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Led By The Alberta Bakken/Exshaw, New Shale Oil Plays Are Emerging



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 NICKLE�S

DAILY OIL BULLETIN

November 16, 2010

Led By The Alberta Bakken/Exshaw, New Shale Oil Plays Are Emerging http://n2003.nickles.com:80/blank.gif.asp?ref=orRYP%2BSY8C%2BpwSpay06Qy20iWJY%2B

By Paul Wells

Drilling and completion techniques that have dramatically altered the North American gas market are now being tested on new shale/tight oil plays in Canada with an early focus on the Alberta Bakken/Exshaw play in southern Alberta.

And its not just juniors that are testing the waters.

Bigger outfits like Crescent Point Energy Ltd. and Murphy Oil Corporation are probing in southern Alberta and multi-national giant Royal Dutch Shell has started a drilling program.

In a recent report, Macquarie Equities Research analyst Ray Kwan said the "shale oil revolution" is garnering significant attention as the industry continues its drive toward oil-related exploration.

"In Canada, we have witnessed several new plays popping onto investors radar screens," Kwan said.

"In our view, Canadian shale oil is likely to emerge as a significant trend over the next five to 10 years, as producers move into the tightest yet largest oil in place rocks available."

According to Kwan, new and emerging plays include the Mississippian Alberta Bakken/Exshaw shales in southern Alberta, as well as the Cretaceous Second White Specks in the Deep Basin, Jurassic Nordegg shales in the Peace River area of Alberta and the Devonian Muskwa/Duvernay shales in northwest Albertas Deep Basin.

"We note that together these shales are estimated to contain over 40 billion bbls of original oil in place, which at even a one per cent recovery factor would go a long way to extending the productive life of the Western Canadian Sedimentary Basin (WCSB)," Kwan said.

Out of all the plays in question, the Exshaw/Bakken in southern Alberta near the Montana border has clearly garnered the most attention, both from industry and the analyst community.

"The Alberta Bakken has generated by far the most buzz of any of the shale oil resources ...

We expect to hear results from up to 20 wells that are expected to be drilled into this play through the first half of 2011, with Crescent Point Energy Ltd. leading this exploration charge," Kwan said.

Other producers targeting these shales include DeeThree Exploration Inc., Bowood Energy Inc., Murphy Oil Corporation, Blacksteel Energy Inc.

and Quicksilver Resources Inc.

Kwan also noted that Quicksilver is following up on Exshaw formation oil shows on its Horn River acreage in northeastern British Columbia.

And with Shell Canada Limited now in the mix -- it recently licenced two new field wildcat wells in the Del Bonita area of the play -- expectations for the Exshaw/Bakken will likely ramp up further.

Bulletin records show that Shell Canada was issued a licence Oct.

21 for a horizontal well at surface location 9-17-1 22W 4M.

Oil is listed as the objective.

The Big Valley formation, which underlies the Exshaw/Bakken, is the terminating zone and projected depth is 3 844 metres.

Land sale records show that broker Contiguous Resources Ltd. purchased 1,024 hectares in the region for a bonus of $2.07 million, or $2,025 a hectare, at the Sept.

1 Alberta land sale.

The second horizontal well licenced by Shell is at 1-23-2 22W 4M.

It has the same objective and terminating zone but its projected depth is listed at 4 038 metres.

During the April 21 Alberta land sale, broker Canadian Coastal Resources Ltd.

picked up 768 hectares in the area for a bonus bid of just over $482,000, or $627 per hectare.

"(Shells) announcement adds another large producer to the mix with Murphy and Crescent Point already letting it be known that they are chasing this emerging new light oil development," GMP Securities analyst Peter Doig said in an Oct.

27 note.

Kwan said that Crescent Point and several land brokers have licensed and started drilling/completing wells in the Del Bonita/Reagan area along the United States/Alberta border, "though no results have been released."

The latest licence in the play was issued on Nov.

5 when Crescent Point received approval for a new field wildcat horizontal well at 15-1-2-20W4M.

Oil is the objective, the Wabamun Group is listed as the terminating zone and total depth is projected at 3 050 metres.

Initial exploration of the Alberta Bakken trend occurred on the Montana side of the border.

