Rows of pump jacks stand out against the snowy landscape southeast of Waskada, a small town in southwestern Manitoba.Tim Smith for The Globe and Mail
Gary Williams recalls the last time the oil industry showed up in his tiny town of Waskada, Man. Crews punched holes in the prairie ground, then disappeared as suddenly as they arrived when those holes came up empty.
But that was 30 years ago. This time, it's different. Armed with new drilling technology and eager to reap the rewards of oil's high prices, companies are tapping complex geological formations, and the crude is flowing, adding Manitoba to Canada's list of significant oil-producing provinces.
"It's just a huge boost for the economy in the area," said Mr. Williams, the town's mayor. "We were sending our young people to Alberta for the last 10 years and now the trend is reversing and we're seeing a lot of Alberta people here and some of our people are coming back."
The oil-drilling boom promises what one company executive calls a "quiet revolution" in the industry. It could reduce the U.S. appetite for imported oil - including, potentially, from the oil sands. And the technological breakthrough could put the brakes on future price increases by bringing new, relatively low-cost supplies to the market - not just in North America but around the world.
Waskada, population 225 and just a few kilometres away from the U.S. border, is on the northern fringe of the prolific Bakken field, a booming unconventional oil play that could soon make North Dakota the second-largest oil-producing state after Texas. The rapid development of the Bakken - which now is now producing 350,000 barrels a day - signals a dramatic new chapter in North American oil industry, where conventional, onshore production was recently considered to be in terminal decline.
As energy companies turned away from low-priced gas, onshore oil production in the United States began reversing a 30-year decline last year. Some analysts project so-called tight-oil plays could contribute two million barrels a day of production by the middle of the decade - nearly as much as current oil sands production.
"It could potentially be a real game changer," said Peter Tertzakian, chief energy economist at Calgary-based ARC Financial Corp.
"Peak oil in North America is likely not to be peak" given $90 per barrel prices and new technology that makes it easier to recover oil, he said.
Drill crews are being deployed across Western Canada and the United States, tapping new formations or, in many cases, reworking old ones that were first brought on stream in their grandfathers' time.
Oil companies are adapting the same advanced drilling techniques that created the boom in shale gas: horizontal drilling and multistage hydraulic fracturing that allow them to break open the rocks at various points and capture the hydrocarbons trapped within.
The other key factor in the tight-oil boom is a high oil price, as North American crude is trading around $90 (U.S.) a barrel and international grades, near $100.
"High oil prices are definitely driving this thing," said Stephen Sonnenberg, a leading geologist at the Colorado School of Mines. "Gas prices are suppressed, oil prices are quite high and everybody is really excited about these tight oil plays."
Growing U.S. oil production would not have the same deflationary impact on prices that the shale gas boom has had - natural gas is a North American commodity and more sensitive to continental factors, while oil price are set on global markets.
Development of tight-oil projects will reduce the United States' reliance on crude oil imports from the Middle East and other OPEC sources as well as Canada, meaning producers in those countries will have to look to other markets to sell their oil. Canadian companies are already attempting to increase exports in the face of stagnant American demand; rising U.S. production will put even greater pressure on them to find new markets in Asia. And it could even delay investments in more costly and challenging Arctic fields, particularly if the companies use new drilling technology to boost production around the globe.
But the tight-oil boom is also reviving the fortunes of Canadian independents who expect to squeeze considerably more oil from formations that, until very recently, were viewed as nearly played out. And it is creating another revenue stream for Alberta and Saskatchewan, and to a lesser degree, Manitoba and British Columbia.
Still, there are major challenges to achieving the much-touted production potential. As with the shale gas, there are doubts over whether the production volumes can be sustained, given the rapid decline in individual wells.
As well, the U.S. Environmental Protection Agency is reviewing the use of hydraulic fracturing in the gas industry, and the tight-oil development may well be constrained by regulators. The EPA is addressing widespread fears about the impact on local drinking water resources from the hydraulic fracturing - in which chemical-laced water is shot into rock to pry open cracks and let the hydrocarbons flow.
