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The Canadian drilling rig count of 315 as at January 13, 2017 was considerably higher than the 227 rigs drilling for the same period a year ago. Although half of the 2013 rig count of 601, this first quarter activity level reinforces an optimistic outlook for drilling in 2017. Demand has risen so that a number of oilfield services (OFS) companies are currently operating at or near capacity, with access to trained labour being cited as their operational constraint. Wages also are no doubt on the rise (at some enterprises).
But as OFS leader Jeremy Rondeau expressed in MNP’s first newsletter of 2017, cautious optimism is needed. Higher activity level itself does not necessarily result in higher profitability. Unless hourly or daily revenues increase as well, the tight operating margins of even the busy oilfield services companies will continue to be under pressure. While it looks like 2017 may be a busier year than 2016, I’m not confident that 2017 will necessarily be a particularly profitable year for the oilfield services industry as a whole.
Of the total number of wells drilled across Western Canada in 2016 — just over 4,600 — close to 47 per cent were drilled in seven key resource plays: the Viking, Montney, Duvernay, Wilrich, Shaunavon, Bakken and Cardium.
These were the only formations that were the projected targets for 100 or more wells in 2016. (The McMurray formation and the Lloydminster member were two other key drilling targets, and saw 639 and 117 wells rig released, respectively, in 2016.)
In 2015, these same seven plays comprised about 40 per cent of the total wells drilled.
The most significant year-over-year increase in well counts occurred in the Viking, which was the focus of close to 20 per cent of all wells drilled in 2016 versus 14 per cent in 2015. The Duvernay also saw a year-over-year increase in drilling, as did the Shaunavon.
On a metres-drilled basis, the seven plays accounted for about 59 per cent of the hole drilled in Western Canada during 2016, up from about 54 per cent in 2015, with the Viking, Duvernay and Shaunavon seeing year-over-year increases in metres drilled.
Saskatchewan plays such as the Viking and Shaunavon continued to attract capital in 2016 due to their astrong profit/investment ratios. Meanwhile, the Alberta government’s Modernized Royalty Framework (MRF) and the subsequent emerging resources program sparked a renewed investment interest by some companies in the Duvernay play.
Geology: Interbedded fine sandstones, siltstones and mudstones, bracketed by two shales.Resource: Light oilLocal MNP Offices: Swift Current, Humboldt, Saskatoon, Lloydminster, DrumhellerBackground: Oil was first discovered in the Viking in the 1950s and has been produced from the formation for decades. Horizontal drilling and multistage fracturing have caused a resurgence in development as the lower region has become more economic.
Opportunity The Viking light oil resource play continues to impress with strong results and attractive capital efficiencies. With high netbacks (revenue per BOE after costs) and large oil-in-place, producers continue to see long-term upside in this play. In the early days of the Viking, analysts mostly dismissed the play for its 50-bbl/d wells. But that was when horizontals drilled and completed in the Viking cost about $1.3 million each. Today, well costs are in the low $600,000s due to improved drilling efficiencies.
While most producers have settled on average horizontal well lengths of about 600 metres with 18 or 20 fracture stages, both Teine and Raging River have tested extended-reach horizontals and technology and practices in the Viking continue to evolve.
“There is lots of running room in Saskatchewan to increase recoveries of oil-in-place and that’s going to be relatively low risk and technologically advantaged,” says John Rooney, president and chief executive of Northern Blizzard. “The province itself is very receptive to new technology and new ideas.”
“Each [operator in Saskatchewan] will tell you we have got years of drilling and production growth embedded in our own existing asset bases,” says Rooney. “There is tens of billions of barrels of oil-in-place in Saskatchewan that has yet to be recovered and it is going to be recovered through all kinds of different methods,” including enhanced oil recovery, polymer flood, steam and fracturing technologies for tight oil.
Recent Drilling Announcements
Geology: Siltstone and dolomitic siltstone with some sandstone and dolostone. It is not shale.Resource: Tight gas, NGLs and oilLocal MNP Offices: Grande Prairie, Peace River, Fort St. JohnBackground: The largest gas volumes are located where the Montney is thick, deep and overpressured. Wells can be massive: up to 2.5 million boe each, with initial production of 2,500 boe per day. Play is generally 100 to 300 metres thick.
Opportunity The Montney is the growth engine of the Western Canada Sedimentary Basin.
The play currently accounts for about 25 per cent of WCSB production, with over 5,000 horizontal wells producing 4.5-5.0 bcf per day (excluding associated liquids).
Production in the play is expected to grow to seven bcf per day by 2020, representing about 38 per cent of WCSB output, and seven per cent of total North American natural gas volumes.
The National Energy Board estimates the Montney’s expected marketable recoverable resource at about 450 trillion cubic feet of natural gas, plus 15.6 billion barrels of liquids (both NGLs and oil).
This places the Montney as one of the top five natural gas fields in the world. To put this in perspective, enough natural gas can be recovered in the Montney to provide Canada’s domestic natural gas use for the next 100 years.
The Montney is clearly the area that has and will continue to drive industry activity in Canada, Jeff Fetterly, oilfield services analyst with Peters & Co. Limited, said at PSAC’s Industry Insights Forum.
An interesting Montney trend, according to Fetterly, is that in 2014 the senior producers, international and national oil companies comprised almost half of all activity in the formation — just under 40 active rigs on average. Peters & Co. forecasts the percentage of 2017 activity represented by this subset of operators will be much lower — just over 10 active rigs on average.
