Could the N.W.T.’s Canol shale be the next Bakken?

MGM Energy is betting big on the Canol, but can the play’s production match its potential?

May 07, 2013

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MGM Energy’s John Hogg says exploring is the fun part of the oil and gas business
Photograph Colin Way

John Hogg considers himself an explorer, not an oilman.

“My 30-plus-year career has all been spent exploring in high-risk basins,” MGM Energy Corp.’s vice-president of exploration and operations says. “Whether I’ve worked offshore Nova Scotia, offshore Greenland or offshore in the Canadian Arctic, I will always explore. That’s the fun part.”

These days Hogg should be having a lot of fun. MGM Energy – a small Calgary-based junior – is part of a group of companies leading the charge to open up the N.W.T’s Canol shale oil play. No one is sure just how much oil might be trapped in the dense rock that lines the remote central Mackenzie Valley where the play is located, but its potential conjures up images of North Dakota’s Bakken, which was producing over 700,000 barrels of oil per day in 2012.

Anything close to that kind of production in the Canol would be a godsend for MGM Energy and the economy of this hard-luck territory. Both the company (spun out of Clay Riddell’s Paramount Resources Ltd.’s Arctic assets in 2006) and the N.W.T had initially hitched their economic futures to the Mackenzie Gas Project, only to see a drawn-out regulatory process and the shale gas revolution in the U.S. put the proposed 1,200-kilometer natural gas pipeline on ice.

But the so-called “shale gale” has not just been a curse for the N.W.T. and the oil and gas companies that have operated there. Advances in hydraulic fracturing and horizontal drilling that have helped the sector unlock huge supplies of shale and tight gas in basins across the U.S. and Canada have done the same for oil. The Canol shale could be one of those basins. The trick now is whether any of the shale oil trapped in the rock can be economically produced.

“Opportunity.” It’s the word Eric Hanson uses when he’s asked why ConocoPhillips Canada drilled two vertical wells on Exploration License 470 this winter. The drilling program also required ConocoPhillips to build a six-kilometer ice bridge from the town of Norman Wells (population 800) across the Mackenzie River, a 25-kilometer ice road to its drill site and 100-person work camp located on the east side of the mighty waterway. All of the equipment for the program had to be trucked from Alberta on a rutted, narrow 794-kilometer winter road that winds through the Mackenzie Valley to the communities that make up the central Mackenzie Valley – known as the Sahtu region in the territory.

Much of the infrastructure the industry takes for granted in Alberta, Saskatchewan and British Columbia – paved roads, bridges, power lines – is almost non-existent in a territory that has only 43,000 residents. The winter road, which opened to heavy traffic the second week of January this year, is the only way to truck the equipment to drilling sites in the central Mackenzie Valley. There is no all-weather road linking southern Canada to the region.

Hanson, who is the supervisor of central Mackenzie Valley exploration for the company, says the lack of infrastructure poses challenges to companies who want to find out what riches may lay deep in the Canol shale. It requires intricate planning and logistics to pull off a drilling program here. And it’s costly, much more costly than drilling a well in southern plays like the Duvernay and the Montney, although the companies who are poking holes in the Canol shale – ConocoPhillips, MGM Energy and Husky Energy Inc. – won’t say how much they spent.

However, the Canol shale’s potential that Hanson talks about is tantalizing enough that ConocoPhillips bid $66.7 million to secure the rights to explore on an 87,000-hectare parcel of land (EL 470) during the federal government’s 2010-2011 land sale for the central Mackenzie Valley. And after drilling two wells on the lease this winter, Hanson says the company is planning to submit an application to regulatory authorities to drill two horizontal wells on the license next winter.

“We have to understand this – if there’s no fracking, there is no development. It’s that simple.”

“It’s an exploration play and I can’t say too much about it,” Hanson says during a telephone interview from Calgary. “But as with any exploration play, we see opportunity there and so ConocoPhillips is engaging in a program to determine the value of EL 470.”

