The West’s new hot plays

Canada is now a full-fledged member of the energy superpower club. Depending on who’s counting, we have the second or third-largest oil reserves in the world, behind only Saudi Arabia and, perhaps, Venezuela.

We’ve vaulted into this elite group thanks mainly to the controversial but immensely rich Alberta oil sands. Just at a time when our conventional oil reserves were starting to run down, the price of crude reached levels that made oil sands development economical and unlocked the vast hydrocarbon storehouse in northern Alberta.

It happened just in time as far as the United States is concerned. Saudi Arabia, long the primary source of U.S. foreign oil, is increasingly directing its exports to China (now its number one customer) and India. Venezuela has become politically unreliable under the quirky leadership of Hugo Chavez. Mexico, once the number two exporter of oil to the U.S., is experiencing a rapid production decline and there is now speculation it could become a net oil importer by 2020.

Meantime, oil sands production continues to increase and, now that the recession appears to be behind us, mothballed projects are coming back on stream and new ones are on the drawing board.

However, production from this area has been branded as “dirty oil” by some vocal environmental groups and U.S. governments and corporations are being lobbied to boycott oil sands exports, with some success. Exactly where alternative supplies are going to come from if the movement takes hold has never been explained but the pressure is such that Canadian producers and politicians have felt the need to launch a public relations counter-attack. Unfortunately, their efforts are undermined to some degree by media coverage of Syncrude’s “dead ducks” case.

While all this is going on, two new plays have emerged that may help to shift some attention away from the oil sands while producers come to grips with their environmental challenges. One is the cross-border Bakken formation which covers about 200,000 square miles of the Williston Basin in southern Saskatchewan, North Dakota, and Montana. The other is the vast Cardium oil play in west-central Alberta which runs all the way from Grande Prairie in the north to the edge of the Calgary airport.

The regions have similar geological structures with oil contained mostly in siltstones and thin sandstone reservoirs with low porosity and permeability – it is commonly called “oil shale”. The Bakken formation was discovered back in 1974 but for years, it was assumed that this “tight oil” was commercially unviable. The Cardium area has been producing oil using conventional drilling methods since the early 1950s and but production has wound down from about 150,000 barrels a day during the peak years to 45,000 barrels a day now.

But recent advances in horizontal drilling techniques have changed everything and a new oil rush is on to snap up properties in these regions. What’s especially attractive to producers is that the output is light, sweet crude – not that heavy, gunky stuff from the oil sands that costs so much to upgrade.

Estimates as to how much recoverable oil is available from Bakken and Cardium using new drilling methods are all over the lot. Some blue-sky figures put the potential from Bakken, including both the U.S. and Canadian areas, as high as 500 billion barrels but that seems highly improbable. To put this in perspective, recoverable reserves from the oil sands were estimated at about 170 billion barrels at the end of 2008 by the Energy Resources Conservation Board. More sober estimates for Bakken run as low as four to five billion original barrels of oil in place, only a fraction of which is actually recoverable.

Cardium is a huge question mark. Based on old technology, there are an estimated 10 billion barrels of oil in place. But Jason Fleury, manager of investor relations with Penn West Energy Trust, which is active in the region, says that this figure will likely rise in the future as new drilling techniques are applied and exploration expands into the “halo” area around the original zone.

Mr. Fleury says that about 17% of the original 10 billion barrels have already been recovered through conventional methods. Applying new horizontal drilling technology, the recovery rate could improve to 25% to 30%, which would translate into as much as 150 million more barrels for Penn West alone. Using other techniques such as fracturing and water injection, the recovery rate could be as high as 30% to 35%.

Because Cardium was regarded as pretty much played out, only 40 new wells were drilled in the region last year. Penn West alone will drill more than that in 2010 and Mr. Fleury thinks the total number of new wells drilled by all companies operating in the region could be in the range of 200. The recent announcement by the Alberta government of a pull-back from the higher royalties imposed a couple of years ago will encourage more activity, he says. “The economics are much more competitive now.”

No one is certain just how much oil is in place in Cardium because there has been virtually no exploration outside the original area since few people believed there was anything viable to discover. So no one has a real handle on how much recoverable oil actually exists in Bakken and Cardium. But growing evidence suggests there’s a lot. Not enough to eclipse the oil sands but enough to make a significant difference in Canada’s total reserves and production balance.

Photo © Björn Kindler

This article originally appeared in the Internet Wealth Builder, a weekly e-mail newsletter that provides timely financial advice from some of Canada’s top money experts. Try it for three months (12 issues) for only $37.50 plus tax.

Gordon Pape’s latest book is The Ultimate TFSA Guide: Strategies for Building a Tax-Free Fortune, published by Penguin Group Canada. It can be ordered at 28 per cent off the suggested retail price at