst expectations, highlight the driver behind the change - the growing separation between natural gas and oil prices. The group expects oil to average $100/bbl this year while Canadian gas stays flat at as little as $3.85/MMBtu. If the expectations turn out to be correct, oil will be more than four times more valuable to Canadian producers than gas this year when the two resources are compared on the energy content scale where 1 bbl is equivalent to 6 MMBtu.

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