In Montana, Rosetta Resources Inc. and Newfield Exploration Company have farmed into a combined 512,000 net acres (800 sections), and, along with Anshultz Oil and Gas (undisclosed land), are the dominant land holders on the Blackfoot Indian Reservation.

Quicksilver Resources Inc.

also has a large land position in the play.

While little public data has been released states-side, as of mid-October, Rosetta, Newfield and Anshultz had drilled six vertical and one horizontal wells with nine wells licensed of an announced 18-well program in northwestern Montana.

The horizontal well is speculated to have tested significant oil on completion, but rates are unknown.

In Canada, Crescent Point announced in September that it had acquired more than one million net acres of exploratory land in southern Alberta that the company believes is prospective for multi-zone light oil opportunities, including the unconventional Bakken and Three Forks zones.

"We believe there is significant untapped unconventional light oil resource potential in southern Alberta," Scott Saxberg, Crescent Points president and chief executive officer said in a press release.

During the third quarter, the first of three (three net) exploration wells planned for 2010 was drilled on these lands and a second has been spud in fourth quarter.

In its third quarter report, Crescent Point said it expects to drill more than 19 net development and exploration wells on these lands by the end of 2011.

During the companys Nov.

4 third quarter conference call, Murphy Oil President and CEO David Wood said the fledgling Bakken/Exshaw play is indicative of the companys North American game plan going forward.

"Our North American resource position provides a nice complement to our global exploration activity and in September we announced entry into a fourth play, this one in southern Alberta targeting the oil-prone Exshaw formation which is analogous to the Bakken play on the U.S.

side of the border," he said.

"We are moving forward with plans for early drilling next year to appraise our position, which we continue to grow on now close to 150,000 net acres ...

we are back actively exploring testing high impact prospects as well as adding new high potential oil opportunities to our portfolio, witness the addition of acreage in south Alberta for the Exshaw play."

Haywood Securities Inc. analyst Geoff Ready said that while the productivity of the play is not publicly known, its geological characteristics "make it interesting." While the play is being referred to as the Alberta Basin Bakken in some quarters, in reality there are three potential productive zones spanning late Devonian to early Mississippian time, he said.

"The Bakken (Exshaw) shale is an over-pressured source rock overlying Banff (Lodgepole) and underlying Big Valley (Three Forks equivalent) carbonate reservoir rocks.

Early indications are that companies are looking to use horizontal drilling and multi-stage fracturing technology to unlock this resource," he said.

Ready said that there is no doubt that the zones are oil bearing as indicated mainly by multiple drill stem tests (DSTs) conducted on wells drilled in the area in the late 1970s and early 1980s.

Land sale activity in the area is a strong indicator of the industrys belief that the play may have legs.

"Crown land sales in the Alberta fairway have generated over $146 million at an average cost of over $1,000 per hectare thus far in 2010.

This is an extraordinary amount considering the lack of well control and negligible horizontal drilling to date," he said.

"The majority of the Crown land has been bought in large blocks under brokers names, seemingly indicating interest from larger corporations."

Ready said he will keep a keen eye on the play as wells are drilled and more companies announce their land positions.

"Many of the large Crown land blocks have two-year terms to validate the licences, therefore we expect activity to pick up significantly within the next year," he said.

"As with many emerging plays, we expect both successes and failures with valuable lessons learned along the way."

In an October 2010 report, BMO Capital Markets said the Alberta Bakken is an example of an early entry tight oil resource play.

The report added that "significant activity" is presently expanding the limits of the Alberta Bakken play.

BMO Capital Markets highlighted the following:

.

Approximately 112,887 hectares (about 436 sections) have been purchased via crown land sales in 2010 for the Alberta Bakken.

.

In southwestern Alberta, Crescent Point Energy (through the acquisition of Darian Exploration for $96 million) and Murphy Oil and Bowood Energy (through farm-ins on the Blood Indian Reserve) have established dominant land positions totaling (approximately) 1,862 sections in the thermally mature Exshaw source rock fairway.

.

In Alberta, one horizontal well has been drilled and completed targeting the Alberta Bakken (drilled under broker Antelope Land Services at 14-7-1-21W4: TD - Wabamum; results confidential).

