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Canada’s New Energy Play – Old Fields – Penn West Energy Set up for Years of Production Growth

September 29, 2010 | About:
CanadianValue

CanadianValue

212 followers
There was an article in the Globe and Mail today that focused on an investment opportunity that I have been watching for a while. The article discusses the vast amount of untapped oil in Western Canada that previously was not retrievable. With the advent of horizontal fracturing much more of this oil can now be produced very economically and those companies sitting on large amounts of acreage have become much, much more valuable.

I’ve previously written about a couple of them, and the one with the largest amount of acreage in Western Canada is Penn West (PWE). Here are the prior articles:

Penn West

http://www.gurufocus.com/news.php?id=105574

Petrobakken (large Bakken and Cardium holdings)

http://www.gurufocus.com/news.php?id=103978

Both of these companies have enough drilling locations to keep them busy for years. If you are like me and believe that they will be drilling into higher oil prices then these companies are going to make a lot of shareholders very happy.

Here is the Globe and Mail Article:

The rapid deployment of new technology in Canada’s old oil fields has the energy industry poised to produce as many as 15 billion barrels it never expected to extract.

Only a fifth of Western Canada’s conventional crude – that is, everything that’s not oil sands – has been pulled from the ground, leaving behind a vast resource of 77 billion barrels that had been largely written off as impossible to get, according to new research released Tuesday by CIBC World Markets Inc.

But a spate of technological changes sweeping Alberta and Saskatchewan could allow energy companies to produce an additional five billion to 15 billion barrels – a significant jump in the world’s potential oil reserves. The number could be even higher, given that new technology is opening up areas never before produced. (In comparison, the United States has about 21 billion barrels of proved oil reserves.)

This has created a bonanza for junior and medium-sized oil companies that have in recent years taken over many of those old fields from larger players. They now find themselves sitting on one of Canada’s richest energy plays, where the cost to produce a barrel of oil can be as little as half that in the oil sands, creating the potential for substantial profits.

Where oil sands developments typically require crude prices of between $60 and $80 (U.S.) per barrel to turn a profit, the new fracturing technology allows companies to be profitable at $30 to $50, said Jeremy Kaliel, one of the lead authors of the CIBC report.

“It’s a total rebirth for the basin,” said Bill Andrew, chief executive officer of Calgary-based Penn West Energy Trust. The change has been so profound that Penn West has sped up its conversion to a corporation by two years as it shifts into an unexpected growth mode. Several years ago, it had 500 drilling targets. Today, it has 5,000, as industry discovers an increasing number of plays it can tap by drilling horizontal wells deep into rock formations, then pumping in high-pressure sand and water to fracture the rock.

That new technique allows previously inaccessible oil to flow to the surface. The technology has been especially beneficial to Canada’s industry, which has long struggled with a substantial amount of “tight rock,” which doesn’t easily yield its crude.

Before the recent advent of horizontal fracturing helped solve the tight-rock problem, production difficulties kept this country from recovering a substantial amount of crude. In the Western Canadian Sedimentary Basin, only 21 per cent of a 98 billion barrel resource has been brought to surface. In the United States, recovery rates from conventional oil wells are typically about 30 per cent.

“We’re missing all that oil because it hasn’t been economic to go and drill the wells,” Mr. Andrew said.

“Now we can do that.” Or, as Mr. Kaliel and Jeff Fetterly, the lead authors of the CIBC report, point out, “bad rock is now good.”

“This is something that’s taking off in Canada first,” Mr. Kaliel said in an interview. “They’re pursuing it in the U.S., but they don’t have our ironic advantage of having a lot of bad rock.”

The change promises to reverse a substantial production decline in Canada, where conventional crude output peaked in 1973, and has fallen 46 per cent since then. It’s down by a third in the past 12 years.

The new technology “is pretty significant in that it opens up those fields again to being developed,” said Scott Saxberg, chief executive officer of Crescent Point Energy Corp. of Calgary. “It’s going to attract a lot more capital.”

The technological leap could also create new industry giants. It has happened before: Both Husky Energy Inc. and Canadian Natural Resources Ltd. grew on the disposition of heavy-oil assets by larger companies. Similarly, the shale gas revolution in the U.S. has catapulted companies such as Chesapeake Energy Corp. and XTO Energy Inc. (the latter recently acquired by Exxon Mobil Corp. for $31-billion U.S.) – from small players into major corporations.

A single oil play helps illustrate why. The Pembina field, first discovered in 1953, contained roughly 10 billion barrels. Only about 1.5 billion have been produced. Until a few years ago, industry estimated it could access only 500 million barrels more.

Now, companies believe they can extract at least another 1.5 billion barrels from the Pembina play on land they already own. Equally promising are formations of oil-bearing rocks that surround Pembina but have long been considered uneconomic to produce. Those contain up to six billion barrels – and it’s now believed they can yield a further one billion barrels.

“It’s a new game out there,” Mr. Kaliel said. “It is really profound what this has done to the basin.”

About the author:

CanadianValue
http://valueinvestorcanada.blogspot.com/

Rating: 2.8/5 (5 votes)

Comments

AlbertaSunwapta
AlbertaSunwapta - 4 years ago
It's still hit or miss. Who's dealing in the picks and shovels?
CanadianValue
CanadianValue - 4 years ago


I don't agree. I think it is a case of who has locked down the acreage when the acreage was cheap. These guys are cash flow machines at $70 oil.
ninoyblue
Ninoyblue - 4 years ago
I own shares on both. Believe there will be better time to add on holdings in a month or two.

Please leave your comment:


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