Ask someone about the Duvernay, the western Alberta formation touted as one of the next energy hot spots, and you're bound to hear one of two narratives.
The first: The Duvernay is the future. With its mix of dry natural gas, natural gas liquids and light oil, the formation's got it all. Over time, its prominence will only grow as more companies drill in the region.
The counterpoint: Sure, the Duvernay's got potential, but its drill results are wildly erratic, and the formation is severely lacking in infrastructure. Although some energy heavyweights are already there, it's going to take big bucks to develop assets.
These dramatically different takes may seem worlds apart, but the truth is they aren't mutually exclusive. Both can be, and arguably are, true. For that very reason, the jury is still out on the formation's prospects.
Here's what we know for sure. Over the past four years, energy companies ramped up drilling activity in the Duvernay. For the most part, the Kaybob region has been the most active, with its well count growing to just over 100 by the end of 2013, up from 11 in 2010, according to an extensive report on the Duvernay released by BMO Nesbitt Burns.
In the early years of drilling, the Duvernay looked promising for the companies with assets there, including Athabasca Oil Corp., Canadian Natural Resources Ltd. and Vermilion Energy Inc. Then dry natural gas prices fell off a cliff as the shale gas revolution flooded the market with supply, hurting those with greater dry gas exposure.
Now there is much more focus on the region's condensate-rich natural gas, which BMO described as "the most economic window for development." Condensate is used to move heavy oil through pipelines, so oil sands producers need it to transport their crude.
Natural gas producers are also all trying to tout their "liquids-rich" assets to earn themselves better valuations, and highlighting their exposure to the Duvernay can help to convince investors their production is diversified.
Beyond that, things get a bit dicey. "[Drilling] results from the Duvernay so far have been all over the map," analysts at Desjardins recently noted. "There have been some outstanding wells with phenomenal condensate yields, but there have also been results that have not been so good."
BMO's analysts echoed those concerns. They are "wary of corporation presentation" of net present values [NPVs] and rates of return, so they "take advertised NPVs with a grain of salt."
They're also concerned about the lack of infrastructure in the region. "Infrastructure constraints will be a key challenge over the next year," they wrote in their report. "Although gas processing capacity appears to be plentiful in the region, the critical test is access to facilities that maximize the yields of natural gas liquids, such as refrigeration plants and deep-cut facilities. This may be a luxury available only to large companies that are able to build their own plants or lock in take-or-pay contracts."
At the moment, it can be hard for analysts and investors to calculate even rough valuations for many of the Duvernay's assets. But BMO notes that a number of transactions are expected in 2014, which should offer some data points, such as decisions on both Athabasca's and Talisman Energy's long-awaited joint venture projects.
New drill results are also expected for wells in the Kaybob, Edson and Pembina areas of the formation, which will help to narrow current estimates.