Penn West Energy delves into high tech oil plays

A 'manufacturing' approach to shale oil redefines a former trust

January 01, 2011

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Manzoni Nunns Ruste McMaster Roberts Wuori

Photography by Jason Stang

Murray Nunns came back – twice. As chief operating officer of Penn West Energy, he stands out as an example of the Alberta petroleum industry’s renowned ability to bounce back from hard landings by reinventing itself. The first time the going got tough for Nunns, he was among the legion of young geologists who were casualties of the slump begun by the 1980 National Energy Program and worsened by the ’86 oil price collapse. “I got axed.”

But he did not run home to Toronto, where he was initially headed into eastern mining. Instead, an Edmonton uncle lured him to Alberta for the last gasps of the 1970s energy boom. He fought the bust in Calgary. “I started generating plays on my own,” he recalls in oil-speak for the role of prospector spotting likely places to drill or dig. “Three of us set up an office, more or less as group therapy. History always looks better when you can write it in hindsight.”

He landed a new job in nine months. He spent about six years roaming the oil world from Indonesia to the North Sea for California-based Unocal Corp. (now Chevron Corp.). “It’s one of those good experiences to get early in your career,” Nunns says.

Back in Alberta, he rose to be chief operating officer of a growth star, Rio Alto Exploration. After building up oil and gas production to a combined volume equivalent to 100,000 barrels per day, the firm fetched $2.4 billion in a 2002 takeover by Canadian Natural Resources Ltd.

Rather than become an administrator for a corporate giant, Nunns took on a role created by an industry pattern that emerged in the late 1990s and early 2000s – serial oilfield entrepreneur. He became an executive builder of small- to medium-sized, private and publicly traded firms with intentionally limited life spans. They grew by developing new production for sale as business packages to energy income trusts, which expanded mostly by takeovers.

The emergence of about three dozen of the tax-exempt corporate cash registers – which lured retail investors by distributing revenues from established oil and gas production – came naturally, Nunns says. “The rise of the trust world was a logical outcome, and not just because it had a tax advantage. There wasn’t a lot left to do with vertical drilling technology. It was a tough game to deploy cash flows productively.”

The trust era became a treadmill, he says. The serial oilfield entrepreneurs punched ever-increasing numbers of wells into targets that were shrinking all the time. The big ones were taken long ago by half a century of tapping geological “traps” or “pools” that flow mostly unaided when penetrated by conventional vertical drilling.

“By 2005 I was tiring of that game,” Nunns recalls. Alberta oil was starting to feel like “a sunset industry.” He semi-retired by dropping out of operational roles in favor of lighter duties as an investor and corporate director, including membership on Penn West’s board.

He made his second comeback after about three years as an energy business squire. A trio of developments re-lit his fire. The federal government canceled the tax exempt status of income trusts, forcing them to sell themselves or convert into conventional companies. New drilling methods opened up a way to jump off the old oilfield treadmill. And provincial governments overhauled their royalty regimes to encourage the change by reducing collections during costly initial stages of implementing the improved approach.

Nunns recalls, “You could start to see the technology shift in 2006 and ’07.” Adopting a strategy that came to be known as “resource plays,” Alberta firms imported a system of deep and horizontal wells combined with multiple rock-splintering “frac” fluid injections. The Canadian version is increasingly developing “tight oil” with technology that was initially developed in Texas to extract natural gas from the dense Barnett Shale geological formation in the Dallas-Fort Worth area.

The new methods have dramatic economic effects akin to the introduction of mass production to the auto industry by Henry Ford a century ago. Just as assembly lines cut the time to assemble a Model T to about 90 minutes, costs per unit of oil and gas output are dropping by as much as 75 per cent, Nunns estimates. The new method accelerates production by manufacturing multiple flow channels in big layers of dense stone saturated with fossil fuels.

“Instead of looking for a slice of bread, you’re looking for the whole loaf now,” Nunns says. Back in an operations role with Penn West as it reconverts back into a company from a trust, uses about $2 billion raised from Chinese and Japanese investors and develops an Alberta oil version of the Texas gas factory, he feels young again at age 54. “It’s like you’ve got a new bike. The industry’s going through a tremendous amount of learning.”

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