John King, Senior Vice-President, Technology Services ... · 70 JUNE 2005 ALBERTA VENTURE John King, Senior Vice-President, Technology Services, Precision Drilling

70 JUNE 2005 ALBERTA VENTURE

John King, Senior Vice-President, Technology Services, Precision Drilling

Alberta’s natural gas resources are running out.For some risk-oriented companies, that spells opportunity

By Tom MaloneyPHOTOGRAPHY BY CHAD JOHNSTON

Oil & Gas 2005

ALBERTA VENTURE JUNE 2005 71

Unconventional.That one word says it all. On the cover of the annual report EnCana

Corporation issued this April, printed in large green and blue letters against a starkly black background, it virtually shouts the company’s vision of the future.

“When it comes to North American gas and oil, the future really is unconventional,” CEO Gwyn Morgan told shareholders at the annual meeting in Calgary, noting 75% of sales from continuing operations will come from so-called unconventional sources.

Unconventional? It’s such a strikingly odd word for a company from Calgary’s conservative oilpatch to adopt as a mission, a mantra. Yet with worldwide demand showing no more sign of backing down than Fort McMurray real estate, traditional reserves declining and prices reflecting the situation, Morgan believes the timing is right.

Energy industry companies large and small are looking to previously uneconomic reserves to meet the demands of a per-sistently hungry world. Tapping them demands new methods, new technology, new thinking.

Ken Sinclair of Canadian Spirit Resources Inc. personifies this new direction of the oilpatch. In 1992, with Alberta’s coalbed methane sec-tor in its infancy, he founded the Canadian Coalbed Methane Forum. The consortium started with 13 oil and gas producers and later evolved into the Canadian Society for Unconventional Gas.

For some 30 years he toiled for oilpatch consultants like TerraTek Inc. and Sproule Associates Limited as a scientist, recommending for or against coalbed methane gas plays. Sometimes the clients listened, other times not.

Defying Convention

INDUSTRY REPORT

Directional DrillingDrilling technology progresses continually, from Model T to Porsche status and beyond, one quantum leap after another.

Launched in the early 1980s, horizontal drills move inv-isibly in every direction from a single base, going further and further afield. This capability, combined with transportable wood pads, can extend the drilling season appreciably on muskeg, long past the spring thaw. The technology also reduces the number of cuts into the landscape for roads, pipeline, and well sites.

Electronic communication devices allow engineers to obtain seismic data instantly. Drills keep boring rather than stopping intermittently for retrieval and analysis.

The latest wave of progress comes in the form of the rotary steerable system. At its Clyde Field in the North Sea, Talisman Energy sought to probe unlocked or previously bypassed reserves. With traditional mud motors, there had been a history of downhole failures and problems controlling the well path. The rotary steerable drill, by contrast, lubricates as it bores, increasing efficiency. John King, Precision Drilling’s senior vice-president of Technology Services, believes this technology will be applied widely in unconventional gas and heavy oil exploration as it becomes less expensive. “Now it’s in the NASA price range but give it a couple of years,” King says. “There will be a lower cost operating model.”

“All the juniors and intermediates are doing unconventional gas wells. Most multi-nationals are still doing the big, bad and beauti-ful. If they find out they’re wrong, we’ll make perfect acquisition candidates.”

Ken Sinclair, Canadian Spirit Resources

INDUSTRY REPORT


Now it’s his company, his turn to roll the dice, his ultimate responsibility. At first work-ing out of a garage, Sinclair partnered with president Phil Geiger to launch Canadian Spirit Resources Inc. three years ago. The company’s fortunes rest primarily on a pilot coalbed methane project in northeastern B.C. Will their gamble pay off? Faithful investors have bet some $30 million on it.

“No question, I’m in the right place,” says Sinclair, vice-president of business develop-ment for the Calgary-based company. “Very simply, I want to make myself a lot of money, rather than a lot of money for other people.”

Canadian Spirit and dozens of compa-nies like it are dedicated to the new wave of Alberta’s energy, unconventional gas – so-called because it’s tougher to reach. The un-conventional reserves are lurking in coalbeds, deep deposits, tight sands, fractured shale and a sub-Arctic phenomenon known as me-thyl hydrates.