A second horizontal well is presently drilling (Antelope Land Services 16-24-2-25W4, licensed to the Exshaw, spudded Aug.

17, 2010), and a third horizontal well licensed by Antelope Land Services located at 3-8-1-18W4 has also been drilled and rig released on Oct.

3, 2010, to the Exshaw.

"It is believed that Crescent Point Energy is the operator of these three wells," the report said.

Macquaries Kwan said that while the Alberta Bakken/Exshaw and the other potential shale/tight oil plays have promise, they will not be without their respective challenges.

Because "not all shales are created equal" and are not uniformly prospective for oil and/or natural gas, he said that its vital that E&P companies active in the plays employ due diligence in an effort to accurately evaluate the quality of their assets from a technical perspective.

In other words, youve got to know your rock.

"Productive capability is dependent on geochemical, petrophysical, geological, mineralogical and economic factors.

The first step in evaluating a shale prospect is to drill, core, and analyze the rock samples displayed in the cuttings," Kwan said.

"With an abundance of technical information on the quality of a source rock/shale, the key is distilling the most important factors."

Those factors include total organic carbon, remaining hydrocarbon potential, thermal maturity, permeability and porosity, pay thickness, lithology and mineralogy.

Kwan said that other drilling and completion considerations and production decline profile also have to be taken into account.

That said, Kwan believes that the aforementioned plays hold much promise and he fully expects a mini-rush of exploration in the shale oil deposits to occur during the coming months.

"We expect producers chasing the ever lucrative source rock in Canada to be a major theme over the next five years.

In areas where the oil window is more apparent, we see potentially higher drilling and land sale activity over the near term, followed by an increase in production, reserves, and cash flow for producers able to effectively execute on their shale oil strategy over the longer term," he said.

"At this point, there is no doubt that shale oil is in the first inning of its delineation phase; however, with further technical analysis, drilling, and technology improvements, we are cautiously optimistic and see enormous promise for each of these respective plays in 2010/11."

In terms of terminology and to avoid confusion, Kwan noted the difference between "shale oil" and "oil shale." He said shale oil (such as the Bakken), which represents the least permeable rock, "falls squarely in the conventional oil in unconventional reservoir rocks" camp while oil shale is considered unconventional oil in unconventional rock.

"Oil shale, which is degraded oil found in tight reservoirs is likely years away from full commerciality given the significant R&D and capital commitments required in light of the current price environment," he said.

Dave Russum, a petroleum geologist who is vice-president of geoscience for Calgary-based AJM Petroleum Consultants, agrees.

"Historically oil shale has referred to rocks like the Green River Shale in Wyoming/Colorado - which is ironic because these rocks do not contain oil but organic matter known as kerogen which is a precursor of oil.

Heating this kerogen to high temperatures and distilling creates synthetic oil - this has been called shale oil.

Really the rock should be called kerogen-rich shale and the product oil from kerogen," he said.

"This distillation of kerogen is basically an acceleration of what happens when similar rocks that have been buried deeper in the subsurface are exposed to higher temperatures over geologic time and liberate light oil.

When this light oil migrates into a typical porous and permeable reservoir it has been called conventional oil.

If it stays trapped in the shale it has been called unconventional oil - it should really be called conventional oil in an unconventional reservoir."

Russum said that gaining a strong understanding of the geology will be key in making the next wave of "conventional oil in unconventional rock" plays like the Alberta Bakken/Exshaw work.

While he wouldnt speculate as to which of the emerging plays may or may not prosper, hes convinced that some producers will have success going forward.

"Rather than suggesting one formation is likely to be better than another, I would suggest there will be more favourable areas in each one of the plays -- sweet spots -- that may prove to be economically viable," he said.

"Higher oil prices certainly encourage the search and reduce the productivity threshold for a viable play but understanding the rocks will be critical to success."

Russum said the term "oil shale" seems to have become "entrenched in our psyche even though it is causing huge confusion ...

because oil is virtually impossible to move through true shale."

By definition, shales are very fine grained rocks which also results in very low permeability.

Because oil molecules are much bigger than gas molecules their ability to flow through a low permeability rock is very poor compared to gas.

