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The Duvernay Shale: Uncorking Canada’s Answer to the Eagle Ford


August 15, 2012

Not until you actually open the bottle, can the party truly begin. And in the case of Canada’s burgeoning Duvernay shale play, the cork is slowly being pulled, as industry players are waking up to the potential of Canada’s answer to Texas’ Eagle Ford.

The comparisons between the two shales are warranted: They have comparable thickness of pay zones; they both have similar porosities in the 3-12% range; and both have estimated reserves of well over 2 billion barrels. But the vintage of the Eagle Ford play in terms of exploration activity is four years older than the Duvernay.

If you’re more familiar with the Eagle Ford, there’s a reason, as it’s had an explosion since the play was opened up and given time to breathe. Going back to late 2009, there were practically no rigs to be seen in the Eagle Ford, versus today where the latest rig count was pegged at 268 rigs (as of August 3, 2012).

Looking back at how the Eagle Ford was developed, one can compare the similarities to the Duvernay as it starts to move along a similar timeline. Right now there are a vast range of players in the region from behemoths like Encana (ECA:US) and Talisman (TLM:CA), down to juniors and micro-caps like Yoho Resources (YO:CA) and Mako Hydrocarbons (MKE:AU).

According to Macquarie Research, the Duvernay shales are “at the precipice of being a timeless unconventional resource play, characterized by the right geochemical, petrophysical, and mineralogical parameters.”

In wine terms: it should have good flavour, it’s aged right, so let’s open a few more bottles.

Source: National Energy Board of Canada

THE DUVERNAY – INTRO

For those unfamiliar with the Duvernay, there’s a reason for the unfamiliarity. This is still an emerging play with very little data available.

Industry has been fully aware of the Duvernay for quite some time, but now with enhanced horizontal drilling and completion techniques, economic recovery is possible. The Duvernay is the source rock for a vast majority of the hydrocarbon-rich pools that this industry was built upon.

What we do know is that it’s large; spanning 100,000km2 (approx. 39,000 mi2)that borders along the foothills of the Alberta Rockies. That said, not all Duvernay is created equal.

The area with the most interest these days is a liquids-rich window, which BMO Nesbitt Burns has pegged to cover 7,500km2 (approx. 2,900 mi2). To put into perspective, that’s approximately 30% larger than the Eagle Ford’s wet gas window.

According to CIBC Wood Gundy (in a June 14, 2012 report), this liquids-rich resource could be as large as 2 to 5 billion barrels of liquids, and an enormous 150 trillion cubic feet of gas. Compare that to the Eagle Ford’s estimated 3 billion barrels and potential output of 420,000 barrels a day, and you can smell the aroma of sweet potential.

WHAT’S THE CATCH?

So we knew it’s huge. It’s huger than huge. The cellar is absolutely full, and the potential is there, but the corkscrews have been relatively silent. Drilling activity has been slow to get moving.

Compared to the Eagle Ford that has corks popping in rapidly increasing amounts, the Duvernay is quiet with only a fraction of the activity of its Texan cousin.

The problem is costs. The Duvernay is deep, and it ain’t cheap. Costs for drilling are in the $5-8 million range, but completion work can bulk on up to an additional $5-7 million, which tends to scare away the cheapskates.

Add in the crucial factor of soaring land prices, and the Duvernay becomes even more restrictive. There have been over 900 Duvernay parcels sold over the last two years alone, which brought in over $750 million in June 2011 alone to the Alberta government. Overall, close to $2 billion has been spent on this land in total since companies started to zero in.

These last two years have seen around 800,000 hectares (315,000 mi2) snapped up at an average price of $2,500/hectare (or $1,000/acre) and about three times the average prices seen elsewhere in the province).

What have also been alarming are the parcels with extreme outlier values as was the case for Sonde Resources that cashed in $75 million for a 24,000 acre (9,712 hectare) Duvernay package that was undeveloped with no reserves on the books; this translates to $3,125/acre!

So with top dollar demands coming from land auctions, the drill bit, and the stimulation “frac” crews, the economics of the play are going to need to be substantial to make it work. Producers are going to need to hit liquid contents of over 60 barrels per million cubic feet of gas to keep up their excitement.

In a mid 2011 report called “Do the Dew-vernay,” Macquarie Equities Research aptly labeled the Duvernay as “Big liquids. Big costs. Big payoff.”

Despite an inability to calculate a type curve with high amounts of certainty (due to a lack of available data as of yet), the Macquarie report calculated what the group believes to be the potential for an IP rate of 4.2mmcf/d and a liquids yield of 75bbl/mmcf, with an average life expectancy that could yield ~ 940 mboe/well (30% of which is liquids). Certain of the big players are already touting 200 bbl/mmcf liquids from early test results, which would make this Canadian shale play, truly world class.

If Macquarie is correct in their assumptions, then the Duvernay will indeed pay itself off. So, it’ll be up to those with the capital to help prove that this is indeed the time to pull the cork on what could be a great resource play.

THE WINE LIST – DUVERNAY PLAYERS

Given the nature of the play, the large companies would be the holders of the best information on the Duvernay, and they ain’t sharing that with a lot of people. They don’t need to, since a 12 month “confidential period” is granted to them by the regulators.

Within the Duvernay’s liquids-rich fairway, there are plenty of players in the mix, from behemoths like Encana, ConocoPhillips and Talisman, all the way down to juniors and micro-caps, such as Yoho Resources and Mako Hydrocarbons.

G. Joel Chury
TheHydrocarbon.com

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