Oilpatch predicts drilling collapse - Low oil price, high royalties hit spending

[leec001]

Oilpatch predicts drilling collapse

Low oil price, high royalties hit spending

By Shaun Polczer December 30, 2008

An Encana gas drilling team works on a well east of Calgary.
Photograph by: Herald Archive, ReutersThanks to a perfect storm of falling commodity prices, ravaged equity markets and higher royalties, Alberta's outlook for conventional oil and gas exploration has never been so bleak in what is usually the busiest time of the year, industry observers say.

"I think it's (the economic downturn) really going to knock it flat,"says Steve Hager, an exploration analyst with Calgary-based Discovery Inc.,which produces geological studies and in-depth analysis of exploration trends in Western Canada. Hager characterized 2008 as bust-to-boom-back-to-bust again as both oil and natural gas hit new peaks and then abruptly fell off.

After testing $35 US a barrel during the holidays, oil prices rebounded back above $40 on Monday, closing at $40.02.Natural gas for January delivery, meanwhile, bounced back above the $6 US per million British thermal units on the New York Mercantile Exchange but remains well below what many analysts consider to be the marginal cost of production of about $7.50.

Driving that initial optimism was a pair of resource plays --the Horn River gas shales in northeast British Columbia and the Bakken light oil discovery in southeast Saskatchewan--giving natural gas processing plant in the horn river shale basin.

A lift to exploration-focused companies like Discovery that consult producers on the best places to look for oil and gas. "We had our very best year ever this year," Hager said. "Interest in these two plays is high in spite of the downturn, but it's pretty scary right now."

According to Gary Leach, president of the Small Explorers and Producers Association of Canada, small-cap juniors account for the lion's share of conventional exploration, drilling two-thirds of the higher risk wells in any given season. Juniors that drill 40 per cent of all the wells in Western Canada probably won't manage 25 per cent this year, he added.

"Right now it's way cheaper to buy gas and oil on the stock market than to go drill for it."

Although global economic chaos is precluding many smaller companies from raising the cash they need to grow, Leach said the writing was on the wall even as oil prices were hitting all-time highs in July. He further blamed the Alberta government's flip-flopping on royalties for scaring away speculative investors that fund higher risk exploration efforts.

"We were already trending to 10-year lows long before the financial market collapse," he said. "That was just the icing on the cake.

"You have to remember that the first half of the year was golden," he continued. "In the second half, everything rolled over: We had the financial market collapse, oil prices collapsed and natural gas went off the cliff. Juniors, we're the canary in the mine shaft."

Alberta's land sales, considered a leading indicator of future exploration and development activity, fell to multi-year lows. According to the Calgary-based Daily Oil Bulletin, sales of oil and gas rights by area were the lowest since 2004. Alberta took in about $1.3 billion from the twice-monthly auctions, a far cry from $3.4 billion in 2006.

The dollar total was roughly the same as Saskatchewan's even though Alberta's oilpatch is five times larger. In B. C., producers put up more than $2.6 billion for exploration and development rights, the highest in its history.

Leach notes that oil and gas is a relatively smaller contributor to each of those provinces compared to Alberta, which is more dependent on energy revenues. Where Alberta used to represent 80 per cent of Canada's oil industry, Leach says that figure has fallen to about 60 per cent in the past year, due mainly to the looming royalty changes that officially take effect next week.

Royalties, along with low prices, prompted big spenders like En- Cana Corp., Canadian Natural Resources Ltd. and Husky Energy Inc. to cut 25 to 30 per cent from their capital budgets, but Leach estimates that figure is closer to 50 per cent for smaller juniors, resulting in cuts of $5 billion to $6 billion next year.

That figure is on top of the $3.8 billion big majors have cut from their spending plans since October, according to Calgary-based Peters and Co. Ltd. which reduced its forecast well count to 14,500 for 2009, down from a previous estimate of 16,500. By contrast, producers drilled almost 25,000 wells in the peak year of 2006.

According to London-based Barclays Capital Research worldwide capital spending is expected to fall for the first time in six years, Barclays analysts James Crandell and James West said in a recent research report, based on $58 US-a-barrel oil and $6.35 US per million British thermal units of natural gas.

The biggest decline is expected to come in North America, where U. S. spending will fall 26 per cent to$79 billion and Canadian spending will slide 23 per cent to $22 billion, Barclays said. By contrast, capital spending outside North America will fall only six per cent to $300 billion.