Companies also need to marshal an army of drilling crews and equipment to develop the fields, and will require massive investment in new pipelines to get the crude to market.
But the boom is already in full swing.
The Waskada field is tiny compared with the Bakken. Still, drilling crews have invaded the thinly populated border area, and Manitoba Energy Minister Dave Chomiak says the province could soon be producing about 50,000 barrels a day of crude, though he admits his more cautious officials forecast 40,000.
Among the handful of companies active around Waskada is Calgary-based Penn West Exploration Ltd. It plans to spend up to $175-million to drill 100 wells in the area, part of a $1-billion capital plan that is focused on tight-oil plays across Western Canada.
Penn West chief executive officer Bill Andrew said it is still too early to know how much production can be squeezed out of the rocks using the horizontal drilling and multistage hydraulic fracturing techniques that have transformed the gas industry.
"It's not being appreciated in Canada because we have a view that it is all about the oil sands or all about shale gas," he said. "But the quiet revolution is in tight oil."
He compares the potential growth pattern to the early days of development in the Western Canadian sedimentary basin. Saskatchewan's Shaunavon field was discovered in the 1950s but took decades to develop. In the past few years, though, there have been over 200 wells drilled and more than 10 million barrels of oil produced.
"And the big story is, it is not even close to being drilled to its potential," he said. "On all these fields, we're still doing the front-end, early-stage delineation. … It seems like the [drilling]application is adaptable - it's adaptable to multi zones, multi areas, multi jurisdictions."
In Canada, analysts are still trying to come to grips with the potential for the new drilling technology to boost production from previously conventional plays.
But in the United States, there are some early forecasts. Cambridge Energy Research Associates issued a forecast late last month suggesting tight-oil production could reach two million barrels a day by 2016.
Analysts from Wood Mackenzie Ltd. are somewhat more cautious - forecasting U.S. tight-oil production of 1.6 million barrels a day by 2015, and growing from there.
In addition to the Bakken, companies are targeting Texas's Eagle Ford play, which produces both gas and oil, the Colorado-centred Niobrara, and several others in California, Texas and Oklahoma.
Oil drilling has soared. The number of crews in United States drilling for oil hit 818 last week, a 23-year high and an 83-per-cent increase from early February, 2010.
Wood Mackenzie analyst Matthew Jurecky said the big tight-oil projects are attracting significant investment capital, including acquisitions by foreign multinationals.
Unlike shale gas, which can be uneconomic at low prices, the tight-oil plays are relatively inexpensive to develop, compared with the oil sands or the ultra-deep water wells. Mr. Jurecky said the leading projects are economical at oil prices below $50 (U.S.) a barrel. At $90, companies expect very attractive rates of return.
"In plays like the Niobrara, expectations are high and money has been put in place for large-scale development there," Mr. Jurecky said in an interview. "As well, there's been lots of M&A [mergers and acquisitions]capital, suggesting a high degree of confidence."
With low gas prices, many natural gas producers - including Canadian companies like Encana Corp. and Talisman Energy Inc. - are shifting their targets to the "wet gas" zones of the Marcellus, Eagle Ford and other shale gas fields. Natural gas liquids - which are counted in U.S. oil production figures - contain many of the components of crude oil but have only 60 to 70 per cent of the heat value.
One of the leaders in the tight-oil boom is Chesapeake Energy Corp., the Oklahoma City-based company that was a prime mover in the development of shale gas.
Chesapeake is shifting its focus away from gas to projects that produce oil or natural gas liquids (NGL). The company expects to increase its liquids production from 49,000 barrels a day currently to 250,000 barrels a day by 2015, which would make it one of the top five producers in the United States.
And foreign oil companies have taken note. Chinese state-owned oil company, Chinese National Offshore Oil Company (CNOOC) has bought a one-third interest in Chesapeake's acreage in Eagle Ford and Niobrara for $3.5-billion (U.S.).
Mr. Jurecky said the current investment will be the tip of the iceberg if the tight-oil plays prove as prolific and lucrative as many believe they will be.