For energy pundits who believe North America is an overworked, mature basin that's literally and figuratively running out of gas, there's a plethora of emerging Calgary junior oils, private and public, that see just the converse in Canada's Western Sedimentary Basin. True, the so-called "one-well wonders" may no longer abound in much of Alberta's Foothills area or northeast British Columbia as they once did. But the use of horizontal drilling, 3-D seismic and well-stimulation technologies is helping small operators drill up plays that were economically out of their reach years ago. Also, most of today's emerging junior Canadian oils are being helmed by seasoned management teams that have the desire and know-how to replicate much of their past production and reserve growth. Indeed, one such new Calgary producer, Duvernay Oil Corp., headed by the former management team of Berkley Petroleum Corp., is already outpacing the daily output and in-ground inventory growth achieved by Berkley itself during its first 30 months of operations in Canada's western basin. Meanwhile, Calgary start-up MEG Energy Corp. is taking a patient approach to building its position in the world-class, oil-sand-laden Athabasca Fairway. There, it expects by 2006 to begin drilling, which shortly thereafter could lead to daily oil output of 25,000 barrels-a level of production usually associated only with intermediate-size oils. In short, there are plenty of untapped drilling opportunities still left in western Canada. It just takes a little more patience and seasoned skill to go after them-that and a judicious use of technology to lower finding and development costs to manageable levels. Exploration still key When it comes to drilling in the Western Canadian Sedimentary Basin, Michael L. Rose, president and chief executive officer of newly public Duvernay Oil Corp. (Toronto: DDV), is no stranger to successfully tapping the region's various play types. In 1993, he and a group of ex-Shell Canada explorationists started Berkley Petroleum Corp. with C$11 million of private equity and bank debt. That same year, Berkley went public and began in earnest to zero in on the basin's vast oil and gas potential. That effort translated into remarkable reserve and production growth-so remarkable that by March 2001, Berkley sold out to Anadarko Petroleum Corp. for C$1.5 billion. One would think a nearly 136-fold return on investment would have sated the aspirations of almost any producer. But not Rose. By July 2001, he formed privately held Duvernay, and two months later, funded it with C$60 million of private-equity backing led by Peters & Co. "If you're a petroleum geologist, there's nothing more exciting than finding new oil and gas pools and having the satisfaction of being right and creating value," says Rose. "Besides, the team we brought over from Berkley, which includes Bob Yurkovich, our vice president of exploration, is still relatively young and really doesn't know how to do anything else." Such a band of explorers really doesn't need to know how to do anything else. With the September 2001 private funding it received, Duvernay-a name derived from the source rock responsible for most of the Devonian-age oil and gas accumulations in western Canada-has grown daily hydrocarbon output from zero to north of 6,000 barrels of oil equivalent (BOE). Proved reserves, meanwhile, climbed from zero to 18.7 million BOE by year-end 2003. Add proved plus probable reserves and that asset base swells to 25 million BOE. This rapid growth-well ahead of Berkley's pace after 2.5 years-has been largely accomplished by accelerated drilling along a broad trend extending from Wild River-Sundance in north-central Alberta to Groundbirch-Sunset in northeast British Columbia. The play areas in northern Alberta also include Peace River High, Fir, Spirit River and Dawson-Puskwa. Duvernay's drilling in these areas has ramped up from one well in late 2001 to 20 wells in 2002 and 40 wells in 2003. Total capex during this period was north of C$200 million. In 2004, the producer, whose C$52.5-million IPO this February was led to market by Peters & Co., plans to spend an initial C$80 million to drill 50 to 60 wells. "In the Wild River area, we've made light-oil discoveries in the Jurassic and gas finds in the Cretaceous; in the Puskwa area, the oil and gas finds have occurred in the Devonian and Mississippian; in the Groundbirch and Sunset areas, they've all been in the Triassic," says Rose. "All these formations occur at depths between 5,000 and 10,000 feet." The biggest of Duvernay's finds to date have occurred at Groundbirch-a tight-sand gas discovery with more than 100 billion cubic feet (Bcf) of reserve potential-and Wild River, a light-oil and gas discovery which may have 5- to 10 million barrels of oil in place and about 50 Bcf of gas, including all the uphole zones. "We operate almost all our wells and are much more focused than we were at Berkley," says Rose. "The major areas we're in are all geologically