In the Western Canada Sedimentary Basin alone, proven conventional gas reserves dropped to 54.9 trillion cubic feet (tcf) in 2003 from 56.2 tcf a year earlier — in spite of a fe-verish, record-setting pace for exploration. In the words of John King, senior vice-president of Technology Services at Precision Drilling,

producers “are running to catch up.” Explorers drilled a record number of wells

in 2003, and again in 2004. Assuming projec-tions come true, another 17,000 record wells will puncture Canadian soil this year, the ma-jority in Alberta which produces 80% of the country’s natural gas.

Western Canada isn’t running out of gas so much as running out of easily procured gas. Ending are the eureka days of drilling an in-expensive shallow well to tap into enormous pools. So, while it costs exponentially more money to drill unconventional wells, compa-nies ranging in size and wherewithal are un-dertaking the risks with a common gusto.

Unconventional gas makes up about 9% of output in Canada, compared with nearly one-third of production in the United States. Because of geological differences, explorers caution the gap won’t be closed automatically. Still, the optimism is palpable in voices rang-ing from the Morgans to the Sinclairs.

“There’s still tremendous initiative in the U.S. but Americans went through the Hubbert Curve 18 years ago,” says King. “The world is moving north now.”

Some companies are going into largely un-explored basins, while others return to sites which have produced oil and gas in the past

Oil well

New wellbore

Directional Drilling


Ken Sinclair, Vice-President, Business Development, Canadian Spirit Recources Inc.

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Coalbed Methane

“[A coalbed methane project is] like carpet-bombing. You’re perforating the entire countryside. It’s about volume.”

John King, Precision Drilling

INDUSTRY REPORT


Alberta’s abundant supply of coal is said to store more energy than the oilsands, with estimates ranging wildly from 100 to 500 trillion cubic feet of methane. Analysts at Peters & Co. puts recov-erable volume between 20 and 100 tcf. Canadian production of Coalbed Methane (CBM) averaged about 150 million cubic feet daily in 2004, triple the level of the year before.

The rise in natural gas prices beyond $7 US is spurring the activity. Peters & Co. suggests CBM plays become commercially logical at $4 US. “True opportunity,” says John King, Precision Drilling’s senior vice-president of Technology Services.

On the flipside, a coalbed methane project can take up to seven years to realize and requires thousands of wells. “It’s like carpet-bombing. You’re perforating the entire countryside. It’s about volume,” he describes.

Alberta’s CBM ventures are in their infancy compared with the U.S., which has been going at it for 20-plus years. The Horseshoe Canyon area, centred near Drumheller, is considered Alberta’s best bet. EnCana Corporation predicts two trillion cubic feet to flow over a 30- to 40-year period from the mystically “dry” coals of the Horseshoe. The only other known coalbed like it is in Australia. Dry coals do not produce water, which helps bring down the recovery costs into the neighbourhood of shallow gas plays.

Once considered a dangerous nuisance that could suffocate coal miners or trigger explosions, the methane emerging from microscopic seams of underground coalbeds today measures nearly 9% of American gas output. Methane is absorbed to coal like water to a sponge from pressure exerted by overlying rock or water. The coal holds nearly six times the volume of natural gas compared with a conventional reservoir. By reducing that pres-sure, producers can release the gas.

Environmental opposition to CBM has resulted in some stum-bling blocks. Nexen Inc. and other companies have had to deal with heavily salinated water in the extensive Mannville formation along the Foothills. Disposal of the waste water has caused some controversy since it has to be reintroduced to deep aquifiers.

from conventional reserves. On the Western Canada Sedimentary Basin, Canadian Hunter Exploration Ltd. pioneered the notion of tur-ning formerly productive fields into rediscove-ries. Wringing the sponge, if you will.

Ron Hietala, now president of a fledgling Calgary company, Golden Eagle Energy Ltd., cut his teeth with Canadian Hunter as vice-president of Technical Services. Sitting in a Calgary downtown office jammed with maps, charts and reports, the petrophysicist scrawls a “resource triangle” on a notepad. Depicted at the triangle’s peak is the reservoir of con-ventional gas. The wider area below repre-sents coalbed methane, wider still are gas from shale’ tight gas, and methyl hydrates.

