A new way to tap oil

Peter Carwardine's holiday gift came late last year.

A few days after Christmas, the chief executive officer of Nexstar Energy Ltd. sat in a small theatre room in Calgary and watched a live stream of technical data from an oil field several hundred kilometres away.

What he saw was one of the first glimpses of new hope for Canadian junior oil and gas companies, a group that has struggled mightily in recent years. With natural gas showing little promise in a gas-reliant province, Mr. Carwardine was looking at something with the potential to restart the flow of profits into an important segment of the country's energy sector: a new way to tap oil.

The feed showed a well being bored horizontally through the Pembina oil field, a mammoth eight-billion-barrel crude reservoir southwest of Edmonton. Though oil companies have spent the last half-century pulling more than a billion of those barrels from its depths, Mr. Carwardine, who announced the sale of Nexstar to Result Energy Inc. late last week, was doing something only done once before in the giant field.

The well, which was conceived by Nexstar but operated by Bonterra Oil & Gas Ltd., employed a new technology called multi-stage fracturing, which meant not only drilling, but also pumping huge volumes of high-pressure sand and water below ground.

The technique, designed to fracture dense rock, had been hugely successful in freeing hard-to-extract natural gas. Mr. Carwardine thought it might work in the Pembina, too, on the less productive fringes of the reservoir. Vertical wells there produced fewer than 10 barrels a day - not nearly enough to turn a profit.

It was a big bet. Nexstar had spent the previous two years with an axe over its head. Half of its capital - $5-million - was frozen in asset-backed commercial paper. It finally managed to sell the paper in November. It had a new lease on life.

But it needed that well to work, especially because it was expensive: This single well would cost $2.5-million, double a typical well. Nexstar would not have much cash left if the well failed.

It didn't.

Before New Year's, Mr. Carwardine knew the fracturing had been successful. Two months later, 300 barrels per day were flowing from the well. Over the following months, Nexstar drilled eight more wells, all with partners. They each found oil. Over the course of the year, Nexstar's stock price has leapt from a penny to a quarter. It was sold last week for a 30-per-cent premium.

"We're very fortunate to be where we are. Simply put, we could have gone away a year ago," Mr. Carwardine said. "We caught a bullet and threw it back."

"Small oil and gas companies quite frankly are only as good as their last well. And in our case, our last number of wells have been rather good."

For a small segment of Canada's junior oil and gas companies, 2009 has been a year of extraordinary success. Following Nexstar's success, other companies have raced to use similar drilling techniques in the Pembina field, in a play called the Cardium, which refers to the underground structure they are tapping.

Companies are also pursuing a different and distinct part of the Cardium, known as the Garrington Cardium, which is located nearer Calgary. Among those with land in the new plays are Arc Energy Trust, Berens Energy Ltd., Bonterra Oil & Gas Ltd., Enerplus Resources Fund, NAL Oil & Gas Trust, Midway Energy Ltd., Triaxon Resources Ltd. and True Energy Trust.

Triaxon CEO Jeff Saponja, whose company pioneered the first multi-stage fractured Pembina well in late 2007, estimates that the new technology, plus coming upgrades, could bring an additional 800 million barrels to the surface in the Pembina Cardium alone. Although the play is in such early days that no one yet knows how it will perform over the long term, Kim Page, an analyst with Wellington West Capital Markets Inc., has calculated that its wells can generate a 50-per-cent profit at $65 (U.S.) oil prices.

Across the border in Saskatchewan, a cluster of juniors is using similar well technology to tap into a trio of promising plays - the Bakken, Shaunavon and Dodsland Viking.

Taken together, the new wave of oil discovery has provided a sorely needed glimpse of promise to a struggling sector.

"Every 20 years in the Western Canadian basin, everybody thinks it's all played out, it's all over, it's a sunset industry. And every so often a new technology comes along that really reignites it," said Gary Leach, executive director of the Calgary-based Small Explorers & Producers Association of Canada. "The multi-stage fracturing that's emerged really has some great potential to unlock billions of barrels of oil that we haven't been able to figure out how to get out."

Curiously, the percentage of natural gas produced by juniors has actually increased this year - growing from 71 per cent to 75 per cent of total production. That owes in part to the balance of expertise in Alberta, which is heavily tilted toward producing gas. It also stems from the premium that oil properties command today: For most cash-starved juniors, it's simply too expensive to switch.

Those juniors with money at hand, however, have begun buying up more crude assets, and, in a significant change, the number of wells exploring for oil has exceeded those chasing gas for the first time in nearly four decades.

Still, those who have made headway in the Cardium warn that it is too small to benefit many. "I don't think there's enough opportunity," said Scott Ratushny, chairman and CEO of Midway Energy. "It's enough to help our specific areas. But not enough to help the whole industry."