Revolution Repeated

The Western Canada Sedimentary Basin. This article appears in the February issue of Oilweek.

By Peter McKenzie-Brown

First came the revolution in natural gas production – the shift to shale gas which, by bringing huge new stores of natural gas into the market drove prices down and made it necessary to fundamentally restructure Canada’s gas-prone petroleum sector. Now comes the revolution in the oilfield. Ironically, the same technologies that made shale gas possible are enabling the industry to begin the restructuring that the shift to shale gas made necessary.

“Oil doesn’t flow as well as gas,” Legacy Oil & Gas president Trent Yanko reminds us. “So in the oilfields of Alberta, especially, is a tremendous opportunity to recover unproduced oil. Original oil in place was in the billions of barrels, so if you can add only one, two, three percent to recovery there is quite an opportunity. You don’t have to be a wildcatter out in the jungle somewhere. All you have to do is better exploit what we already know is there.”

The technologies that made the shale gas revolution possible are beginning to have a similar impact in the light and conventional oil sector, which can now develop reservoirs that could not be exploited until energy prices and new technologies made production economic. For small companies in particular, this is presenting exceptional opportunities. From start-ups to mid-caps, companies like TriAxon and PetroBakken Energy are creating profitable enterprises from oilfields discovered 50 years ago. Already successful in similar enterprises, Legacy is taking on the big kahuna – the century-old field that put Canada’s petroleum headquarters on the map.
Juniors and the Treadmill

Since it became commonplace in the late 1980s, horizontal drilling has been enhanced by increased drilling efficiency. Much longer horizontal legs are now possible: many are two and three kilometres in length. This is possible because of improvements in bit design, the increasingly effective use of coil tubing and better down-hole motors. Other contributors include geo-steering and increasingly effective measurement-while-drilling (MWD) tools and techniques. Most important of all is multi-stage fracturing. The industry can now isolate many completion zones along lengthy horizontal wellbores: a two-kilometre horizontal leg can host up to 20 hydraulic fractures.

These technologies are making formations like the Bakken viable. Increasingly, the technologies that created the shale gas revolution – long horizontal wells and multistage fracturing – are being applied to aging light oil reservoirs in North America. This production phenomenon has also involved largely unacknowledged regulatory responses by the governments of Western Canada. These factors and other technologies are opening up important new opportunities for production from largely depleted reservoirs. For example, Gary Leach – executive director of SEPAC (the Small Explorers and Producers Association of Canada) – notes that “microseismic for the more precise design of frac jobs is a particularly important new technology.”

A year ago, TriAxon Resources represented a big success story among private junior oil companies. The company was created with what in 2006 was the novel idea of applying the cluster of new technologies to oil production. After screening available prospects, the company focused on the Bakken, Glauconite, Cardium, and Viking formations. The company raised $87 million in private financing; two and a half years later the partners sold out to Crescent Point Energy for $257 million.

Then, according to former president Jeff Saponja, he and his two partners – chief operating officer Colin Flanagan and operations vice president Rob Hari – took a two-week break before establishing TriAxon Oil Corp. – “TriAxon Two,” he calls it.

The opportunities come with a cost, of course. Saponja cautions that those technologies present unique challenges because they are so capital-intensive they. “Fifteen years ago, in the heyday of conventional oil exploration and production, you would put $150,000 to maybe $500,000 into the ground to get 200,000 barrels of oil,” according to Saponja. “Now you have to put maybe $4 million in the ground to get 200,000 barrels of oil, and you have a 50% to 80% initial rate of decline. To get these multistage frac wells to work you have to drill a lot of wells in these lower quality reservoirs.” This leads to what he calls the treadmill.

“To offset decline you have to be continually drilling, because the decline rate is so high. The main point of the equation is that these horizontal wells are very capital-intensive. Initially you get a very high rate of oil production but they will decline quite quickly. The economics are actually fairly marginal on a well to well basis, so you have to drill a lot of wells to benefit from scale. Except in the Bakken,” he says, “Most of these multistage frac wells really struggle if oil prices are below $60 or $70. For these wells to be really profitable, oil has to be over $80 a barrel.”