Leach said it's ironic that Alberta is hiking royalties at a time when other governments around the world are looking to stimulate their economies with bailouts of key industries. In Canada, federal officials have raised the possibility of assisting the ailing forestry and mining sectors, oblivious to the fact that Statistics Canada ranks Alberta's natural gas industry as the worst performing segment of the economy in 2008.

"At a time when all governments are flooding the private sector with money, Alberta is taking it out. We seem to be relentlessly looked to support government with massive royalty and tax payments and, when times get tough, we're left out in the cold."

A bright spot for service companies that support exploration and development are unconventional gas deposits like the Horn River shales and continuing development of in-situ oilsands, says Paul Crilly, president and chief executive of Norex Exploration

Services Inc.

Norex performs the seismic and geophysical work used by oil companies to delineate new oil and gas pools. Although he's expecting a busy winter season, Crilly said the bigger question mark is what happens after the first quarter.

"There's no question our customers are reducing their budgets," he said. "We're seeing a pullback in Western Canada. Conventional oil and gas exploration has diminished significantly. Shale gas is driving our industry right now.

[email protected] a file from BloomBerg

© Copyright (c) The Calgary Herald

[Palmiros]

... More details on Horn River for anyone interested.

Fort Nelson hasn't been the same since the chopstick factory closed.

At one point in the early '90s, this tiny community of 5,000 was the largest source of disposable chopsticks in the world due to the specific qualities of the wood used to make them: smooth, knot-free aspen prized in the sushi bars and noodle houses of Japan for their cream colour, firm feel and lack of splintering.

"Now they're logged in Russia and manufactured in China," says Bill Streeper, the town's newly-elected mayor.

Fort Nelson's fortunes have always been subject to events taking place far around the globe. The town itself was built during the Second World War, when it was a staging area and conduit for men and materiel used to build the Alaska Highway--which remains the largest single construction project undertaken in North America to this day.

More recent events also illustrate Fort Nelson's dependence on the global economy.

The U.S. housing crash resulted in the close of the town's last sawmill and plywood factory earlier this summer, even more collateral damage from the ongoing financial crisis. Protests in Europe put the bite on fur trapping years ago.

In times like these, when the traditional pillars of the economy, forestry and mining, crumbled, locals have been able to turn to the oil and gas industry.

"When we had a lull in one, we always had a boom in the other," says Streeper, who ran an oilfield hauling company for almost four decades before he was elected mayor this year --running on a platform to rebuild the town's economic health. "But conditions worldwide, they're uncontrollable. Fort Nelson is well affected by the economic crisis in the world right now."

The last several years have been tough for roughnecks. Natural gas prices tanked after the run-up to hurricane Katrina and except for a brief period last winter, have never really recovered. Although the region would benefit from an Alaska pipeline, the possibility of a $40-billion link from the North Slope seems more remote with each passing day. Some doubt it will ever get built.

Similarly, conventional exploration has always been hit and miss. Major oil companies like Petro-Canada and Canadian Natural Resources have played the area for years, chasing Devonian reefs with limited success. Despite a major push in the days following the Ladyfern discovery, nobody ever seemed to find the elephant fields that would justify full-bore development.

Exploration in the horn river shale basin has hit a hectic pace to find the Devonian reefs hidden below.

Most of the boggy terrain is only accessible in winter, when rigs have to be hauled over ice roads and hundreds of thousands of square kilometres of muskeg in a window that extends from January to March.

Little wonder locals dubbed the winter drilling season "100 days of hell."

Any discoveries that were made suffer from a lack of modern infrastructure to take them to market. Roads, where they exist, are decrepit and narrow. Pipelines and processing plants are old.

The inherent volatility of the energy industry always seemed to prevent it from gaining dominance.

Just when things were looking good, events in the financial capitals of the world always seemed to set the local industry two steps back.

"I know it's boom and bust," says Streeper. "I've been riding it up and down at least three times now."

About four years ago, pessimism cautiously turned to optimism on the promise of almost limitless supplies of clean-burning natural gas.

The Horn River shale deposit had long been considered little more than a nuisance by rig hands and drilling engineers looking to tap the conventional gas deposits under it.

The brittle stone wreaked havoc on expensive rock bits, causing lost time and delays in an already tight operating window. And it seemed to be everywhere, a prolific dark siltstone that turned up in the well bore of nearly every hole drilled in an area the size of Maine.