contiguous; that allows operations to be run with a smaller staff. In fact, we run all of our field operations out of just one office, in Fort St. John in northeast British Columbia." In addition, the exploration-focused junior oil, with a market cap of C$420 million, has staffed up in tandem with its growth rather than growing, then having to scramble for more hands. "Also, as the result of having the best of the Berkley staff, we've learned from our past mistakes-we're more patient and better at predicting where our reserves and production are going to be." Applying new frac technology to its tight-sand gas wells is also helping the company grow output. Says Rose, "In many cases, it has meant the difference between not producing anything and having commercial wells." Not relying solely on repeatable development opportunities, Duvernay's inventory of 50 to 60 planned wells this year includes 13 to 15 high-impact exploratory wildcats in its core areas. "With the well-defined exploration and development program we have, we can easily see ourselves growing core-area daily production beyond 10,000 BOE within the next 18 months," says Rose. "After that, there's still lots of oil and gas to be found in western Canada, including the largely unexplored Northwest Territories, from Fort Liard all the way up to the Mackenzie Delta. The number of large, new-pool discoveries there is quite high relative to the number of wells drilled." Eschewing acquisitions Another seasoned explorationist who knows his way around western Canada is J. C. Anderson, chairman of privately held Anderson Energy Ltd., a 2002 entrant to the Calgary E&P scene. Anderson is the former head of Anderson Exploration Inc., a producer that itself was private for some 20 years before going public in 1988. That's when its growth through the drillbit in the Western Canadian Sedimentary Basin really took off. In October 2001, the Nebraska-born Anderson sold his namesake company-then producing about 210,000 BOE per day-to Devon Energy for C$7.1 billion, including the assumption of debt. "However, when we sold to Devon, I didn't feel like I was done playing the exploration game-not when there were still plenty of drilling opportunities left in western Canada," says Anderson. "On top of that, there were some super, like-minded people from Anderson Exploration who felt we could pull together a successful new E&P company." By May 2002, Anderson Energy Ltd. got off the ground with C$80 million of funding. Among the founding shareholders were seven former senior Anderson Exploration executives and directors including Brian Dau, the new company's president and chief executive officer; Darlene Wong, its chief financial officer; Anderson himself; and two executives who joined the firm from other oil companies. Collectively, this group owns a 28% stake in the upstream start-up. Other financial backers include additional members of the Anderson family who hold a 16% interest, Canadian and U.S. institutional investors which have a 34% interest, and friends and associates who have a combined 22% stake. "When we started Anderson Energy, all of us thought that we were going to spend about half the raised capital on acquisitions because a number of the larger oil companies were then selling off properties," says Anderson. "However, the prices that were being paid for oil and gas properties by Canadian royalty trusts just ballooned out of sight, so we chose not to compete. Very simply, we're not interested in annuities." As a result, the company's strategic emphasis shifted almost exclusively to growth through exploration drilling. The core focus: the Sierra and Chinchauga areas in northeast British Columbia where gas prospects are in Devonian carbonate sediments, 5,000 to 10,000 feet deep; an 1,800-foot shallow-gas play in northeastern Alberta focused on Devonian carbonates and Cretaceous sands; a 3,000- to 4,000-foot gas play northwest of Edmonton involving Cretaceous and Triassic sands; and Mississippian-subcrop and Cretaceous channel-sand oil prospects, down to 8,500 feet, south of Calgary. "We think that natural gas is the game to play," says Anderson. "Commodity prices have gone up significantly and are likely to stay there. The fact is, North American producers are having a hard time replacing production-and that bodes well for future gas prices." While the company's current production is only 1,500 BOE per day, it fully expects daily output to ramp up significantly by 2005. "We've just come off a successful winter drilling program, primarily in northeast British Columbia, but we're in the early stages of exploration and those wells which successfully found natural gas won't be on production until next year," Anderson says. "So our numbers are going to change significantly." He cautions, however, that current and future drilling successes won't be one-well wonders or out-of-the-park home runs. "As a general rule, we expect our finds to be the sort that give us plenty of room to run after a discovery is made, in