“You have to be continually drilling to offset decline. It’s called the treadmill. The main point of the equation is that these horizontal wells are very capital-intensive. Initially you get a very high rate of oil production but they will decline quite quickly. The economics are actually fairly marginal on a well-to-well basis, so you have to drill a lot of wells to benefit from scale. Except in the Bakken,” he says, “Most of these multistage frac wells really struggle if oil prices are below $60 or $70. For these wells to be really profitable, oil has to be over $80 a barrel.”

Does it make sense for private companies like TriAxon to stay public? According to Saponja, the economics of staying private are iffy. “These are very expensive wells. For a junior to stay on the treadmill becomes very difficult after you reach 3,000 or 4,000 barrels a day because you need a lot of capital to grow production and combat decline. The challenge that juniors face is that they have to either get their hands on more capital or be prepared to monetize their assets by selling them off. That’s the case for going public: it gives you access to low-cost capital. However, my partners and I are happy building basements, then selling them to the highest bidder.”

Midcaps in the Bakken
The highest bidder for TriAxon One was Crescent Point Energy – one of the two largest players in the Bakken, and the main competitor of PetroBakken, a midcap headed by Gregg Smith. “Our decline rates in the Bakken are about 60% in the first year, so we have to keep drilling to maintain production rates. You have to experiment a lot to be successful in plays like this. When you come into these plays your initial results are going to be mixed, but as you refine your drilling and production systems they improve.”

With considerable satisfaction, Smith notes his company’s success in drilling bilaterals from a single wellpad. “For PetroBakken to drill a single horizontal, the cost is $2.4 million. However, to drill two bilaterals from a single pad costs $3.6 million. It’s much more capital-effective, and it delivers an extra 50,000 barrels per well into the bargain.”

According to SEPAC’s Leach, the obviously improved economics of tighter spacing is generating “a regulatory response. The design of wellpads has to be different, and the new wellpads provide both environmental and economic benefits. Regulators are beginning to respond in all three western provinces.”

He adds, “The Cardium just began to take off in early 2009, and it was SEPAC companies – junior and midsized companies – that set the stage for this. Those sectors are looking to restructure because of the long-term poor prospects for natural gas, and this has played a role in that. It’s really turned around the fortunes of the industry, and generated a lot of investor interest.” With some satisfaction, he notes that multinational companies are coming back to North America to get back into the light and conventional oil resource plays. This involves a turnabout for some companies. for example, Talisman sold off a lot of its Alberta oil production just a few years ago.

PetroBakken’s Smith stresses that the situation in Canada is quite different than that in the United States. The Americans “are drilling shale oil plays. (By contrast) most of the horizontal wells with multistage fraccing in Canada are into reservoirs that were previously simply uneconomic or marginally economic (if you were trying to produce) oil from a vertical well.” This is all changing now, he says. “Now you’re seeing people try to tie up shale oil plays like the Alberta Bakken, the Duvernay and the Nordegg.”

Back to the Future
Of course, old hands in the oil industry are the first to tell you that technology has always been the key factor in expanding production. In fact, in this period of oilfield revolution the importance of technology is more obvious than ever before. According to Legacy president Trent Yanko, “Technology has always been an important part of oilfield development in Canada. I started out in Saskatchewan in 1980s, which was really Canada’s leader in horizontal drilling because of a major government incentive program.” After a few years the industry found itself drilling more horizontals in Saskatchewan than anywhere else in North America – “even the Austin Chalk” in Texas.

“Southeast Saskatchewan has been a classic case of the use of technology to extend the life of reservoirs,” Yanko continues. “Since the 1960s the industry has applied waterflood there, horizontal drilling, CO2 injection and other technologies, each of them extending the life of the province’s south-eastern petroleum reserves. As a result, in the late 1990s oil production matched what everybody thought had been the peak oil levels of 1966, and today the province is at record production.”

