Improving economics, higher oil prices and exploration that pushes the boundaries are three factors that could create even higher valuations in the Cardium play, industry executives say.
The Cardium oil play has turned into Canada's second biggest tight oil play, after the Bakken in Saskatchewan.
Economics improved in the Cardium during 2010, as producers refined their completion techniques (i.e. they found continually better ways to fracture the formation) which has generally meant a $500,000 reduction in cost per well. Most wells are now completed for just under $3 million.
"Completion techniques are improving, leading to higher production profiles over the initial months," says Kevin Shaw, an energy analyst at Wellington West Capital Markets in Calgary. "Costs are coming down as the industry connects 'more wellbore to more reservoir.' (The producers) have shifted from 600-1,000 meter horizontals legs to 1,100-1,400 m laterals with some looking to test 2,000 meter-plus horizontals."
"With longer horizontal legs, the industry has moved from six to eight to 12 plus frac stages. And both the longer legs and bigger fracs are being executed for less cost."
Midway Energy (MEL-TSX) CEO Scott Ratushny gave me a technical talk on how they reduced costs and improved economics in the Cardium in 2010.
"We learned some big lessons in our frac (short for fracturing) spacing, and what types of fracs to use. We started off very conservative and generic, doing 1,000 meter horizontals, putting in ten stages of frac, which is easy to manage."
"Then we start to push on it and increased the number of fracs. When someone puts in 20 stages of frac, there is more of a chance of error.
"And we got faster with each drill as we learned what muds and (drill) bits work best. We're doing a well in 12-13 days now, down from 18 days, and a day of drilling is worth approximately $50,000 plus ancillaries.
"We are still finding little efficiencies that are worth $5,000-$10,000 per improvement but nothing major. (The formation) is overpressured so it has lots of 'energy' and the wells will flow on their own after the frack. We try to encourage them to flow as long as possible before putting on pump jacks."
"We would get an IP (intermediate pressure) at 1,000 barrels equivalent a day then have it drop to 150 because of pumping problems. We used to go to a pump jack right away, but we found the oil was trying to flow past the pump. Now we let them flow until they die and then swab to get them flowing again, and continue to do that over and over until the well loses its energy, and then put the pump jack on."
(Swabbing a well is like having a plastic cup, or buckets on a string, that pulls the oil up and encourages it to move up the well bore. Then the oil will start flowing on its own for awhile).
Everybody agreed that the Cardium in 2011 will separate the haves from the have-nots - who has the highly productive property...and who doesn't.
"It's very variable," says Doug Bartole, CEO of Vero Energy (VRO-TSX). "Within a mile you can have a good well, and a mediocre well."
"There are definitely sweet spots," agrees Shaw. "Not all areas are created equal in-terms of the ability to "blanket drill" and get solid results."
Shaw says several areas in the Cardium are outperforming:
"Garrington has done well for Midway (MEL-TSXv) and NAL (NAE.UN-TSX). Going back to reserves per well being booked, these guys are seeing about 220,000 bbls per horizontal well.
"Willesden Green and South Pembina, or the entire "West Trend" as I like to call it, running from Willesden Green up through the Ferrier and Brazeau areas and ending up near Big Stone have been very good to bigger players like PennWest (PWT.UN-TSX), Daylight (DAY-TSX) and Petrobakken (PBN-TSX), as well as smaller-cap names like Bellatrix (BXE-TSX) and SkyWest (SKW-TSXv) who both have premium land positions in these areas.
"Willesden Green, for example, has seen repeatably some of the best Cardium horizontal wells with some of the thickest gross pay, and higher GORs (gas to oil ratio). This is considered a good thing given the gas helps drive more oil to surface - achieving higher oil rates - which is a big deal in tight resource plays like the Cardium."
Producers have now pushed out the edges of the Bakken far beyond what people thought realistic when its development started in earnest several years ago. Could the same thing happen to the Cardium, or is its geological edges well defined?
The answer, says Bartole, partially depends on the price of oil.
"We'll continue to see it step out if the price of oil is good. "There are thin sections (in the Cardium). We target five to six meters of pay, but there is a lot of ground with three meters of pay" which could become economic at a certain oil price, he says.
"The Bakken is laid out in a larger area," says Ratushny. "The Bakken is more continually laid out. The Cardium is found in more defined pools." He adds "It will be interesting to watch the guys who are pushing the envelope (of where the Cardium is productive) in 2011."
Shaw says areas like Brazeau and Lochend in the Cardium are relatively new areas that weren't really considered productive when the Cardium started to open up a couple years ago, and these new areas could conceivably continue to be discovered.
Of course, everybody wants to know, where will the next Cardium be - the next big oil play that a basket of junior explorers can develop big reserves.
"Source rock oil might be the next Cardium," concludes Ratushny. "It could be Crescent Point (CPG-TSX) in the Alberta Bakken or the Nordegg (formation) in Peace River Arch, or the Duvernay."
"But it will be somewhere that hasn't produced economically before. And if you think you have a good zone that's been overlooked you can't tell a soul."
Follow this link for Part 1 of my Cardium oil series.
(c) 2009, Oil & Gas Investments Bulletin