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Canada's Canol Formation Stirring Shale Excitement

Canada's frontier shale drilling hot spot lived up to hopes for a new source of premium-grade oil, according to first results disclosed from 2012-2013 winter exploration in the central Mackenzie Valley region of the Northwest Territories.

The Canol formation, described by geologists as potentially comparable to the rich Barnett formation in north Texas, flowed "light sweet oil and natural gas," said Calgary-based MGM Energy Corp. "We are very excited with the early results of the well," said MGM President Henry Sykes. "The results are quite consistent with our expectations."

But the expectations were limited by harsh conditions, high costs, regulatory restraints and a short work season on the remote drilling frontier beside the Mackenzie River in road-less woods and muskeg swamps near Norman Wells.

The successful well, known as I-78, only sampled the Canol with a vertical bore and low-power fracturing. MGM and investment partner Shell Canada last fall withdrew a regulatory application for a second well to perform a shale production test with horizontal drilling and full-strength hydraulic fracturing, after territorial authorities ruled that the larger effort would require an environmental assessment.

When the production trial was postponed, Sykes said, "MGM Energy simply cannot justify the allocation of resources to pursuing a regulatory process that is uncertain both in terms of requirements and time lines, and thus cost. It is premature to invest substantial and indeterminate time, money and resources in this regulatory process at the exploratory phase of the Canol shale oil play. As the play advances, the time for such a process may come, but that time is not now."

The I-78 success has moved industry closer to an arctic trial of the advanced and controversial shale production technology developed in the Barnett and spreading across more accessible regions of the United States and Canada, Sykes indicated.

"One or more horizontal wells will need to be drilled to establish the best method," the MGM president said. "In the near term, a great deal of work and analysis remains to be done with respect to information obtained and cores taken during the project, and that work will take some months to complete. We also look forward to working with regulators and local communities to ensure that the benefits of responsible development of the Canol shale are well understood and quantified."

Costs of Canadian shale drilling near the Arctic Circle remain undisclosed, with MGM's John Hogg, exploration vice-president, saying only that even a lone vertical sampling well runs into "tens of millions."

Canol fortune hunting costs four to five times more than exploration drilling in northern Alberta and British Columbia (BC), Hogg told a recent industry conference held in Calgary by CI Energy Group.

The I-78 well confirmed that the Canol geological layer is about 100 meters (328 feet) thick, but also that drilling down more than a mile is required. The oily zone in MGM's exploration leases is 1,819-1,919 meters (5,966-6,294 feet) below the land surface.

All equipment, personnel and supplies have to be carted into the Canol area by river barges, then from specially built landing zones beside the Mackenzie out to well sites on trucks using man-made temporary ice roads, which can be trusted to support heavy weights only during the coldest three months of winter.

All waste, from drill-bit rock cuttings to camp kitchen trash, must be hauled out of the northern bush to regulated oil- and gas-field disposal sites in Alberta and BC.

In spring, summer and fall, the arctic ice roads and equipment operating surfaces melt away, forcing industrial explorers to start over from scratch for every frosty working season.

Drilling only accounts for 42% of the cost and less than one-tenth of the time for a Canol exploration well, Hogg reported. Planning and obtaining regulatory approvals take 12 months and eat up 17% of the budget. Barging and ice construction represent another 25% of expenses, and a complete well test is expected to take three months and 16% of costs.

Along with MGM and Shell, Husky Energy and ConocoPhillips Canada mounted Canol shale drilling expeditions this winter. Imperial Oil has also scooped up exploration rights in the area but sat out the 2012-2013 season.

Eric Hanson, central Mackenzie Valley exploration supervisor for ConocoPhillips, said, "We're taking a very long-term view of this project." Hanson described the current drilling as "laying foundations for decades of activity," provided the Canol fulfills the industry's hopes during an extended frontier exploration phase that is liable to last up to six years.

Like MGM and Shell, ConocoPhillips has to date limited itself to vertical shale sampling wells. Hanson said horizontal drilling and hydraulic fracturing production trials could be attempted in 2014 and 2015. But he added that the industry hopes territorial authorities will await a full-sized commercial development before requiring a complete environmental assessment, which is expected to take up to three years in the notoriously complex northern Canadian regulatory maze.

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