Almost all of the reservoirs now being developed with these technologies were discovered after 1947, when the Leduc discovery ushered in the industry’s modern age. Yanko, however, has plans to apply them in the petroleum industry’s birthplace. “Through the acquisition of a private company in July,” he says, “we acquired the Turner Valley oilfield. We control most of the production and all the facilities there.”

To understand Turner Valley’s significance, it’s worth noting that the field’s proximity to Calgary is the reason Canada’s petroleum sector is headquartered in the city. And, as SEPAC’s Gary Leach observes, Calgary now hosts the 45% of the world’s publicly traded oil and gas companies.

As he discusses this property, Trent Yanko becomes palpably excited. “There is still a lot of meat on the bone. There’s been less than 1% decline in (annual) oil production (from Turner Valley) over the last fifty years. The original oil in place was 1.3 billion barrels of 40° oil, and the historical recovery factor to date is only about 12%. So we think it has huge development potential. Before we acquired the property, the last vertical wells were drilled there in the 1940s. There was some horizontal drilling in the 1990s, but the field has been non-core for a long time.”

Although Legacy is proceeding cautiously, its president is thinking big. To begin with, Yanko believes Legacy has mapped a Cardium trend right on top of the field – “11 miles long and about 1½ miles wide,” with 10 metres gross maximum thickness. “In Turner Valley there’s a vertical well that just missed the Cardium and still produced more than 19,000 barrels. Otherwise, that trend hasn’t even been touched.”

“We believe the application of horizontal drilling and multi-stage frac technology can increase the recovery factor,” he adds. “So can infill drilling and reactivation of the waterflood. This property hits a lot of our hot buttons.” In the fall, the company drilled a number of vertical wells into the field. “We are going to frac them, and they will provide a great controlled environment to help us understand the horizons for future horizontal drilling. These wells will help us design that drilling program properly.”

When Turner Valley was first drilled in 1913, it was a wet gas field from which liquids were extracted and natural gas flared. A century later, with conventional gas again a marginally economic commodity, the prize sought in Turner Valley reservoirs is again its hydrocarbon liquids. The difference today is the toolkit.

Vocal Records

Photo of the Bitumount oilsands plant, 1936. Bitumount was one of the first commercial oilsands plants.

Oilsands oral history project gets underway with the support of five key players. This article appears in the February issue of Oilsands Review 

By Peter McKenzie-Brown

Four oilsands companies – Syncrude Canada, Imperial Oil, Athabasca Oil Sands and MEG Energy – have become founding sponsors of an oral history project conducted by the Petroleum History Society (PHS). Why?

To appreciate the significance of this development, consider the story of Karl Clark. By far the most influential oilsands researcher, Clark did his important work before anyone now working in the business was born. Yet historians have easy access to useful information about him. That’s mostly because Clark lived during an era of low technology. He wrote letters and diaries and prepared scrapbooks and, with the methodical skills that made him a first-rate scientist, filed them carefully away. Since most of his work was done at the University of Alberta and the provincial government’s Alberta Research Council, his studies became public documents, now accessible through the university’s archives.

The accessibility of this work enabled Clark’s daughter to compile an authoritative and insightful book – Oil Sands Scientist: The Letters of Karl A. Clark, 1920-1949 – with relative ease. Direct, clear and intelligent, his letters contain important technical and chronological information about Clark's work. They also reveal much about his personality and character.

How many letters have you written recently? Probably very few. Because it’s faster and more secure we’re far more likely to send e-mail or use the phone than write memos and letters. In some ways technological advances are making it harder – not easier – to follow the impact of influential people. The profusion of information about us obscures areas of our intellectual and personal footprints. For those of us who believe an understanding of industrial development is possible, and necessary, this is a big loss. What's the best way to proceed?

The answer is oral history. To create balanced pictures of the growth of big industrial sectors, historians need personal recollections. The memories of those involved breathe life into the dry corporate and government documents that provide so much of the raw material of history. In this case, those being interviewed were mostly engaged with the oilsands for long periods. Their understanding of the sector has more depth than versions provided in the popular press.

