Where Does the Next Cardium Oil Opportunity Lie?

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 frac 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 Wellington West Capital Markets Energy Analyst Kevin Shaw. "Costs are coming down as the industry connects 'more well bore to more reservoir.' [The producers] have shifted from 600m–1000m horizontals legs to 1,100m–1400m laterals with some looking to test +2000-meter horizontals. With longer horizontal legs, the industry has moved from 6 to 8 to +12 frac [hydraulic-fracturing] stages. And both the longer legs and bigger fracs are being executed for less cost."

Midway Energy CEO Scott Ratushny gave me a technical talk on how the company reduced costs and improved economics in the Cardium in 2010.

"We learned some big lessons in our frac spacing and what types of fracs to use. We started off very conservative and generic, doing 1,000-meter horizontals, putting in 10 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 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 ancillaries. We are still finding little efficiencies that are worth $5,000–$10,000 per improvement but nothing major. [The formation] is over pressured, so it has lots of 'energy' and the wells will flow on their own after the frac. We try to encourage them to flow as long as possible before putting on pump jacks."

"We would get an IP at 1,000 barrels equivalent a day, and 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. Then we continue to do that over and over until the well loses its energy and we put the pump jack on."

[Swabbing a well is like having a plastic cup 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 a while.]

Everybody agreed that in 2011, the Cardium will separate the haves from the have-nots—who has the highly productive property. . .and who doesn't.

"It's very variable," says Vero Energy CEO Doug Bartole, adding "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 and NAL Oil & Gas Trust. 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, Daylight and Petrobakken, as well as smaller-cap names like Bellatrix and SkyWest, both of which have premium land positions in these areas. Willesden Green, for example, has seen some of the best, repeatable Cardium horizontal wells with some of the thickest gross pay and higher GORs [gas: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 are 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 5–6 meters of pay, but there is a lot of ground with 3 meters of pay," which he says could become economic at a certain oil price.

"The Bakken is laid out in a larger area," says Ratushny, "it is more continually laid out. The Cardium is found in more defined pools. 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," says Ratushny, "it could be Crescent Point in the Alberta Bakken, 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 link to read Part 1 of the Cardium oil series.

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Where Will the Next Cardium Oil Opportunity Be?