Canada’s Duvernay oil play attracting big attention, big money and a big damaging earthquake, knocking power out to thousands

Don’t write off Canada just yet – emerging east Duvernay oil play starting to attract big attention and big money by Terry Etam, May 23, 2017, BOE Report

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2019 03 05: AER orders Vesta Energy to suspend frac operations at well site linked to 4.6M earthquake in Central Alberta

2019 03 04: 4.6M earthquake, 1 km in depth, most powerful yet in central Alberta, hits SW of Red Deer, cracks walls in homes, knocks power out to thousands. Vesta Energy reports quake to AER, shuts down frac’ing. AER investigating. Geological Survey of Canada says looks like fra’cing didn’t do it

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Pack up kids, we’re moving to Trochu. No, there’s no water park but something way better. An exciting new light oil play is unfolding an hour northeast of Calgary.

Excitement over new plays is not that common anymore. Resource plays have taken over the headlines, large deposits that have been well documented but have become feasible fairly recently with new technological developments. In Canada over the past number of years, the Montney and Kaybob Duvernay plays have recieved most of the attention and attracted most of the money. About 5 years ago, land values went from sleepy to crazy in short order. On the oil side, a similar escalation occurred in the Saskatchewan Viking and Bakken formations.

It is particularly big news then when a new exploratory resource play breaks cover, even more so when it is in an established area. Just recently, land sale bids went through the roof around some exploratory wells targeting Duvernay oil in a previously undeveloped region. The east Duvernay oil zone stretches from west of Red Deer down towards Drumheller. Part of the larger Duvernay formation that energized the Kaybob region, the oily east Duvernay has not had much attention to date. A few juniors had been making small inroads and accumulating acreage, and a few exploratory wells had been drilled. Then, at the April 26 land sale, a step change occurred.

That was the day that $21 million was dropped on several relatively small parcels some 50 miles southeast of Red Deer for acreage targeting Duvernay oil. Whoever bought that land is still keeping quiet about it, but the size indicates some deeper pockets are getting interested. Juniors known to be targeting Duvernay oil in the area include private companies Artis Exploration and Vesta Energy. Being private, neither are household names but their production was visible in the public domain. Vesta recently announced a $300 million equity issue and provided more information about their east Duvernay land position and production, which shed more light on the play.Vesta’s wells are closer to Red Deer and their news release never mentioned any new land purchases, so the buyer is likely someone else who’s identity we will find out when they are good and ready to tell us.

It is not a mystery that the Duvernay is a phenomenal resource. In 2011-13, the likes of Encana and Chevron flagged the Duvernay as one of a handful in North America that they would be focusing on, calling the zone a “world class reservoir.” The gas and liquids rich Kaybob Duvernay region has indeed produced some spectacular results and lived up to expectations.

What’s interesting about reviewing Duvernay maps from the first boom days of 5 years ago is that the east Duvernay region was not of interest to anyone. Geologists have known for a long time that the Duvernay window extended to that region and that it was likely oily, but as with the Permian in the US, it took modern technology and some fresh perspective to take a kick at it. Results so far, from public data, seem very good. But whatever drove an unnamed company to pay $4,200/hectare is not public data; presumably the buyer was bidding on some fairly substantial information. In comparison, Duvernay land sales in the area seldom exceeded $300/hectare in 2016, and the parcels that did were small and directly offsetting successful wells.

A few things can be gleaned from public data, particularly with the help of a helpful and knowledgeable local geophysicist. First, we know that the eastern oil zone is not nearly as deep as the Kaybob Duvernay, occurring at only 2,000-2,200 meters in depth. That means much cheaper drilling costs than the more westerly liquids rich gas play.

Second, initial results from the first horizontal multistage well fracks have been inconsistent but impressive, and it’s a true adage that the best wells in a play are rarely drilled first. Every play has a learning curve. Sure enough, the most recent well brought onto production shows the most promising results to date. This well is apparently what precipitated a step change in valuations, because the better the results the bigger the audience of interested parties. Bigger companies tend to open the wallet much further for de-risked plays.

Third, this area is all oil, meaning the possibility of more wells per section and much higher valuations. $4,200/hectare, or about $1,700/acre, sounds impressive, but Permian acreage – the current shale gold standard – has changed hands for more than $50,000/acre this year. And that’s in US dollars. That would be nearly 40 times the recent highly valued east Duvernay sale results, which shows both that valuations have a long way to go to match a true frenzy, and that the Permian basin has gone truly nuts.

Like the Permian though, the east Duvernay play has a strong geographical advantage. The recent drilling activity and land sales are in prairie grassland region, which is much easier to access and develop than the foothills or Peace River Arch. The area is well connected to decades-old conventional oil pipeline infrastructure which will lower development costs down the road. The geography also enables year round access, which is becoming a very big deal with drilling seasons for Duvernay gas/Montney plays being quite seasonal or winter access only. All in all, it is not difficult to see where the excitement is coming from, as long as the well results keep improving.

It is interesting that the trajectory of the east Duvernay oil play is following that of the Kaybob Duvernay so very closely. At Kaybob, juniors were the first to start poking around and finding interesting things, but the high cost of wells (in the neighbourhood of $15 million apiece, at the time) made drilling a game for the very brave. Once the juniors had proven the potential, the majors moved in in a big way, escalating land values to the stratosphere.

That appears to be happening at east Duvernay as well. Juniors like Vesta and Artis have accumulated significant land positions, though being private the numbers tend to be speculative – we have to rely on the word on the street (which is growing, as the brokerage houses have started offering opinions on the play – a sure sign of heightened investor interest). Other juniors have most likely been dabbling and accumulating acreage in the area as well. The April 26 landsale is clear evidence that the cat is out of the bag. Further positive drilling results will surely see the trend continue. And whatever the purchaser of those blocks saw, they are obviously pretty confident about it.

Regardless, this is great news for Canada’s oil patch, which has been hammered (thanks Captain Obvious) for pretty much exactly 2 years and 7 months since OPEC brought the house down. The potential of the east Duvernay play is enormous, spreading over possibly a thousand square miles (or more, depending on how wells perform and what oil prices do). The oil patch, and the rest of Canada actually, should be excited at the prospect of a new high-value development such as this. Good news is long overdue.

One of the comments:

Diana Daunheimer

Way back in 2012 in our local paper:

“With a series of wells underway 10 kilometres west of Red Deer, EOG Resources looks to replicate their success in fields such as the North Dakota Bakken, which helped launch the shale gas revolution back in 2006.”

“The Duvernay shale has been tapped as the “sexiest” resource frontier in Canada by some observers, and oil industry players have been watching closely.
“Exploration activity in the East Shale Basin is expected to increase due to recent land sales and the licensing of the first Duvernay oil well,” stated a July 9 operational update from Waldron Energy, referencing the EOG licence, which it notes is an offset of a 1969 well that tested 42 degree API light oil.
The company believes its own holdings, which provide access to the formation, are “highly prospective for Duvernay light oil.”
Companies that stand to benefit if the EOG wells prove profitable are Bonavista Energy, Celtic, Athabasca Oil Corp., Trilogy, Delphi Energy, Guide Exploration and Longview Oil Corp., among others, say officials.”

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