Canadian drilling is reviving, but producers are switching targets by turning away from natural gas and concentrating on oil as their prices stay on diverging courses. The new focus for hydraulic fracturing techniques is “tight oil.”
The switch looks likely to last for at least two years, Roger Soucy, president of the Petroleum Services Association of Canada (PSAC), predicted Thursday. He released a revised, increased drilling forecast that shows oil has become the target for a significant majority of field activity for the first time in memory.
The PSAC, one of the most trusted industry forecasters because its 250 member firms are mostly grass-roots contractors on intimate terms with field operations, now expects Canadian producers to drill 11,250 wells this year.
The new total is up by 35% from both the 8,350 wells drilled in 2009 and PSAC projections last fall that activity this year would stay just as depressed.
Canadian drilling peaked at 23,300 wells in 2006, with 70% of them directed at gas. As the recovery develops this year, the contractor association predicts that 54% of the activity will center on oil, with gas trailing at 46%.
The PSAC’s expectations reflect projections of a lasting commodity price divergence by forecasters ranging from the National Energy Board to business analysts such as Martin King, institutional research vice president at FirstEnergy Capital Corp. His spring forecast calls for oil to average US$83/bbl this year, $87 in 2011 and $95 in 2012. He expects natural gas to stall at US$5/MMBtu in 2010, $5.75 in 2011 and $6.25 in 2012.
In effect, from producers’ point of view, gas will stagnate at less than half the value of oil by the accepted comparison yardstick of energy content. If the fossil fuels are at price parity, 6 MMBtu fetches as much as a barrel of oil. In King’s outlook — which drew no quarrels at an industry briefing in the Calgary Petroleum Club, and parallels most current Canadian business and government forecasts — producers will have to pump out 15 to 17 Mcf of gas to match the revenue from a single barrel of oil.
Fear of glut pervades North American gas markets due to spreading production from gas shale plays, accelerating ocean tanker trade in liquefied natural gas supplies and shaky demand, King says. But oil is roaring back from the 2008-2009 recession, he adds. He points to international agencies’ projections indicating that world oil consumption will set a new record of 87 million b/d this year while supply stays reined in by economic aftershocks, political tumult, depletion of old reserves and limited industry access to new resources.
Big producers with deep pockets continue to focus on shale gas, embarking on long-range programs of simultaneously probing recently acquired drilling rights and refining the technology. Imperial Oil President Bruce March said his company and partner (and majority owner) ExxonMobil Corp. are making encouraging progress with shale gas trials on jointly held properties in the Horn River Basin of northern British Columbia.
But for smaller, independent operations looking for faster returns, western Canadian geology makes the new technology of horizontal drilling and multiple well fractures (fracs) cheaper to use for tight oil than shale gas, say senior producers such as Penn West Energy President Murray Nunns. Although his firm ranks among Canada’s top 10 gas producers at 440 MMcf/d, almost all of its C$200 million (US$194 million) 2010 drilling budget will be aimed at oil.
Canadian producers like Penn West have coined a term for the new targets — “tight oil.” Like shale gas, they are embedded in rock layers that lack flow channels and have to be broken open with high-pressure fluid injections with splintering results that resemble spider’s web cracks from hammer blows on a safety glass auto windshield. But the new oil targets are only 1,200 to 2,700 meters (4,000-9,000 feet) beneath Alberta and Saskatchewan, or less than half the typical depth of British Columbia’s gas-rich shale at 3,600 to 4,500 meters (12,000-15,000 feet).
Tight oil wells take three to 12 days, compared to 15 to 25 days for shale gas drilling. Injections to break flow channels into the oil-bearing rock use five to 20 tons of frac materials, compared to 100 to 200 tons for a Canadian shale gas well.
The technical differences hold down costs of tight oil wells to C$1 million to $2.5 million (US$970,000-2.4 million) compared to the C$4.5-7.5 million (US$4.4-7.3 million) typical for Canadian shale gas wells, Nunns estimates. The savings, combined with the low relative market value of natural gas, more than make up for smaller oil production volumes.
The celebrated Bakken formation — widely estimated to harbor five billion barrels in Saskatchewan, Manitoba and North and South Dakota — is only the first tight oil target, says Peters & Co. Research by the Calgary investment house identifies a score of other old black gold stockpiles — familiar to Alberta geologists under names like Bluesky, Cardium, Lower Shaunavon, Pekisko and Viking — that are starting to be revisited with the new drilling technology.
While still in their formative stages in Canada, the tight oil and shale gas hunts are starting to change the overall industry operations pattern. At the peak of gas prices and previously dominant shallow drilling in 2006, Canadian wells were done in an average of about six days. The length of drilling jobs has since stretched out by one-third to an average of eight days.
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