Alberta’s Duvernay shale emerges as an investment hotspot

High costs offset by promising liquids yields

December 10, 2012

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Illustration Kyle Metcalf

At a June investor symposium hosted in Calgary by the Small Explorers and Producers Association of Canada, Brian McLachlan compressed the rush to snap up drilling rights in Alberta’s Duvernay shale into four words: “The game is on,” he told a crowd of bankers and analysts.

McLachlan, the president and chief executive officer of Yoho Resources Inc., could soon count ExxonMobil Corp. as a partner on several wells in the formation after the Irving, Texas-based giant plunked down $3.1 billion for Celtic Exploration Ltd. in October, marking the arrival of a significant new player in the contest. Yoho declined to comment while Canadian regulators review the deal.

Yoho, which has a market capitalization of just $115 million, had partnered with Celtic on several prospects in the Kaybob region of the liquids-rich Duvernay shale as a way to offset the enormous cost of drilling deep, horizontal wells in the region.

Exxon brings deep pockets and scale to the Duvernay, which has attracted billions of dollars through land auctions since 2009 and “has the potential to become one of North America’s most attractive liquids-rich plays,” energy consultancy Wood Mackenzie said in an October report.

While very little about the Duvernay has been disclosed – “It’s quite a speculative play,” one exploration manager says – producers have been drawn by the promise of large condensate yields located next door to a rapidly growing source of demand in the oil sands.

The ultra-light oil, which typically fetches a premium to West Texas intermediate, is used in massive amounts to make bitumen flow in pipelines. “That supports the demand story,” says John Dunn, Wood Mackenzie’s lead analyst for Canada and Alaska. “It certainly helps the play’s economics and gives the players some comfort as well.”

Chevron, Husky Energy Inc., ConocoPhillips, and Talisman Energy Inc. have each staked claims in the formation. Encana Corp. alone holds 400,000 net acres and has identified 1,000 to 1,600 net well locations at an expected spacing of 160 to 330 acres in the play, according to an October investor presentation.

A Wood Mackenzie analysis estimates Duvernay wells could generate revenue of between $4.6 million and $5.6 million each on a net present value basis. One prospect drilled by Yoho Resources yielded 658 barrels per day of condensate over an 11-day test period, it notes.

Initial well results “can be all over the map,” says Andy McConn, an upstream analyst for Canada and Alaska with the Edinburgh-based consultancy and the report’s co-author. In the Kaybob area, for example, early test rates have yielded from 55 to 200 barrels per day of liquids for every 1.5 to 1.8 million cubic feet per day of gas extracted, according to Wood Mackenzie. Still, he says, “Something like that, with 658 barrels per day, that’s pretty comparable to something in, say, another high-level liquids play such as the Eagle Ford” in Texas.

Drilling in the Alberta formation is not cheap. Encana has pegged the cost of Duvernay wells – with depths approaching 13,000 feet and lateral lengths of up to 6,500 feet – at $15 million each. Yoho Resources, to take another example, estimates it can drill, case and complete a well for $10 million, although the job that produced the big liquids yield cost $13.5 million.

The capital-intensive nature of the basin could lead to more consolidation and a slower pace of development, Dunn at Wood Mackenzie predicts. “To move things forward in terms of a commercial development program, part of that story is you need to have the financial firepower, so some of the smaller guys may struggle to do that without help,” he says.

Encana, which booked a net loss of $1.24 billion in the third quarter of 2012 on falling gas prices, is among those looking for partners. It currently has two rigs running in the play with 12 wells planned for this year, and early results indicate “very promising” condensate yields, the company said in a statement announcing its third-quarter results.

The high cost of sinking a well in the budding formation is likely to be dampened somewhat by existing infrastructure.

Unlike the remote Horn River and Liard gas plays of northeastern British Columbia, which straddle the boundary with the Northwest Territories, the greater Kaybob and Pembina areas are not strangers to oil and natural gas development, a January 2012 activity update on the Duvernay published by investment boutique Peters & Co. points out.

“As a result,” it says, “natural gas pipelines are ubiquitous throughout the prospective fairway, and processing options are available due to existing midstream and upstream company plants.”

For now, the Duvernay remains something of a black box. “We don’t know exactly how big [it could get] or the pace of development or a lot of the details yet,” McConn says, “but the one thing you can say for sure is that this particular play will be here for a while.”

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