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Alberta joins the shale-gas stampede

Firms jostle for position in Duvernay, Exhaw/Bakken; province in line for fresh E&P bonanza

THE ALBERTA petroleum industry is being swept up in a new land rush as companies dash to stake a claim on shale oil and gas prospects across the province’s 250,000 square miles.

From the Duvernay gas and liquids-rich formation in Alberta’s far north, to the Exshaw/Bakken oil play of the deep south, a shift away from 65 years of conventional petroleum production is under way. The move portends a demand for new pipelines and storage facilities, says Ziff Energy analyst Simon Mauger, “which will essentially turn the way the industry has been doing business on its head”.

For now, attention is concentrated on who is buying land, where and on what exploration plans they have. Answers are scarce.

Typical of land rushes in Alberta, most of the successful bidding at government auctions is being carried out by brokers, keeping the identity of the buyers confidential until they choose to disclose their plans. But enough are being flushed into the open to reinforce the view of Haywood Securities analyst Geoff Ready that the involvement of brokers points to interest from larger corporations.

In the Duvernay, Chevron has disclosed its recent acquisition of 200,000 acres, which it rates as a “core position”. Rival Encana has coyly acknowledged that Duvernay was a key element of the C$325m ($330m) it spent last year on 0.5m net exploration acres, but the company’s Canadian division president, Mike Graham, will say only that the Duvernay position is “very material” to Encana.

Only just surfacing is the Exshaw/Bakken activity, where government land sales last year generated about C$150m in successful bids for 280,000 acres or about $535 per acre, a tally that Ready describes as an “extraordinary amount considering the negligible horizontal drilling that has taken place to date”.

Leading the charge

Leading the charge are Shell, Nexen, Murphy Oil and Crescent Point Energy, which are ploughing into a shale-oil formation that Macquarie Equities Research analyst Ray Kwan claims could rescue the Western Canada Sedimentary Basin (WCSB) from its irreversible conventional oil and gas decline.

He says the Exshaw/Bakken shales are the largest of four formations that extend into northern Alberta and British Columbia (BC) and are estimated to hold more than 40bn barrels of original oil in place. Kwan says that “even at a 1% recovery factor [these shales] would go a long way” towards prolonging WCSB production.

Interest is being fuelled by a westward push in Montana, the US state just south of Alberta, in the prolific Williston basin, the centre of rapidly increasing Bakken oil production in Montana, North Dakota and southern Saskatchewan. The Montana Department of Natural Resources has received 261 nominations for a 1 March auction for 66 tracts in and around Blackfeet Indian Reservation. That same geological formation also embraces Alberta.

Brad Hayes, president of Petrel Robertson Consulting, says the Exshaw/Bakken shale is “regionally very extensive”, stretching more than 800 miles north into the Horn River basin of northeast BC, Yukon Territory and the Northwest Territories.

Nexen disclosed this month that it has established a presence in the Exshaw/Bakken, although chief executive Marvin Romanow would not provide details while the acquisition programme continues, beyond saying he expects initial drilling results within a year.

After Shell said late last year that it is in the mix, GMP Securities analyst Peter Doig concluded that the Anglo-Dutch major, Murphy and Crescent Point have “let it be known that they are chasing an emerging new light-oil development”.

Crescent Point chief executive Scott Saxberg says his company has accumulated more than 1m net acres of exploration rights in southern Alberta, confident there is “significant untapped light-oil resource potential” in the region, including the Bakken and Three Forks geological zones that dominate production in the Williston basin. The company drilled three wells last year and plans 19 net development and exploration wells by the end of this year.

Murphy chief executive David Wood says his company’s 150,000 net acres in the Exshaw/Bakken is part of its North American game plan and “provides a nice complement to our global exploration activity”.

Also active in the Exshaw/Bakken is a host of junior companies, including Blacksteel Energy, DeeThree Exploration and Bowood Energy. This mirrors interest among the minnows in Montana, where Rosetta Resources and Newfield Exploration have farmed into a combined 0.512m net acres and Anshultz Oil & Gas has undisclosed holdings. Those three companies have drilled six vertical wells and one horizontal probe and licensed nine of 18 scheduled wells. One of the completed wells is rumoured to have tested at significant oil rates, further spurring interest in Alberta.

Drawn by what Ziff Energy president Paul Ziff says are the lowest royalties in North America, the Duvernay play has dominated Alberta land auctions over the last year, with Encana repeatedly teasing analysts during conference calls with glimpses of its land position.

During Encana’s latest earnings conference call, Graham added to the speculation by telling analysts his company plans to focus more on liquids-rich gas plays, including its “large land position” in the Duvernay, as it chases alternative sources of cash flow to its over-weighted gas position. He says the Duvernay has demonstrated “significant liquids potential” during the testing of one well that is expected to result in appraisal drilling this year.

Chevron says it acquired Duvernay acreage at a “very reasonable entry price” and will now evaluate the assets, which it views as an opportunity to build its unconventional-gas position in Canada. Although sketchy, these plans give some credence to estimates by geologists that Alberta’s shale-gas resources could amount to 1,000 trillion cubic feet.

Chris Theal, Macquarie’s managing director of research in Canada, says that once Alberta establishes a royalty regime that allows shale-gas operators to first recover their capital costs it “could open another resource play” in the WCSB.

Mike Dawson, president of the Canadian Society for Unconventional Gas, says there is industry confidence that the Duvernay is a “huge, emerging potential” shale play that could be two to three times the size of BC’s Horn River. And Horn River was rated this month by Nexen’s Romanow as holding more discovered gas than all of Alberta.

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