“As you go down further in the triangle, the reservoir gets tougher and tougher to crack, but the base amount of gas gets larger and larger,” says Hietala. “Where we’re oper-ating to date is really only in the top part of the triangle. What drives the ability to move down are two factors: technology and price. You’ve got to have the technology and money together to be able to push down.”

Coalbed methane (CBM) represents the current strata on the resources triangle. MGV Energy Inc. began testing quietly for CBM in the late 1990s and today, it rivals EnCana in Alberta for commercial production.

“It’s a different kind of wildcatting,” says Mike Gatens, president of MGV Energy

In addition, the presence of noisy compressor stations repre-sent a further environmental hurdle for the industry, and a building source of resentment for ranchers and other residents of rural communities.

Deep GasDeep natural gas is deposited far underground, traditionally con-sidered beyond the reach of conventional drilling depths — typically 400 metres or deeper. But the evolution of the drilling industry’s capacity, evolving 3D imaging and other analytical tools, along with the rising price of gas are now making these reserves economically feasible.Canadian Hunter Exploration Ltd. revealed the existence of 17 tcf in the Elmworth field, fulfilling, as company co-founder John Masters once wrote, “the fondest hopes of all explorationists.”

As with CBM, most activity is taking place in the U.S. on this fledgling front. The National Petroleum Council projects the share of natural gas production from deep wells to grow to 12% by 2010. In the Gulf of Mexico, companies have drilled below 20,000 feet and are targeting 30,000.

Coalbed Methane Retrieval

Overburden (unconsolidated sediment)

Coal bed seam

Natural gas from coal wellheads connected to gathering system

INDUSTRY REPORT

INDUSTRY REPORT


INDUSTRY REPORT

Ron Heitala, President, Golden Eagle Energy Ltd.

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INDUSTRY REPORT


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ALBERTA VENTURE

Tight GasThe National Energy Board estimates Canada’s tight gas supply in the range of 89 to 1,500 trillion cubic feet. Though tight gas is characterized by very low flow rates, EnCana’s Suffield gas field in southeast-ern Alberta shows worthy results, produc-ing nearly 250,000 cubic feet daily. Tight gas is trapped in hard rock or limestone/sandstone formations. These formations are unusually non-porous. Pumped-in water makes the ground more permeable through a process known as hydraulic frac-turing. This method of extraction, creates a network of microscopic tunnels through which gas moves.

Gas From ShaleAncient Devonian shale, or stone formed from clay, is a fine-grained sedimentary rock. It is made up of thin layers that trap gas along its seams. Extraction is both expensive and difficult. Ron Hietala, pres-ident of Golden Eagle Energy Ltd., calls shale gas “the sleeping giant” because of its vast potential. Much more research is required, “because all shales are not created equal,” he says. The U.S. govern-ment has declared shale gas to represent nearly 5% of total recoverable resources.

Methyl HydratesFound in the Arctic, lattices of frozen water trap molecules of methane, in a manner similar to bitumen in oil sand. The U.S. Geological Survey believes the organic energy contained in hydrates could sur-pass the entirety of the world’s coal, oil and conventional natural gas volumes. Methyl hydrates are also known to exist on ocean floors around the globe. The methane can be liberated by way of heat-ing, chemical additives or decompression, but no known organization has yet come up with a way to produce methane from the hydrates commercially.

Tight Gas Fracturing

Well

Gas bearing rock

Fracture zones

INDUSTRY REPORT


and chairman of the Canadian Society for Unconventional Gas (CSUG). “Traditionally the explorationist went looking for the needle in a haystack. These unconventional deposits are quite often thick and continuous over vast areas, and the locations are well understood. The wildcatting element is in finding areas with a known accumulation, where the right combination of property access, technology and cost all come together to make a project economically feasible.”

The onus is on the engineers, geologists and petrophysicists to figure out reams of in-creasingly sophisticated seismic results. The new buzzwords in the oilpatch are formation evaluation – can enough gas squeeze through hairline fractures of coal to justify millions of dollars in well piloting?