For MGM Energy, the value of the Canol shale is immense. In fact, the company’s survival may depend on it. When the company was formed, its focus was on snapping up land and discoveries to feed into the $16-billion Mackenzie Gas Project led by Imperial Oil Ltd. The pipeline was approved by the National Energy Board in December 2010 and would send approximately 800 million cubic feet per day of natural gas from three anchor fields located north of the central Mackenzie Valley to southern markets.

But the approval of the Arctic megaproject also coincided with the shale gas boom in the U.S. Production from plays like the Marcellus and the Utica has flooded the North American market with natural gas and there is no need for additional supply from the N.W.T. Imperial Oil has until 2015 to commit to build the pipeline, but it appears in no hurry to do so.

If all MGM Energy had were natural gas discoveries and land in natural gas prone assets in the North, the company would be in serious trouble. However, its management also had the foresight to acquire 189,000 net acres in the Canol shale.

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The Canol is believed to be the source rock of the Norman Wells oil discovery, which has yielded millions of barrels of oil since it was discovered in the 1920s. For MGM and John Hogg, the Canol shale has become its sole focus. “We know there is a tremendous resource here,” Hogg says. “What we don’t know is how much has the potential to be economically developed.”

The only way to do that is to drill wells. MGM Energy did that this winter at one of its four licenses in the play. Partner Shell Canada, which also has four licenses in the Canol, paid for the cost of drilling the single vertical well north of the tiny community of Tulita.
Hogg says only 20 wells have penetrated the Canol over the years. So the big leaseholders, MGM Energy, Shell Canada, Imperial Oil, ConocoPhillips and Husky, are working in an oil and gas frontier. Hogg also points out that even in prolific shale basins like the Bakken, not all wells are equal. “There are lots of parts of the Bakken that don’t work. But you don’t hear about that,” he says. “There are clearly sweet spots in these shales, and pre-drilling you don’t know where those are.”

Geology is not the only thing standing in the way of developing the N.W.T.’s Canol shale, however. Because it’s a shale play, companies must drill horizontal wells and hydraulically fracture these wells to crack the tight rock and allow oil and natural gas to flow to the surface.

Hydraulic fracturing is a controversial extraction method that has been blamed for contaminating drinking water and even causing earthquakes. Environmental concerns run deep in the central Mackenzie Valley. The communities are small and largely aboriginal. They see themselves as stewards of the land and many people here still depend on “country food” – caribou, fish and other wildlife – to feed their people. Concerns about the environmental impact of any kind of industrial development are never far from the surface.

Dave Ramsay, the N.W.T.’s minister of industry, tourism and investment, makes frequent trips from his home in the capital of Yellowknife to the central Mackenzie Valley to witness the mini-boom that Tulita and Norman Wells are enjoying as industry begins to work on the Canol shale. He recognizes that there are concerns in the region about fracking but he also believes it can be done safely. “We have to understand this – if there’s no fracking, there is no development. It’s that simple,” he says.

Ramsay is hopeful it won’t come to that and in order to get information to the people in the region that isn’t culled from the movie Gasland or YouTube clips, the territorial government arranged for the members of its legislative assembly to travel to Alberta in 2012 to learn about hydraulic fracturing. Ramsay says this spring the government was planning to send leaders from the central Mackenzie Valley to the Saskatchewan portion of the Bakken to learn how oil and gas activity has impacted that area.

“We know there is a tremendous resource here. What we don’t know is how much has the potential to be economically developed.”

“We’re not seeing the big pushback that some other jurisdictions have seen,” Ramsay says of residents’ concerns about hydraulic fracturing in the Valley. “I think that is a result of these communities having 40 to 50 per cent unemployment, not much happening economically and leaders wanting a future for their kids and their grandkids.”