“We have seen a significant increase in the activity by intermediate producers, and obviously private producers,” he says, adding intermediate and private producers are increasingly becoming more active in the Montney. “They are starting to test some of the well design and completion intensity elements.”
Geology: Marine shale of Devonian age. Because of its environment of deposition, the Duvernay is very rich in organic material, which has over time been transformed into oil and gas.Resource: Full spectrum – oil, gas, condensateLocal MNP Offices: Calgary, Red Deer, Rimbey, Lacombe, Leduc, Edmonton, Lloydminster, Drumheller, AirdrieBackground: The Duvernay is a world-class emerging play in west-central Alberta. There is increasing industry confidence in the play, where about 450 wells have been drilled since 2011.
Opportunity Well productivity in the Duvernay is among some of the best in North America, and capital costs are falling. Encana’s average drill and complete costs declined to about $7.5 million per well in late 2016 (and under $7 million for its pacesetter wells) from over $12 million in 2015.
Chevron and Shell are moving towards larger pads and large-cap midstream companies are building additional plant capacity in the area.
“The Duvernay especially is a very good buy, and it will give you rates of returns in the sweet spots that are in excess of many of the U.S. plays,” says Wendy Smith-Low, energy A&D advisory group managing director at BMO Capital Markets. “That is what excites us about the Duvernay.”
Western Canada has a high demand for condensate, and with condensate receiving WTI prices, the economics of the play are very compelling for producers. In some areas of the play, operators report 150-250 bbls of condensate per mmcf of gas produced.
Geology: Tight sands, with good porosity but poor permeability Resource: Liquids-rich gas Local MNP Offices: Prince George, Fort St John, ClearwaterBackground: The Wilrich reservoir is widely deposited in varying thicknesses and quality over an area spanning more than about 325 kilometres in northwest Alberta.
Opportunity The Wilrich ranks as one of the most active and fastest growing plays in the Western Canada Sedimentary Basin. As of September 2016, it comprised 40 per cent of Peyto’s production of about 100,000 boe per day, up from close to a standing start in 2010.
JP Lachance, Peyto’s vice-president of exploitation, says the Wilrich formation continues to provide good returns and it will be the company’s primary focus again in 2017 at Sundance. “But we’ll also continue a steady diet of Notikewins on the heels of that program.”
Geology: Variable mix of limestone, shale and minor sandstoneResource: Medium oilLocal MNP Offices: Swift Current, ShaunavonBackground: The Lower Shaunavon has emerged as a significant tight oil play in the last few years.
Opportunity Crescent Point says it owns about 95 per cent of this significant oil pool with over 18 years of identified drilling locations. The company’s steady growth plan includes increased drilling activity and further expansion and development of its waterflood program, which has shown significant improvements in decline rates and estimated recovery factors.
Resource play economics continued to improve in 2016, due to improved efficiencies and lower capital costs in Shaunavon. To date, Crescent Point has successfully reduced its well costs in the Lower Shaunavon play by 15 per cent and in the Upper Shaunavon play by 23 per cent, compared to year-end 2015.
Earlier in 2016, Surge drilled eight consecutive wells driving the cost of drilling, completing, and tying-in a well down to an average of less than $1.25 million — which is down 43 per cent from the cost of $2.2 million per well 20 months earlier.
Geology: Bakken oil is hosted in very fine-grained dolomitic sandstones and siltstones. The Torquay, which underlies the Bakken, is comprised of dolomite and shale, with lesser amounts of anhydrite. Some brecciated fragments of dolomite occur scattered in the mudstone. Resource: Light oilLocal MNP Offices: Weyburn, Estevan, Regina, Moosomin, Deloraine, Souris, Brandon Background: Since the early 2000s, a huge amount of effort has been put into unlocking the Bakken oil formation, primarily through improved horizontal drilling combined with hydraulic fracturing, and more recently multistage fracturing and waterflooding.
Opportunity Activity continues to be very strong in the Bakken with Crescent Point responsible for the majority of the wells. Bakken production has declined with lower capital spending in the past 18 months, while the smaller Torquay tight oil play has been growing as the economics are slightly stronger, according to Scotia Waterous.
“The reason people are still drilling in Saskatchewan is because those plays are still economic, and because it’s a stable environment politically,” says Patricia Mroch, associate director with Scotia Waterous in Calgary.
Recent Project Announcements
Geology: Interbedded sandstone and shaleResource: Tight oil Local MNP Offices: Calgary, Red Deer, Rimbey, Lacombe, Leduc, Edmonton, Lloydminster, Drumheller, AirdrieBackground: Oil has been produced at the Pembina field for over 50 years, but with advances in horizontal fracturing technology, it is now thought to have the largest amount of original oil in place of any tight oil play in Western Canada, at 10 billion to 15 billion barrels.
Opportunity Pembina is the largest conventional oilfield in Canada with large oil-in-place and low recovery to date. The pool is characterized by high oil in place, low recovery factors, long-term stable production, high quality oil and high netbacks.
Production and decline rates are predictable. Several of the play’s legacy pools are under active waterflood, which has the impact of lowering pool declines and increasing the percentage of the oil in place which is recoverable. Performance of these waterfloods has been improving with optimization efforts.
Recent Drilling Announcements
MNP understands the oilfield services industry – its drivers, challenges and opportunities. We are proud to provide insight into the latest industry news and trends in our newsletter, issued in association with JuneWarren-Nickle’s Energy Group. For more information on MNP’s OFS services, contact David Hammermeister at 306.637.2310 or [email protected]
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