February 13, 2008

Application Of New Technologies Creates Potentially Huge Resource Play At Montney

By Pat Roche

Montney natural gas is potentially one of the largest economically viable resource plays in North America, says a report by Raymond James Ltd.

Estimates for gas content in the sandstones, siltstones and shale sequences of the Triassic-aged Montney formation in northeastern British Columbia put the resource size at about 50 trillion cubic feet (tcf) over an area of about 680 square miles (73 billion cubic feet per section), the 32-page report says.

This estimate is near the bottom end of the range of the B.C. government estimates of 30 tcf for the Upper Montney and 50 tcf in the Lower Montney in B.C. alone. the report says.

"We believe the economics are sufficiently robust to attract more capital to the play. We believe that the returns and recycle ratios in the play will settle into a range that will make the Montney a top-decile play in Canada," Andrew Bradford, an oilfield services analyst at Raymond James and a co-author of the report, said in an e-mail.

"We believe that the play is large enough that it could make a meaningful impression on the oilfield services landscape -- though probably not until facilities on the B.C. side of the play are de-bottlenecked," Bradford said.

On the service sector side, the play has the potential to have the biggest impact on well-fracturing companies due to the frac-intensive completions -- with four to 11 high-tonnage frac treatments per well, he added.

"Even with the 90 or so horizontal wells on the books to be completed this year, the impact on Canadian pressure-pumping operations could be noticeable vis-a-vis our original estimates," Bradford said.

For this reason, Raymond James has upgraded its recommendation on Trican Well Service Ltd. to "outperform" from "market perform."

In its report, Raymond James says the economics have improved from a break-even prospect using vertical wells to a 27% expected internal rate of return (IRR) using horizontal wells.

Large producers such as EnCana Corporation and ARC Energy Trust have recently announced plans to increase capital spending on the Montney play on the B.C. side of the border. This includes expansion of pipelines and compression facilities to increase gas production from the area.

Raymond James says smaller companies such as Duvernay Oil Corp. and Birchcliff Energy Ltd. have the potential for larger proportional growth, and therefore are more highly-levered to the play.

The investment firm is moving its rating on ARC Energy Trust to "market perform" from "outperform," saying the stock has outperformed since the start of the year, leaving a total return potential of just 8.4% at the Feb 8 close.

Commenting on the outlook for the sector, Raymond James says: "While the impact should be modest this year, we think that ultimately, the impact for service companies could prove to be meaningful," especially for well fracturing companies such Trican and Calfrac Well Services Ltd.

Other Montney players (either on the producer or service side) include Murphy Oil Corporation, Ensign Energy Services Inc., Storm Exploration Inc. and Sabretooth Energy Ltd., among others.

However, Raymond James warns that the limited facilities and pipelines in the areas will constrain significant production growth until new infrastructure is added.

For example, EnCana -- which plans to drill 50 horizontal Montney wells in 2008 -- is limited to about 10% average production growth in its Cutbank Ridge core area (the area that contains the Montney play).

"We expect some producers, and perhaps midstream companies, to construct new facilities, and we have included gas processing and transportation costs in our economic analysis," Raymond James says.

The current focus is the Upper Montney which is being developed by drilling horizontal wells with multi-stage fracs.

Raymond James says EnCana, the dominant operator in the area, did the primary research and development with two primary objectives: (1) to drill longer-reach horizontal wells and complete them so that several sections -- typically at least four stages -- can be isolated and stimulated; and (2) to frac the various sections of the horizontal well by pumping about 400 tonnes of propant sand per well (100 tonnes per stage).

The report says fracing techniques were optimized while vertical wells were commonly used. As more companies drilled horizontal wells, carbon dioxide was substituted for nitrogen to provide more energy during the flow-back period of the frac.

Raymond James says a head-to-head competition with a CO2 poly frac fluid design resulted in horizontal wells with production at least 15% better than the nitrogen.

Much of the time saved during well completions came from more efficient frac clean-out techniques.

Two years ago the first horizontal wells used coiled tubing-conveyed bridge plugs and perforating guns. Each frac was followed by a one- to two-day period in which the well was flowed, after coiled tubing was run back into the well to drill out the bridge plugs.

"This was a long, laborious procedure with many trips in and out of the hole, taking about four days per frac," the report says.

Raymond James says the trial of pump-down bridge plugs and wireline-conveyed perforating guns (as used in the Barnett Shale in Texas) created a more continuous operation. But it was not until the recent application of open-hole packers -- such as Halliburton Energy Services's Swell Packer -- that the in-casing plugs could be eliminated.

The report says the "packer and port" assembly of the open-hole packer is more expensive, but the operation is much more efficient and can be completed in less than half the time.

The horizontal sections of the wells are now getting longer at up to 2 500-metre displacement from the surface location.

With the advent of longer horizontal sections and the introduction of external open-hole packers, the current trend is to frac more sections or stages -- up to 11 fracture treatments per well.

Raymond James says a horizontal well with a three-stage frac has a twofold increase in production compared to a vertical well with a two-stage frac. With four-stage fracs, a fourfold increase is typical compared to single-stage vertical wells.

"With horizontal wells, the recycle ratio doubles and the project returns two dollars for every dollar invested at a discount rate of 10%," the report says.

Comparing economic estimates, Raymond James says wells in the Barnett Shale play in Texas show similar characteristics to the Montney (for example, first-year average production), but the Barnett wells have higher internal rates of return -- primarily due to faster completion times -- and hence lower wells costs.

In the Montney, average horizontal well costs have fallen to the $4-$5.5-million range (drilled and completed) -- much better than 18 months ago when some horizontal wells were still costing $7-$8 million, the report says.