In the parlance of geologists, "it's tighter than cement," says Robert Spitzer, Apache Corp.'s vice-president of exploration.

It's been said that 99 per cent of geologists working in Calgary never make a single discovery. But with the Horn River, Spitzer has two. He was previously with Shell Canada when the company sold its conventional oil exploration unit to Apache at the start of the decade. Three months later, the massive Ladyfern well blew in.

Horn River is an entirely different creature. Spitzer's crews drilled right through it on the way down to deeper targets below before realizing it was the real prize.

Glenna Jones, a vice-president with Calgary-based Ross Smith Energy Group, says Apache "serendipitously" fell into the Horn River while it was busy looking for Slave Point reefs.

"They spent a lot of their budget looking for another Ladyfern; they weren't looking for shale. In that sense, they were a serendipitous early mover in the play."

Taking a cue from the Barnett shales in Texas, which are producing close to four billion cubic feet a day, Apache's technical team wondered if the same success could be replicated in B.C.'s own shale rocks.

A few kilometres away, EnCana Corp.'s geologists were thinking the exact same thing.

For almost a decade, EnCana has been the premier unconventional gas driller in North America, betting the company on plays like the Greater Sierra near Fort St. John and tight gas in places like Colorado and Wyoming.

Shale gas, already a big hit in the United States, seemed like a natural fit.

For Apache, a large American independent with deep roots in Canada at places like Rainbow Lake over the Alberta border, a partnership with its Canadian rival made sense.

The pair agreed to pool their talent and, more importantly, their land, and drilled a series of test wells that confirmed some 35 trillion cubic feet (tcf) of potential resources, about 13 tcf considered recoverable.

After that, Horn River became a household name.

In May, Scotland-based exploration consultants Wood Mackenzie published a report that suggested Horn River could "easily" grow to more than 50 trillion cubic feet, making it by far the largest natural gas field in Canada, if not North America.

"With conventional western Canadian gas production in decline, the emergence of shale gas as a future source of supply could be vital in maintaining Canada's position as a major producer of natural gas," said John Dunn, the company's Canadian upstream analyst.

Calgary is too small to keep your cards too close to your chest for too long, especially when you're sitting on potentially more gas than the proven reserves of Alberta and B. C. combined.

It was inevitable that word began to leak out.

The first hint that Horn River could be a game changer came when B. C. began racking up huge bids at its bi-monthly land auctions.

The province would normally see $200 million in an average year; suddenly it was getting $200 million at a single sale. Land that sold for $300 a hectare three years ago was now selling for $30,000 a hectare.

Already in 2008 the province has taken in more than $2.5 billion from land sales, more than half of it from Horn River alone.

"When we saw some of these numbers coming in, I was surprised," admits B. C. Energy Minister Richard Neufeld, who was previously Fort Nelson's mayor before he was elected as the area's MLA.

"It's massive. There was that talk, it had been around for a long time. Once I'd heard about the Barnett, it didn't surprise me when the big companies started coming out. But the dollar amount, I never in my wildest dreams expected we'd be at $2.5 billion. That's phenomenal."

Many parallels have been drawn between the Barnett and the Horn River, and some of them apply.

The Barnett was an overnight success more than 20 years in the making. Like the Horn River, geologists had known for decades that the shales held ample supplies of natural gas.

Coaxing it out of the tight rock was a different story.

The key to unlocking the shale is almost exclusively attributable to new drilling technology. Using a combination of extended reach horizontal wells and multistage fracturing, producers were able to draw blood, literally from a stone.

A new variation called a "slick frac" draws even more.

Using newly designed high-pressure pumps, the idea is to force as much water and sand down the hole as fast as possible, shattering the surrounding shale to release the gas and increase flow rates.

It's the initial flow that will mark the line between commercial success and failure.

Dan Brown, EnCana's Horn River regulatory point man for its foothills division, compares it to cracking a windshield with a rock chip or shattering it with a bowling ball.

It's the difference between a well that comes on at one million cubic feet a day and quickly peters out or a "boomer" that blasts six to 10 million cubic feet a day and keeps producing at a steady rate for years longer.

The question is whether it's enough to justify the additional cost of operating in a remote location.

