The Triassic Spearfish formation (known as Lower Amaranth in Manitoba) is situated at the northeastern flank of the Williston Basin extending from Southwestern Manitoba into North-central North Dakota (Bottineau County). This is another classic case of technology (horizontal drilling and multi-stage fracturing) transforming a marginally economic vertically drilled reservoir into a highly sought-after tight oil resource play with millions of barrels in recoverable oil.
Oil was initially discovered at Newburg, North Dakota in the late 50s and extended updip in the 80s and 90s at Waskada and Pierson, Manitoba. In 2008, EOG Resources’ application of horizontal drilling and multistage fracing was highly successful at cracking the oil bearing formation sands. Initial production (IP) rates were reported at 150-200 bopd which is multiple times the vertical IP rates of 10-30 bopd.
“Stop Looking for Oil. Go to where you know there is oil and concentrate on improving recovery.” Sean Kehoe, CEO Atikwa Resources.
And that is exactly what happened, EOG’s success at Waskada captured the interest of several Calgary based companies including Arc Resources and Penn West Energy which followed EOG into the area. Recent IP rates have exceeded 300 bopd as improving completion techniques drive well performance. Today, Spearfish oil production in Manitoba exceeds 12,000 bopd, up from 2,000 bopd back in the year 2,000.
The Spearfish formation lies at sub 1,000m depth and contains 9 to 15 million barrels of oil per section and upward of two billion barrels of OOIP. Atikwa Resources estimates up to 5 billion barrels of OOIP which may well turn out to be true since the resource potential of this tight oil play is still being delineated. The latest advances in completion techniques have allowed producers to fine tune their fracs in order to avoid propagating them into an underlying water formation in some areas.
The formation produces 36°-37° API crude quality fetching Edmonton Par light oil pricing and insignificant amounts of natural gas. Current oil recovery is estimated at less than 3% which means millions of barrels in recoverable oil lie for grab. Primary recovery through horizontal drilling will bring the recovery factors (RF) up to 10% while incremental secondary recovery through waterflood adds another 5% in RF. Estimated capital per well is ranges from $1.3-$1.7M with an EUR (Estimated Ultimate Recovery) of 70,000-115,000 barrels of oil per well.
The number of oil companies in this play is small and mostly composed of senior producers. Land is tight which makes it very challenging ($$$) for a new company to establish a foothold or for an existing company to lease more land. Let’s take a look at how much land each producer currently holds:
|ARC Resources||TSX:ARX||6,400 net acres|
|Atikwa Resources||TSXV:ATK||1,900 net acres|
|Canadian Natural Resources||TSX:CNQ NYSE:CNQ||14,000+ net acres|
|EOG Resources||NYSE:EOG||35,000+ net acres|
|Hess Crop.||NYSE:HES||50,000+ net acres|
|Legacy Oil & Gas||TSX:LEG||78,000 net acres|
|Penn West Energy||TSX:PWT||75,000 net acres|
|Petrobakken Energy*||TSX:PBN||1,000+ net acres ?|
|Renegade Petroleum||TSXV:RPL||3,400 net acres|
|Surge Energy||TSX:SGY||98,000 net acres|
*I delayed this post 2 days waiting on PBN’s IR for a call back or an email answer (none received yet) to my question regarding their land position. What a useless IR service.
While Penn West is at the forefront of this play, in my opinion the following intermediate producers provide the best exposure to the play: Legacy Oil & Gas (TSX:LEG) and Surge Energy (TSX:SGY). Legacy has recently reported strong IP90 rates of 96 bopd based on the average of 15 wells drilled in both Manitoba and North-Dakota. These results lead to superior long term production performance, higher per well reserve bookings plus additional locations booked. Speaking of locations, Legacy has potentially more than 570 net locations, at eight wells per section. But EOG and PWT have been drilling 24 wells per sections at Waskada which means LEG’s drilling inventory may easily double at a minimum.
Surge Energy’s Spearfish drilling inventory stands at 212 net locations based on 24 wells/section at Waskada and 20 wells/section in North Dakota but this inventory covers a mere 13% of its land base. The upside clearly lies in the remaining 85,000 net acres currently under technical review in North Dakota.
But value can also be sought through one of the few junior producers on the list like Atikwa Resources. Atikwa holds 3 net sections of land which according to the CEO can easily fetch up to $30,000,000 should the company decide to sell. Any senior producer looking to consolidate his holdings will have to pay a hefty price per section which could have a material impact on a small producer like Atikwa. Talk about a sudden surge of liquidity on the balance sheet!
Manitoba’s oil production is on track to exceed 40,000 bopd this year with Spearfish oil easily accounting for 30% of the volumes. This unconventional oil play lies in a very competitive area on both sides of the border, land consolidation will involve premium pricing reflecting the robust economics of this play.
This list was compiled by BeatingTheIndex.com from the latest presentations and company news releases. I do not guarantee the accuracy of the data so if you spot an error in the data or know of a company that I missed from the list, please do not hesitate to contact me.
Who would you pick from the list above and why?