terms of being able to drill a lot of development wells to grow our production base." What is also going to help the start-up efficiently grow not only production, but also reserves, is its use of horizontal drilling, 3-D seismic and well-stimulation technologies. "These are all things that make smaller targets-which were uneconomic 10 to 15 years ago-very much economic today," he says. "With these technologies, we're able to more fully explore a particular zone with fewer rigs, get the kind of deliverability we need, and keep finding and development costs low." Will this newcomer ultimately grow to the size of Anderson Exploration? "Right now, I'm just interested in seeing us, two or three years out, increase daily production to 10,000 BOE or more," he says. Big-barrel target Bill McCaffrey, president and chief executive officer of privately held MEG Energy Corp., also brought a lot of upstream knowledge to the table when he and two other partners-Dave Wizinsky and Steven Turner-formed their March 1999 start-up. During his prior 18 years with Amoco Canada, McCaffrey was at one point responsible for the growth of the company's largest oil-sands project in western Canada-the Primrose project in northeastern Alberta's Cold Lake area, south of the Athabasca Fairway. "At the time we formed MEG, oil prices were around US$10 per barrel, and most people felt prices were going to remain low for a long time," says McCaffrey. "We saw this as an opportunity at a countercyclical point in the industry to link our experience with a very large growth prospect close to U.S. markets." That not unfamiliar growth prospect is the Athabasca Fairway, which has one of the largest oil-sands deposits in the world. According to U.S. Geological Survey estimates, the bitumen deposits there contain more than 175 billion barrels of recoverable oil reserves. Taking aim at that resource potential, the start-up firm in 1999 acquired within that fairway 5,000 acres, on which existing wells identified the presence of oil-sands deposits. Since then, the company has greatly enlarged its Athabasca Fairway oil-sands lease position, to 33,000 acres-100% owned and contiguous. This holding is adjacent to EnCana Corp.'s Christina Lake thermal-oil-recovery project, which has initial daily oil production of 5,000 barrels. "Meanwhile, we've also drilled 68 core holes on this lease which have helped us characterize its resource potential and allowed us to begin identifying where the best pay zones are located," says McCaffrey. "In tandem, we've also shot more than 22 miles of 2-D seismic and 12 miles of 3-D in order to put together a geologic model of the oil-sands-bearing formations." The company's aim is to begin commercial development of the lease in 2007-using steam-assisted gravity drainage (SAGD) technology-and to produce 25,000 barrels of oil per day by 2008. The SAGD process involves drilling a series of horizontal well pairs-parallel to each other-down through the overburden into the oil-sands formation, which in this case is some 1,200 feet below the surface, explains McCaffrey. Steam from a central surface facility is then injected into the upper horizontal well, creating a steam chamber and allowing the heated oil in the formation to drain down to the lower horizontal well. Lift mechanisms are then used to get the heated oil in the lower well out of the ground into separation, tank-battery and pipeline facilities. To ensure sufficient funding is available for such an ambitious, capital-intensive drilling project, the private start-up this February got the crossborder backing of New York-based Warburg Pincus, which is providing C$59 million of private equity. "The fact that we had already built up a strong leasehold position, have a strong management team in place and enormous resource growth potential in front of us were clearly factors attractive to Warburg," says Dale Hohm, MEG chief financial officer. Attractive, too, is the composition of MEG's board. It includes Alan Archibald, formerly a senior executive with Anderson Exploration before successfully growing Westpoint Energy and Tripoint Energy-two other private Calgary producers. Also on MEG's board is Paul Rady, chairman and chief executive officer of Denver's Antero Resources Corp., another Warburg Pincus-backed private operator; Whitney Ward, a former global partner with Invesco in Denver; and Lloyd Swift, a former vice president with Nesbitt Burns in Calgary. McCaffrey believes the fundamentals for continuing high oil prices in North America are very strong. "Additional sources of supply are in decline plus demand throughout the world continues to grow, particularly in China." While an initial 25,000 barrels per day of oil output from the company's planned drilling program would catapult it to the ranks of an intermediate-size Canadian producer, "we see significant upside beyond that as we advance through further phases of development on our lease," McCaffrey says. M
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