Joint ventures — and accompanying drilling carries — are playing a significant role in the development of world-class natural gas resources in British Columbia but may prove to be a double-edged sword as drilling carries wind down.
For Talisman Energy Inc., a corporate philosophical shift to living within cash flow may crimp the speed with which the company brings its substantial Montney shale resources to market following expiration of existing joint venture arrangements over the next couple years.
“We went through a re-organization last week,” Mike Wood, vice president for Talisman’s Canadian shale operations told attendees at the DUG Canada conference in Calgary at the end of February. “Talisman is cutting back a lot of our activity and trying to live within cash flow. Because of the Sasol (drilling) carry—they pay 93% of drilling and completion costs—as that drilling carry runs out we will face 50/50 dollars,” Wood continued. “Within Talisman right now we do not have the capacity to develop the Montney at a pace we think is logical, so we are looking at joint venture partners and are also looking at some type of rationalization out of some of our fee areas.”
The situation points to the dilemma gas-rich Canadian producers face. With as many as six LNG projects proposed for exporting stranded Canadian gas to Asia, Canadian producers will have to increase drilling to supply product to LNG export facilities. However, shale drilling is an expensive undertaking in an isolated and remote part of Canada and operators need the higher prices generated by LNG export to underwrite the drilling effort. To date, Canada has licensed two LNG facilities on its west coast.
Thus operators are facing the old chicken and egg conundrum.
And the conundrum lingers with the persistence of Canadian cold weather despite impressive technological gains that have significantly reduced well costs for Talisman Energy in the Montney shale, where estimated ultimate recoveries range from 5 to 9 billion cubic feet of gas in a resource base that is approaching 500 trillion cubic feet of original gas in place.
“When you think of the Montney shale in comparison with other shale plays under development in the world, you basically have four plays stacked on top of each other to make one major shale because of the thickness,” Wood explained.
But that gas is deep—vertical well bores can reach 14,000 feet with laterals approaching 5,200 feet. Talisman has opted to create 24 well pads with up to six pods on each pad targeting the four separate gas producing benches that comprise the play.
On the other hand, the Montney provides benefits to balance out the challenges. The first is flexibility. With all land owned by the crown, leases run for 10 to 15 years and a single rig can hold a substantial acreage block such as the 200,000 net acres Talisman has leased in the Montney.
Secondly, there is the size of the prize. The Montney shale offers a recovery factor of 35 to 40% of the nearly 500 Tcf original gas in place. Similarly, British Columbia’s Horn River also features 448 Tcf of original gas in place. For comparison, the recoverable resource in each play alone exceeds three Haynesville shales, or six Barnett shales.
The size of that prize finds Talisman in the same postal code with deep-pocketed players such as Royal Dutch Shell Plc, Encana Corp., Devon Energy Corp., Progress Energy Canada Ltd. (now Petronas), and Murphy Oil Corp. Furthermore, natural gas from British Columbia, including the Montney shale, is predestined for export as LNG to Asia, which has attracted Asian capital partners such as Petronas, China National Petroleum Corp. (CNPC), Japan’s Mitsubishi Corp., and Korea Gas Corp.
Consequently the play has witnessed an acceleration in activity following a number of transactions over the last half decade beginning with Shell’s acquisition of Duvernay Oil Co. for $5.9 billion in 2008, followed by Shell executing a joint venture with China National Petroleum Corp. in 2012 for 20% of the acreage. Similarly, Encana sold a 40% working interest in its Cutbank Ridge acreage to Japan’s Mitsubishi Corp. for $2.9 billion in 2012.
Meanwhile, Talisman entered a joint venture with Sasol Partnership in 2011 in which Sasol acquired a 50% working interest in Talisman’s Farrell Creek and Cypress A sections of the Montney for $2.1 billion in two separate transactions. Sasol is researching a potential gas to liquids program with Montney gas.
Also in 2012, Petronas purchased Progress Energy Canada Ltd. for $5.3 billion.
Talisman’s current position in the Montney includes access to 29 trillion cubic feet equivalent (Tcfe) of natural gas, including 5,700 potential well locations. The company will operate three rigs during the first half of 2013 and is generating average net production of 73 million cubic feet equivalent per day (Mmcfed).
“The name of the game in Canada is getting your costs down,” Wood told DUG Conference attendees.
“It does cost more money to do business in Canada. There are fewer (service) companies to deal with. It is a very remote area and we have weather challenges,” Wood says, including winter-like conditions for eight months of the year.
Talisman has embarked on a pad drilling program that generates 24 wells targeting four separate layers of the Montney. The company uses a commercial software program to plan each well pad. The company may drill only one layer of the four-tiered pad in a year to study production history before returning to develop the next layer. The software keeps a very complicated underground profile working smoothly involving six pods per pad drilling up to four laterals for each pod.
Talisman drills the first pod, moves the rig off the pad and fractures the four wells using zipper fracs.
The company has lowered drilling costs by 28% in two years and shaved another 29% out of completion costs by incentivizing crews and better well design. Other savings come from the use of dual fuel engines on drilling rigs and boilers. On the completion side, Talisman now sources its own sand for fracturing in Saskatchewan, saving $150,000 per well, and pipes its own water via a $42 million pipeline from Wellington Lake in British Columbia, which is distributed to storage ponds, then distributed to every pad in the field. Talisman also reuses 100% of its water and has exchanged $800,000 in direct water costs for roughly the cost of electricity used to pump water around its acreage at 7 cents per barrel.
“You can see the cost of your wells at over $2 million for water if you don’t have water management in place,” Wood said.
Talisman is involved in four major North American shale plays covering 840,000 acres, including 200,000 acres in the Marcellus shale, 350,000 acres in the Duvernay shale, and a joint venture with Statoil covering 80,000 acres in the Eagle Ford shale. The company runs a combined 12 horizontal rigs in North America where it is currently producing 600 million cubic feet of gas per day net.
Contact the author, Richard Mason, at email@example.com
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