Unlike the Barnett--where wells are being drilled in the Dallas suburbs--Horn River is a vast and empty wilderness where individual wells carry a price tag of $10 million or more, not including the cost of building the roads and camps to support them.

Brown said those costs have to be cut in half before Horn River can be declared a commercial success.

"Execution is going to be the key to unlocking this play," he says from the cockpit of a chopper circling over EnCana's first serious assault on the shales, a pair of rigs standing on a remote pad in a sea of trees.

Along with Apache, the company plans to drill 40 wells this winter to establish a commercial pilot and firm up its operating technique--full-scale factory drilling the likes of which has never been seen, not even in Texas.

Brown envisions an round-the-clock regimen of drilling and fracing; fracing and drilling. Repeating itself over and over again.

It's Henry Ford's assembly line on a much grander scale.

Brown says the only way to bring the cost of each individual well down is by drilling hundreds, or even thousands, at one time.

Each rig is mounted on skids to enable it to punch one hole before sliding off 30 metres to dig the next. The first rig sets surface casing to 850 metres and moves on. The second follows with the horizontal sections, a half-dozen or more from each pad. Frac crews come in after that, working 12-hour shifts. When one comes off, another will come on in a never-ending cycle of 24/7 drilling.

By drilling ever-longer horizontal sections, EnCana is hoping to perform as many as 10 to 12 fracs per well, with each section capable of adding a million or so cubic feet a day of incremental production. To pack enough pressure downhole to literally pulverize the surrounding rock, EnCana is using a wide-diameter drill pipe more commonly found in offshore wells.

Brown says no other company has attempted to place so many horizontal wells into such a small area, no mean feat considering the limited size of the surface leases above ground. It's a tough squeeze to pack so much equipment --two triple rigs and associated trucks, trailers and mud tanks--on a tiny pad to limit land disturbance.

If the physical infrastructure is a challenge, finding the people to man the equipment could be even bigger. EnCana is building a 750-man camp, dubbed Paradise City, to house the personnel, featuring all the amenities of home and then some--pool tables and mess halls, sleeping quarters with flat-screen TVs that could put any hotel room in town to shame. Eventually, it could be expanded to house as many as 2,000 people, making it a good-sized town in its own right.

Earlier this year, EnCana CEO Randy Eresman boasted that Horn River could eventually produce more than one billion cubic feet per day net to EnCana alone, or more than a quarter of B. C.'s current natural gas output. In light of the Barnett and other shale plays in the U. S., several observers said he's being conservative.

But B. C.'sNeufeld says Horn River is far from a slam dunk. "If the (gas) price stays in the tank, it won't get developed," he cautioned.

Likewise, Mayor Streeper is careful not to put all the town's economic eggs in one basket even though it was the Horn River issue that ultimately got him elected.

"The Horn River train was leaving the station and we didn't have a ticket on it," he said. "Personally, I think this Horn River is the best thing to happen to Western Canada in the history of the oilpatch.

"But if I say it as the mayor of Fort Nelson, I have to use caution because I don't want people running out and buying trucks and cars thinking they're going to get rich working there. Horn River is not 100 per cent sure at this time. But I do think you're going to see Horn River make a substantial impact on the gas supply in North America."
© Copyright (c) The Calgary Herald

http://www.calgaryherald.com/Hunting+Horn+River/1043499/story.html

[weeznah]

to much to read...

[Senseiz]

To Summarize:

Lots of numbers, but in general, we started 2008 with a big bang, but Alberta slowed down in the second half of 2008. With those numbers, the peak was actually close to 2006-2007. So it seems like economic recession is coming close.

Along with the Royalty increase in Alberta, thanks to Stelmach, it will hurt the oil and gas economy more. Seeing how most government in other countries are helping the economy by aiding the companies.

So some big companies are exploring outside of Alberta, namely, BC and Saskatchewan.

Next post mentions BC shale gas development in the Horn River and how Encana gambling it's capital on something that is not 100% certain and the capital costs are through the roof.

[semograd]

Most important sentence..

So some big companies are exploring outside of Alberta, namely, BC and Saskatchewan.

So the rumors are true about alberta investors moving into saskabush, I've started to hear this in April 2008, but did not believe it until now...

[soloracer]

If I heard correctly Encana recently shut down their drilling program in Horn River.

[sputnik]

Originally posted by soloracer
If I heard correctly Encana recently shut down their drilling program in Horn River.

Nope. Still moving forward as of this week.