Sunday, December 30, 2012

Sliding Off the Peak

Because of  new technology and new geological ideas, oil production in western Canada is rising after decades of decline; graphic from here
 This article appears in the January 2013 issue of Unconventional Resource Guidebook and Directory 
By Peter McKenzie-Brown
Junior producer MGM Energy’s vice president, John Hogg, gets animated when he talks about his unconventional oil prospect near Norman Wells. Located in the Canol shale, he thinks his liquids rich shale play is going to trump other shale oil plays in Western Canada – Horn River and Muskwa in BC, and some of the Duvernay plays in Alberta. To take just one metric, Hogg says total organic content in the Canol averages 8 percent – twice the value of its Devonian competitors in BC and Alberta.

His arguments are sufficiently convincing that last June Shell Oil announced a farmout agreement with MGM, which would be the operator. The super major will fund 100% of the cost to drill and complete a well to earn a 37.5% interest. That’s commitment. “Our original plan was to drill a vertical well which could give us some scientific and engineering background,” according to Hogg. “But because we have Shell as a partner, we’re now planning to drill a 1000-metre horizontal well. The challenge in the North is that the regulatory system is much more complex.”

According to Hogg, Canol seems to be the source rock from which oil migrated into the 90-year-old Norman wells oilfield – a reef which is expected to produce 300 million barrels of oil during its lifetime. “That’s the same oil we are looking for, but we’re looking for it in shale. The early wells drilled into the Norman wells oilfield actually produced from the shale. Imperial discovered the reef somewhat later.”

“We’re a very small company,” he adds, “and there are a lot of synergies between us and Shell. We know the North. We can work with the First Nations, for example, and that’s useful for them. But they have a great completions department.” Acknowledging that Shell also has a lot of land in the neighbourhood, he is philosophical. “They will work with us to understand the reservoir, but I’m sure that they will then move on to do their own thing. Shell is a leader in this, and we’re more than happy to work with them.”

The MGM/Shell agreement illustrates several things about unconventional oil resources in today’s market. For one thing, both big players and little ones are getting in. For another, these resources can be found in many parts of the country – in the North, in Western Canada and even in southwestern Ontario, where Canada’s petroleum industry began. Across North America, it is leading to a turn-around in oil production.

To put the discussion in context, only a few years ago everyone seemed to be talking about peak oil – a point in time when petroleum extraction maxes out, and the production curve enters terminal decline. For Canadians, peak oil seemed to be the potion that would make the oil sands a resource of continually increasing value. However, the recent technologies for producing shale oil and light, tight oil have thrown a spanner in the peak oil works.

New production systems are leading to increases in the light oil production that’s supposed to be declining from its peaks. Oil production from Texas is a particularly dramatic example. In steady decline from the early 1970s until about 2009, when daily production totalled 1 million barrels per day, things have dramatically changed. Today, production is more than 1.7 million barrels per day, and growing. Similarly, after being in decline for decades, light oil production in Alberta is again at 2003 levels. In three years, nearly 100,000 barrels-per-day of new production have taken the total to 400,000 barrels-per-day.

Before moving on, a few words of clarification. Oil shale is sedimentary rock high in total organic content. If you cook it in a retort, you can get oil from the stone; this has been done since prehistoric times. While there are certainly more than one trillion barrels of shale oil around the planet (estimates range up to 3 trillion), and small amounts are produced in some countries, technical difficulties are likely to prevent this energy source from soon becoming an important source of energy supply. Last year  a study by the American Bureau of Land Management proclaimed that “There are no economically viable ways yet known to extract and process (oil shale) for commercial purposes.”

More than any other series of innovations, the technology-intensive processes that now surround directional drilling have enabled the industry to get production out of otherwise unproductive rock. Shale oil refers to flowing oil that you can get out of a shale source rock using horizontal wells and multi-stage fracturing. Light, tight oil refers to oil in sandstone or other mostly depleted reservoirs using these same techniques. To keep things simple, this article uses the term “tight oil” to refer to commercial production from either type of source rock.

