Unconventional resources: How the Canadian experience could benefit South America

By Dave Russum

South American countries — who are eager to develop their own unconventional resources¹ — will undoubtedly look northward for insight and examples on how to proceed. Drawing on the Canadian experience, South American oil and gas exploration and development companies can better position themselves for success by understanding these key considerations:

• What are the benefits of the horizontal drilling and multi-stage fracture technology?
• Why is it critical to focus on the 'sweet spots' of the unconventional reservoir?
• What are the best examples of applying new technology to Canadian unconventional plays?

Next month I will have the honour of delivering a presentation, entitled ‘The Paradigm Shift in Upstream Oil and Gas — Learning from the Canadian Experience’, to the American Association of Petroleum Geologists International Conference in Cartegena, Colombia. Following is a relatively non-technical preview of that presentation, including some of the Canadian insights and experience that, I believe, might be useful in South America

It is critical to identify the best opportunities in the key plays and use the most efficient drilling and completion techniques to optimize results.

Benefits of horizontal drilling
Since 1987, more than 40,000 horizontal wells (Deloitte, 2012) have been drilled in Western Canada with an expected additional 8,168 horizontal wells this year (The Petroleum Services Association of Canada, 2013). Horizontal drilling was first used to improve recovery from conventional reservoirs in the mid-1980s, and many benefits have evolved from it, including the following:

• Allowing access to the most productive ‘sweet spots’ of variable reservoirs
• Selectively producing the hydrocarbons from reservoirs with underlying water
• Allowing producers to get more of the hydrocarbons out of heavy oil, bitumen and low permeability reservoirs
• Enabling rapid injection and withdrawal from gas storage reservoirs

The need to artificially fracture the rock in tighter (low permeability) formations was a problem in early horizontal wells because the industry had no way of controlling where the induced fracture occurred. The ability to isolate individual portions of the horizontal wellbore, and fracturing each stage separately, was the critical step that enabled more efficient access to the reservoir.

Finding the ‘sweet spots’ of the reservoir
While many unconventional reservoirs are present over large areas, it is becoming very clear that a focus on the best parts of the reservoir — often termed ‘sweet spots’ — is key. While a sweet spot is typically thought of as the portion of the reservoir with the most abundant resource, there are many other issues that will influence a sweet spot for a particular company or investor. These include the following:

• Rock properties
• The type and quality of the hydrocarbon
• Depth, stress regime
• Proximity to infrastructure and access to market

Understanding all aspects of the opportunity is vital, particularly when product prices are low.

Examples of Canadian unconventional plays
Perhaps the best Canadian example of the application of this technology is the Triassic Montney Formation in west-central Alberta and northeastern British Columbia. Production from conventional Montney reservoirs dates back to 1954 (AJM Petroleum Consultants, 2011). New technology has allowed access to large volumes of gas contained in the finer-grained rocks deeper in the basin to the west, creating one of the largest gas producing opportunities in North America.

The Duvernay Formation in Alberta is an example of a true shale that has captured industry attention. The industry spent more than $2B to acquire land rights during 2009-2011, with drilling beginning in 2010 in the Kaybob area. Typical of these plays, early drilling has confirmed the presence of hydrocarbons but does not necessarily prove the economic viability of the play.

The Duvernay has a number of advantages:

• It is a proven hydrocarbon source rock
• Drilling activity over the past 50 years provides surface access and production facilities 
• Exploration and development of the underlying Swan Hills Formation fields provided the initial geological interpretation and aids in well control
• Mineral rights were largely open crown land so aggressive companies could acquire large contiguous land blocks
• The Duvernay is overpressured in certain areas which enhances the volume of hydrocarbons in the reservoir

Conversely, there are a number of challenges:

• The Duvernay is relatively deep at 3,200 to 3,500 metres, so the cost to drill and complete is in excess of $10,000,000 per well.
• The Duvernay is a shale with very low permeability, making the ability to produce high liquids gas or oil more challenging
• Reservoir quality, thickness, stress regime and ability to induce fracturing all vary across the area so it is important to understand specific conditions in specific areas

Successful operators are distinguished from the rest by taking the time and spending the money to thoroughly understand the reservoir and identify the best drilling and completion practices. Deloitte’s Resource Evaluation and Advisory group has extensive experience in the Duvernay.

The best opportunities, the most efficient techniques
The use of horizontal drilling and fracturing techniques has resulted in rapid growth of U.S. natural gas production and a drastic decline in natural gas prices. Consequently, Canadian producers are moving toward reservoirs, like the Duvernay, where the gas stream is rich with liquid hydrocarbons. The higher-priced liquids helped compensate for the lower gas price.

The techniques have also been applied to low permeability oil reservoirs, providing a new lease on life for many old favourites including the Cardium, Viking, Bakken, Slave Point and Swan Hills reservoirs. These reservoirs are often misleadingly referred to as oil shale; however, the oil is conventional light crude and the reservoir is typically composed of coarser-grained rock than shale.

Reports of high initial production rates have made unconventional plays very attractive for investors. However, high associated costs and rapid decline rates mean that these plays are not necessarily cheap to exploit. In Canada, where costs and distance to market tend to be higher than similar plays in the United States, the challenge is significant. The Canadian industry has learned — to optimize results in the unconventional resources industry, identifying the best opportunities is critical. Tweet this To the same end, it is equally critical to use the most efficient drilling and completion techniques.

1.Natural gas from coal, tight gas sands and carbonates, shale gas, gas hydrates and light tight oil (source: The Canadian Society for Unconventional Resources).

Dave Russum is Director of Geoscience in Deloitte’s Resource Evaluation and Advisory practice. He has more than 30 years of experience.