"Therefore producing oil from a pure shale rock is a challenging and expensive proposition that may not be economically viable," Russum said.

"Most rocks that produce light oil, for example the Bakken, have a significant component of coarser grains - silt or sand-sized grains that typically give the rock a higher matrix permeability and should probably not be called by the geological term shale.

As a result, Russum thinks that the places where industry will see progress and economic success will be in the "hybrid-type plays" where the oil source rock is proximal to coarser grained more porous/permeable rock.

"Its still low quality compared to conventional reservoirs but capable of liberating oil using horizontal drilling and intensive completion techniques," Russum said.

Petroleum geologist Brad Hayes, president of Petrel Robertson Consulting Ltd., notes that while theres many similarities between shale gas and shale oil exploration, producers in search of the more liquid hydrocarbon are hoping to punch holes in slightly less mature shale geology as thats where the oil window is likely to be found.

"Really, the essential difference is youre talking about the shales being somewhat less mature overall so that when you get in there and stimulate them with your horizontal wells and multi-stage fracs, youre going to get liquids out instead of gas," he said.

"Of course, just like everything else in oil and gas plays, theres no absolute window between the two.

Weve seen that over the last while where the shale gas players have been focusing more towards the liquids-rich shale gas plays because theyre getting more liquids out of them," Hayes added.

"Really, what theyre looking at is shale gas reservoirs that are part-way between shale gas and pure shale oil."

While he says that "theres no doubt" that the newer and emerging shale oil plays could have great potential, Hayes cautions that there are many hurdles ahead as producers try to prove up the plays and their economics.

"I think were a lot further along the road in shale gas and actually proving that economic rates can be had with current technologies.

With shale oil - largely because youre trying to get a much more viscous material out of the rock compared to gas - its going to be a much more difficult task to get that stuff to flow," he said.

"So the key comes down to what sort of rates you can get.

Theres no doubt that theres a huge amount of oil in place in the ground, and theres no doubt that many of the reservoirs like the Duvernay/Muskwa and the Colorado and rocks like that are going to be targets, but youve just got to look in different areas."

By that, Hayes is referring to the geological fingerprint of a given area inside a given play.

While industry has generally mastered the science of determining what will make a shale gas play work, its still early in the game when it comes to the oil equivalent.

"You know whats worked for shale gas and industry can probably get to the answers much more quickly because of that.

But there are going to be some differences (from shale gas exploration) because youre focusing on that liquid content and maybe you will have to look at some different techniques or at least youll have to establish what the cutoffs are for the important parameters," Hayes said.

"Theres lots of core and lab work to do to establish the various parameters youre looking to measure.

Theres other things, too - depth, pressure, temperature and particularly viscosity, or the maturity of the oil.

If you get down there and get a nice 45- or 50-degree API oil thats very light and kind of flows like gasoline, well thats going to come out a lot easier than maybe a medium crude at 25- or 30-degrees."

Although he believes shale gas will prove to be a safer bet in Western Canada than shale oil, Hayes nonetheless says the newer plays will have an important role to play going forward.

"I would say that shale gas is probably a bigger target here than the shale oil but I still think theres going to be - in the right areas - some pretty big oil in place numbers and the challenge right now is to get the recovery factors to make the recoverable amount of oil substantial," he said.

"Certainly, if (producers) can do the work and the prices stay at a reasonable level, I certainly think the reserves you will be able to attribute down the road to shale oil will be very considerable."

Dave Collyer, president of the Canadian Association of Petroleum Producers (CAPP), said hes "optimistic" when it comes to shale oils potential in Western Canada.

"I think ...

shale oil, the equivalent of shale gas for oil, has been understated.

I think theres a lot more potential out there then is reflected in (CAPPs) forecast and many others," he said.

"That is an opportunity for the industry in Western Canada that has not yet been fully recognized."

Gary Leach , executive director of the Small Explorers and Producers Association of Canada (SEPAC), says the junior sector will play a prominent role in developing the new tight oil plays.

"I think this emerging new resource opportunity in shale oil, which first started drawing some quiet investigation a year or more ago in Alberta, is ideally suited to be developed by early entrants from the entrepreneurial junior sector we have in Canada," Leach said.

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