North America’s Next Big Shale Play

by Tsvetana Paraskova (feat. Kevin Birn)

Oil Price.com
Febbruary 1, 2018

The oil price crash of 2014 not only weighed on Canada’s oil sands industry, but it also directed more company investment into shorter-cycle shale projects in the U.S. at the expense of more capital- and energy-intensive oil sands production in Canada.

While the oil sands will continue to be a growth story thanks to investments made before the downturn, Canadian energy officials and many oil companies — both Canada-based and supermajors — are increasingly looking to explore and drill in the two largest shale formations, Duvernay and Montney, estimated to hold billions of barrels of light tight oil and trillions of cubic feet of gas.

Currently, Canada’s shale oil production is around 335,000 bpd, according to estimates by energy consultancy Wood Mackenzie, quoted by Reuters. This is some 8 percent of total Canadian production, which the National Energy Board (NEB) says was nearly 4.2 million bpd in 2017. Wood Mackenzie expects shale oil production to rise to 420,000 bpd in a decade.

Some two-thirds of Canada’s oil production comes from oil sands. In 2017, Canadian oil sands production is expected to have exceeded 2.6 million bpd, according to IHS Markit. Production is expected to continue to grow, thanks to investments made prior to the oil price crash, while future investment is “to remain lower than historical levels”, the data and analysis provider said in a report earlier this week.

Investment in new oil sands production capacity has dropped by two-thirds since the oil price crash — from more than $30 billion to just over $10 billion estimated for 2017 — and may fall further this year before starting to recover, IHS Markit says.

“Once operational, oil sands facilities are largely unresponsive to the oil price — with production neither ramping up nor ramping down materially,” said Kevin Birn, executive director at IHS Markit.

However, it’s likely that the investment in mega oil sands projects — sanctioned before the downturn — has ended with the Fort Hills project that started pumping oil this month.

Now oil majors and Canadian companies are looking at the vast shale deposits of the Duvernay Shale in central Alberta and the massive Montney resource play in northwest Alberta and northeast British Columbia.

The NEB has estimated that the Duvernay contains 3.4 billion barrels of marketable light oil and field condensate and nearly 77 trillion cubic feet (Tcf) of marketable natural gas. The Montney formation is estimated to be very large with expected volumes of 1.125 billion barrels of marketable oil and 449 Tcf of marketable natural gas.

The Duvernay play could be compared to the Eagle Ford in the U.S., while Montney is unique, and contains several different levels at which oil and gas can be drilled, Mike Johnson, technical leader of hydrocarbon resources for the NEB, told Reuters’ Nia Williams.

And oil companies plan to invest more in Canadian shale.

Last year several oil majors sold their oil sands assets, with Shell selling its interests for around $8.5 billion, and ConocoPhillips divesting oil sands assets in a $13.3 billion deal.

However, both companies continue to hold and develop their tight oil assets, and both Shell and Conoco have acreage under development in Duvernay and Montney.

This year, investment in Duvernay will be Shell’s second-largest shale investment, second only to the Permian in Texas, the company’s spokesman Cameron Yost told Reuters.

Last November, Chevron said that it was moving into development on a portion of its lease holdings in the Kaybob Duvernay area of west-central Alberta, following a successful three-year appraisal program.

Calgary-based Encana plans to invest virtually all its anticipated 2018 capital in its core assets, with around 70 percent directed to the Permian and Montney. In Montney, Encana’s liquids production more than doubled from Q4 2016 to Q4 2017, driven by a focus on condensate rich wells and the early start-up of some processing plants. The company expects to further grow its liquids production this year.

“Increasingly we are going to see light tight oil and liquids-rich natural gas forming a key part of Alberta’s energy future,” Alberta’s Energy Minister Margaret McCuaig-Boyd told Reuters.

Still, Canada’s shale oil patch needs more exploration for drillers to understand the structures of the vast formations. It also has a formidable competitor for investment dollars south of the border, with U.S. shale now in its 2.0 boom. And Canada will has transportation difficulties — not all proposed pipelines to ease Canada’s takeaway capacity restrictions will see the light of day, and even if they do, it won’t be until 2020.