New Geography: The techniques that transformed the natural gas business a few years ago are today turning the oil world upside down. Tight oil production from petroleum-bearing shale or sand formations of relatively low porosity and permeability uses the same horizontal well and hydraulic fracturing technology that led to the boom in shale gas production.

According to Daniel Yergin, an American oil and gas consultant and Pulitzer Prize winning author, “What all the conventional resources have in common is that they are not the traditionally produced onshore flowing oil that has been the industry staple since Colonel Drake drilled his well in Titusville (Pennsylvania) in 1859. And they are all expanding the definition of oil to help meet growing global demand. By 2030, these non-traditional liquids could add up to a third of (North America’s) total liquids capacity.”

The new geography of oil and gas describes the rapidly changing picture of oil and gas production systems. The shales that are at least theoretically capable of tight oil production include the Muskwa/Duverney, which stretches from the Northwest Territories through northeastern BC into south-central Alberta. The Bakken/Exshaw formation can be found in all three Prairie Provinces and BC. The Viking and the Lower Shaunavon formations cross the Alberta/Saskatchewan border, while the Lower Amaranth is a child of Manitoba.

The oil and gas industry has a long history of going from boom to bust, and has therefore become quite adaptable. According to John Hogg, “in Western Canada the (unconventional oil) plays are mostly tight Cardium, tight Viking. There is good porosity at the top, but poor porosity at the bottom. (But geologically speaking) there’s a continuum between shale oil and condensate and gas. Right now people are focusing on the liquid components. If the price of gas goes up, they will move toward the gassy end of the continuum.”

From Hogg’s perspective, his company’s joint venture with Shell gives the concept of new geography a whole new meaning because “there is going to be devolution of the resources to the Northwest Territories and Nunavut.” In his view, the MGM/Shell joint venture near Norman Wells “is a really important project for the Northwest Territories. If it does turn into an oil shale project with production (flowing) through the Enbridge pipeline it could make a huge difference for the territory as they move toward province status.”

According to Ziff Energy’s senior vice president, Bill Gwozd, his firm’s recent report on North American resource potential “looked at Canadian oil production in seven different regions. We looked at heavy oil, for example, and other production areas. Up in the north around Grand Prairie, production is still declining. However, in central Alberta we expect oil production to almost double by the end of this decade. In Southeastern Saskatchewan, we expect oil production to increase because of the Bakken. Also, solution gas is adding about 50% to our matrix of that fuel.”

The Turnaround: Noting that oil drilling is now much more important than gas-directed drilling, Gwozd notes that traditionally it has always been the other way around. “Western Canada used to be a strong gas basin, but that has now diminished.”

AJM Deloitte’s Dave Russum, whose career in geoscience has mostly focused on natural gas, confirms the trend. “Because of the change of activity in the industry, we have been doing a high percentage of our work on the oil side. That’s where clients are focusing their attention.” However, he adds, “there is now a real blurring of the boundaries between oil, liquids-rich gas and dry gas. In the past we've always seen gas and oil is separate pieces. With the extreme differential in prices between gas and oil, oil is clearly king. Because of the price of liquids, gas can now also be a very profitable business. Liquids-rich gas, depending on where you pursue it, is a pretty attractive commodity.”

Canadian and American increases in oil and liquids production are positive in the sense that they increase North American security of supply, but there may be reasons for concern. Canada’s production of both bitumen and light oil production is growing rapidly as the US, which is Canada’s only export market, is consuming less because of higher oil prices, lower economic activity and government policy. Should the Canadian industry worry about a glut?

Bill Gwozd, at least, dismisses the idea. “We will never be in an oversupply situation. There will be a lack of transport capacity to get it to market, but in time we will develop the capacity to deliver this oil. Companies clearly have that idea in mind.”

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