The Horse’s Mouth
Oral history is a discipline that has developed over the last 60 years in lock-step with the spread of technology. As the personal and business letters that once formed core material for historians disappeared, technologies like cassette decks and video recorders proliferated and plummeted in price. This has enabled many historians to move beyond documentary research – instead, preparing contemporary history by simply asking people to tell their stories.

According to the Glenbow’s library and archives director Doug Cass, “to anyone researching and writing about history in the 20th and 21st centuries, any oral history that can be found is very important to our understanding of the past. Memory is, of course, very complex and fallible, but it just seems so obvious to use someone who was involved in an event to provide first-hand knowledge.

“Oral history is a source like any other, and the information provided needs to be cross-referenced with other materials,” he says. However, “the rich data about feelings and relationships is compelling and valuable.”

Clint Tippett – president of the Calgary-based Petroleum History Society – concurs. “If we want to understand history, there’s no better way than from the horse’s mouth. Every aspect of history is complicated – causes, effects, decision-making and repercussions. So there is no replacement for getting the true goods from a person who was actually involved.”

Mixed metaphors notwithstanding, Tippett’s comments celebrate initial funding for an ambitious oilsands history project. When Syncrude, Esso, Athabasca Oil Sands and MEG Energy agreed to fund the first phase of this oilsands oral history, they were continuing an industry tradition that began 35 years ago. PHS intends to conduct and record extensive interviews with 100 of the sector’s pioneers, then transcribe that material. The organization will donate this valuable source material to the petroleum collections of Calgary’s Glenbow Archive (part of the Glenbow Museum), which will make them accessible to media, the public and historians.

Two key supporters of this project, Eric Newell (formerly chair of Syncrude) and Bob Taylor (formerly Alberta’s assistant deputy minister for oil) described the project as providing “historians, researchers and educators with a repository of primary information from knowledgeable sources…(it) is part of a 30-year oral history effort by the Petroleum History Society (which has) already collected and archived more than 300 interviews with key figures in the evolution of the Canadian oil and gas industry” – pioneers like Jack Gallagher and Carl Nickle. Taylor said in an interview that “this effort will create a wealth of material that should be part of the industry’s educational efforts.”

According to the Glenbow’s Doug Cass, “the oral history recordings produced by the society’s previous petroleum industry oral history efforts are among the most used collections in our archives.” Especially since so many of these interviewees have passed away, these files are an irreplaceable part of the Glenbow’s extensive petroleum industry collection. “With the loss of these individuals, we lose important voices that can help historians recount the story of how this industry was created.”

A Textbook on Steam Technology
The history society’s Tippett is a strong believer in the efficacy of these personal statements. “We may think that we understand what happened in the past and why,” he says, “but we work with incomplete information and through the filters of our own experience. We may not see the bigger picture or context within which events unfolded. Records are commonly incomplete and small but critical aspects, in particular with regards to people, often fall between the cracks” when a historian is trying to re-create a piece of the past.

“Indeed,” says Tippett “seeing the powerful role that people play and the degree to which they are driven by their personalities, values and aspirations” makes those personal perspectives a critical part of understanding how events occurred. “The way people interacted with the technology of the day and how they innovated also becomes more tangible when it is heard from an actual participant. I’d much rather listen to a train engineer describe how he handled a steam engine than read a textbook on steam technology.”

The formal PHS proposal describes the project as “a core educational project for the oilsands industry. It will honour those who helped create and shape the industry. By uncovering stories of challenge and innovation, it will contribute to a deeper understanding of how the industry developed and how it functions. It will serve as an important resource for historians, researchers and educators.”

Tippett adds that “the opportunity to contribute to oral history can often be seen as recognition of an individual’s accomplishments. Unfortunately,” he says, “the other major place where a person’s life is spelt out is in an obituary – and by then one isn’t in a position to either appreciate or correct it!”