The N.W.T.’s byzantine regulatory system is just as formidable an opponent to the industry’s development plans in the Canol as the geology or concerns about fracking. Unlike Alberta, there is no single regulator companies can submit applications to when they want to drill a well in the territory. Because of settled aboriginal land claims, various resource management boards have been established throughout the N.W.T to review applications submitted by industry to develop non-renewable resources.

In the central Mackenzie Valley, the Sahtu Land and Water Board regulates the use of land and water by issuing, amending, renewing and suspending land use permits and water licenses on all federal, private and Sahtu lands. In October of 2012, it signaled its reservations about allowing horizontal drilling in the region when it referred MGM Energy’s application for a water license and land use permit to drill a horizontal well on one of its licenses – EL 466 – to an environmental assessment.

In a letter sent to MGM Energy providing the reasons for the decision, the board’s chairman Larry Wallace cited that because this was the first proposal to horizontally fracture a well in the territory a “more in-depth review of the potential risks is needed.” Wallace also noted that significant public concerns had been identified about the proposed drilling program and that the board staff that had reviewed the application had expressed concern about “environmental effects of hydraulic fracturing given the controversy surrounding the practice in other jurisdictions.”

The decision did not please MGM Energy or Shell, which had committed to fund the two- well program for MGM. While regulatory boards in the territory estimate an environmental assessment will take 16 to 18 months, Hogg says he’s never seen a project get assessed that quickly. Shell decided under its agreement with MGM Energy on EL 466 to not pay for the environmental assessment process. MGM Energy also decided to scrap the program and withdrew
its application.

Hogg insists his company is supportive of sending its projects to an environmental screening if it is in the development stage but not in the exploratory stage. “To be sent to an environmental assessment when I’ve never produced a drop of oil, what questions are you going to ask me that I can answer with honesty? I haven’t done any of this stuff,” Hogg says.

“The building of infrastructure and drilling of more wells by area operators will help to advance the play.”

In Hogg’s view, the Sahtu Land and Water Board’s decision to send its horizontal drilling program application to an environmental assessment could slow down the work needed to prove just how much – if any – shale oil can be economically produced from the Canol shale. “I had the potential of Shell drilling two wells for me. For little MGM Energy to have Shell drilling and paying for us to get science and engineering out of it – that’s a coup. And it was all thrown away because we were sent to an environmental assessment.”

The results had been anticipated for weeks, and in mid-March MGM Energy went public with some data on its East MacKay 1-78 well drilled this winter to test the Canol shale formation on EL 466B in the central Mackenzie Valley.

The well was hardly a gusher. During the March 10-14 testing period, MGM Energy said in a press release that the well returned approximately 140 barrels of fluid consisting of a mixture of frack fluid and formation hydrocarbons consisting of light, sweet crude and natural gas. Still, company president Henry Sykes said the company was “very excited” with the early results of the well. “While it isn’t possible to establish ultimate flow rates with a vertical well and the small fracks undertaken, at this point we’ve identified the presence of hydrocarbons in the Canol shale underlying our lands,” Sykes said in that same press release.

In a research note sent to clients after the results were made public, Calgary-based Peters & Co. analyst Dan Grager described the data from the East Mackay I-78 well as “not a good result.” But he also recognized what every company with land in the Canol play has said – it’s early days. The results from one well will not make or break the Canol shale and the fact that Husky Energy plans to drill two wells on its licenses this summer and ConocoPhillips wants to drill two wells next winter will increase the understanding of where the sweet spots might be. “The building of infrastructure and drilling of more wells by area operators will help to advance the play,” Grager wrote.

John Hogg has no intention of slowing down his company’s efforts to discover the next Bakken in the N.W.T.’s central Mackenzie Valley. Like any exploration play, there will be highs and lows during the journey. But for the explorer in Hogg, the chance to be part of opening up a large oilfield in Canada’s North is all part of the fun. It could be mighty profitable, too. “This project – if it goes the way we think it will – has the potential to be a game-changer for MGM and the Mackenzie Valley.”

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