When it comes to unconventional gas, sci-entists and executives alike have embraced the grassroots entrepreneurial spirit of days bygone. “All the juniors and intermediates are doing unconventional gas wells,” says Sinclair. “Most multinationals are still doing the big, bad and beautiful. If they find out they’re wrong, we’ll make perfect acquisi-tion candidates.”

While the stock market casts some doubt on Canadian Spirit’s potential, yanking down the share price on the TSX Venture Exchange from $6.90 in early February to $3.90 in a span of three months, Sinclair says it’s all about pa-tience. In the Farrell Creek area, the company has found “a huge resource of natural gas,” documented by Sproule Associates to be in the 400 to 600 billion cubic foot range. Question now is, can it be removed efficiently?

“We’re spending a lot of money on tech-nology so we can build on a sound base,” Sinclair says. “All our homework is done, and we’re taking our time so when we get to the commercial stage, everything will be set up We’re a high-risk company with high-risk in-vestors. At the end of the day, we’ll see if we were right.”

As for EnCana – whose annual report heralds the new direction of the patch – it vaulted over a pair of multinationals last year to become the number-one producer of natural gas in North America. Says CEO Gwyn Morgan, “We haven’t just gotten big-ger, we believe we’ve gotten better through unconventional thinking.”

The oilsands too are experiencing a period of intense technological research into how to better tap existing resources. As most of Calgary’s oil patch tweaks ex-isting methods of boosting efficiency in the Athabasca sands, Petrobank Energy and Resources Ltd. is applying a revolu-tionary combustion technology to one of its projects this summer.

The Toe-to-Heel Air Injection process comes billed as a potential revolu-tion in the production of heavy oil in the tar sands, deep sea basins and other sites. Acronymed and patented as THAI, test results motivated the federal gov-ernment to invest $9 million through Technology Partnerships Canada, into a $44.7-million pilot project being undertaken by Petrobank’s subsidi-ary, Whitesands In situ Ltd., located in Christina Lake south of Fort McMurray.

Initially, a combustion front is created by burning the tar sands underground. Compressed air pumped through a verti-cal well at the toe of the reservoir pushes the smoldering front continuously to-ward the heel. The heat generated by combustion gases reduces the oil vis-cosity, allowing it to flow by gravity into a horizontal producing well. The oil con-veniently undergoes upgrading during this process, due to thermal cracking.

The fluids move to the surface via com-bustion gas lift, theoretically eliminating the need for mechanical pumping. The combustion front is sustained by the coke

Toe-to-Heel Air Injection

left behind the moving oil.Invented by Professor Malcolm Greaves

of Bath University in England, with col-laboration from Alex Turta of the Calgary’s Petroleum Recovery Institute, THAI result-ed in 80% recovery rates during testing. On his Website, Greaves reports that oxy-gen never broke through in more than 50 3D cell tests.

Chris Bloomer, Petrobank VP of heavy oil and chief financial officer, says capital and operating costs should be reduced by 30% next to operations using the industry standard in-situ process, steam-assisted gravity drainage (SAGD). By compari-son, use of natural gas, steam and water processing would be minimal.

“It has potential to get a much higher recovery rate at about $8 per barrel cost,” he says. “And we’re going to use heat at surface to generate electricity. It’ll be like a geothermal power project. We hope to at least be able to create self-sufficiency for the firing of compression and at the high end, we may even be able to export power.”

If it works on site according to compu-ter modelling and 3D testing, Petrobank says there will be comparatively little re-quirement of natural gas and fresh water, reduction if not elimination of diluent to transport the bitumen through pipelines, and lower greenhouse gas emissions.

The company also believes THAI can be applied in ocean basins and other deposit areas of heavy oil to extract resources left behind in the first go-round.

Cold heavy oil

Frontal advance

Injection well

Production well

Pipe perforated in injection zone

Toe

Heel

Mobile oil zone

Combustion zone

Coke zone

Pipe perforated from toe to heel

Toe-to-Heel Air Injection

Documents

John King, Senior Vice-President, Technology Services ... · 70 JUNE 2005 ALBERTA VENTURE John King, Senior Vice-President, Technology Services, Precision Drilling