If you want to profit from North America's shale boom, all you have to do is follow the drill rigs.
Today in Alberta, Canada there are 433 rigs spinning. Although that's "only" about half that of Texas, there's a lot of opportunity brewing up north.
Last week I ventured to Calgary, Alberta to get a good (cold) feel for what's happening. From what I saw, the next leg of North America's shale boom is taking place right now, up north…
"80% of the world's oil reserves are held by national oil companies (NOCs)," says Ken Hughes, Alberta's Minister of Energy. Hughes is referencing the simple fact that countries—like Saudi Arabia, Iran, Russia, Venezuela, Nigeria, Brazil, Mexico and others—have nationalized their oil industry. Indeed, 80% of the world's oil reserves are "hands off" for you and me.
Although, "of the other 20%," Hughes concludes, "HALF are here in Alberta."
Indeed, when you think of North American energy you likely think of places like Texas, Alaska, or more recently, North Dakota – but today I urge you to keep an eye on Alberta.
Part of Alberta's energy bounty is found in its massive deposit of oil sands, to be sure. But the other part, important for today's discussion, is found in up-and-coming shale plays
It's the same story we've heard here in the states. We've always known the oil and gas is under the ground, we just never knew an efficient way to get it out.
Today, we've unlocked the door to North American energy independence —and a huge part of that is taking place in Alberta's shale patch.
There are two main plays that you need to be familiar with today: the gas-rich Montney and the oil-rich Duvernay.
The standout player in energy potential is the Montney. As you can see in the chart above, when converted to its oil equivalent, the Montney has the potential for nearly 1.5 million barrels per day (by 2030.) But, with the drawback in natural gas prices lately the Montney is more akin to Pennsylvania's Marcellus gas play. The potential payout is huge, but a lot hinges on the price for natural gas.
The Duvernay on the other hand is more akin to the Eagle Ford in Texas. In fact, the Duvernay has the potential to be the BEST shale oil play in North America.
According to Hart Energy's Peggy Williams, the estimated ultimate recovery (EUR) is anywhere from 600,000–1,000,000 barrels per well. One million barrels per well!? When compared to other familiar names in the shale patch, that far exceeds the Permian and the Bakken—it also nudges out the Eagle Ford for the top spot.
Indeed, with energy potential like that, it's only a matter of time before producers in the region start cashing in. And although drilling and service prices are slightly higher in Canada there's a lot of reason to stake a claim to this up and coming region. Not the least of which is my next point…
Canada's Shale Boom: A Global Player
One of the major issues that Alberta has faced—other than modestly higher service/drilling prices due to seasonality—is geography. Alberta is landlocked. And when it comes to producing oil and gas, getting your product to market is just as important as getting it out of the ground.
In the past, selling oil and gas to the U.S. was easy. But today, as seen with the Keystone XL decision/debacle, that's not exactly the case.
"Alberta has been well served by one customer, the U.S., but with growth in U.S capacity we have to get products to market—get to tide water—and get world prices," says Energy Minister Hughes.
Canada, Alberta in particular, sees the writing on the wall. The back and forth nature of U.S. energy policy, along with a U.S. shale boom, is creating a potentially unmovable impediment to Canada's energy production.
So in the past where Canada could count on the U.S. as an energy partner, today the tide is shifting. In fact, the one major theme that I walked away with after my trip to Calgary, was that Canada is open for global business.
And as the cheap and bountiful energy starts to flow from beneath the frosty tundra, there will be plenty of ways to play it. Here's how. . .
Stake Your Northern Claim
Back in October 2012 we discussed three simple words that can unlock the profit potential in shale plays (these prescient words came to us from one of the forefront thinkers in the shale space, Richard Mason, Chief Technical Director for Hart Energy.) In particular for any shale play there will be three distinct phases: discovery, optimization and harvest.
1. The discovery phase offers wildcatter profit opportunities and the associated high risk. In other words, if you hop on the right horse that has acreage in an up-and-coming shale play you could be set to cash in.
2. Next up is the optimization phase. This is where established players with knowledge of the play learn how to maximize drilling and recovery rates, midstream players begin pipelines, storage facilities and processing plants, and majors come into the play and look for buyouts.
3. Last is the harvest phase. At this stage the established players have a well-known formula for making money. The bulk of the high profit opportunity is gone. But with continued production and transport, residual profits (through dividends) can payout for years to come.
The shale plays in Alberta—the natural gas filled Montney and the oil rich Duvernay—are transitioning from the discovery phase to optimization. Right now, with the fog clearing around the estimates of the recoverable resource base, smart investors like us can start making a lot of money in the shale patch.
In fact, recently the money has started to really start flowing – a good sign that we're in the right place. Take a look at the string of buyouts and joint ventures (JVs) in the past 12 months:
- Encana's JVs with Mitsubishi ($2B) and China's CNPC ($2B)
- Petronas's acquisition of Progress Energy ($6B)
- CNOOC's acquisition of Nexen ($20B)
- Exxon's acquisition of Celtic ($3B)
- Petro China's stake purchase of Shell Oil's shale-gas assets ($1B)
Add it all up and there's been over $35B in play over the past 12 months. Indeed, if the big guys are willing to shell out this type of cash, you know there's some money to be made here, smack-dab in the of the shale cycle.
I'll leave it at that for today, but there's plenty more to cover north of the 49th parallel.
Keep your boots muddy,
The Daily Reckoning