With prices stabilizing, companies begin looking to drill Lloydminster heavy oil wells

Image: Baytex Energy

Several heavy oil producers, including Canadian Natural Resources, BlackPearl Resources, Gear Energy, Kaisen Energy and Northern Blizzard Resources, have all announced plans to drill in the Lloydminster region in the coming months.

“With oil prices strengthening, we have taken the action to allocate an additional $50 million to drill an additional 123 primary heavy oil wells, five light oil wells and 11 thermal heavy oil wells in 2016,” said Steve Laut, president of Canadian Natural, in June.

“As these wells have a certain amount of capital sunk with lease builds and things like that and are part of a high-quality, low-cost inventory…we are able to execute very quickly and add value,” Laut said.

Gear Energy is also looking to head back into the field.

“After eight long months of sitting on the sidelines waiting for commodity prices to recover, we kicked off our 2016 drilling program last week. The Gear program is forecasted to include 10 low-risk horizontal heavy oil wells and is planned to be funded through second-half cash flow,” Gear president and chief executive officer Ingram Gillmore said in late June.

In the wake of the 2014 price crash, heavy oil drilling activity around Lloydminster dropped sharply. On the Saskatchewan side of the Lloydminster play, Canadian Natural, which had drilled 139 wells in 2014, had drilled only one well by fall 2015, according to CanOils figures. The drop in activity varied among companies, but for most, it was in the 60–85 per cent range.

“The downturn for CHOPS [cold heavy oil production with sand] is as bad as I’ve ever seen it. The nosedive of 2014-15 and the price volatility since then has been scary. We need to be able to look at three, six, 12 months of stability. It gives you the comfort zone to make plans,” says Robert Besse, production manager at Rife Resources.

But higher recent prices are bringing back cautious optimism.

The response of BlackPearl Resources to recent market conditions is not atypical of companies operating in the region.

“Last year, we drilled zero CHOPS wells,” says John Festival, president, chief executive officer and director of BlackPearl, which has assets in Saskatchewan near Lloydminster.

This year, however, the company plans to drill five to 10 wells in the region. The nearer the price is to US$50 or more, the better the likelihood of 10 wells being drilled, Festival says. “It’s very price sensitive.”

Cost structures and the economics for BlackPearl, he says, are comparable to those of most other companies operating in the region’s conventional heavy oil sector. And there have been a couple of positive trends in the sector that could help spur companies to drill.

A CHOPS well is costing less to drill these days. Two years ago, it cost around $700,000 to bring a 100-bbls/d producer online, but it can now sometimes be done for $600,000 as prices have dropped in the slowdown, says Jeff Holmgren, senior vice-president and chief financial officer at Kaisen. “It’s the lowest-risk oil around. Also, you can drill seven to nine CHOPS wells for the same cost as one in the Montney,” he says.

Another factor that should breathe some optimism into the sector is the drop in the heavy oil differential. In 2013, when Kaisen was founded, the differential was in the $30 range, but Holmgren believes it has now stabilized in the $15 range. When the company was set up to target heavy oil near Lloydminster—currently at Edam and Lone Rock—the founders anticipated that more pipeline infrastructure would soon be built, which would puncture what might then have been called the local “bitumen bubble” and cut the differential. This is exactly what has happened, Holmgren says.

He notes that Western Canadian Select (WCS) can experience seasonal swings in the differential—higher in winter, lower in summer. He expects the differential to narrow if, as some analysts have said, oil prices recover in 2017.

“In a rebounding WTI environment, expect some WCS torque. Relative to WTI, WCS will have a better rebound,” he says.

In addition to the new, lower differential making US$50 WTI more palatable for operators, Holmgren expects drilling activity to ramp up significantly as the WTI heads north of US$50.

But even at current prices, more companies are opening their wallets for drilling. In early June, Northern Blizzard announced that it had increased its capital program to $55 million from $40 million, with plans to drill 46 wells. Some of the drilling will target new light oil wells in the Viking at Coleville, but the rest of the program will focus on new heavy oil wells at Cactus Lake and Winter. The bulk of the work will be done during the third quarter of 2016.

The uptick in prices, however, comes too late for a number of heavy oil producers. Small operators Tuscany Energy and Edge Resources have both been forced into receivership as a result of the two-year downturn, and other familiar names in heavy oil production, including Rock Energy and Hawk Exploration, were forced into selling.


Article Compliments of JWN.com August 26, 2016