Mission & Name
US Foreign Policy (Dr. El-Najjar's Articles)
Why Conventional Oil Drilling Makes Sense in
North America in 2015
By James Stafford
Oil Price, Al-Jazeerah, CCUN, January 15, 2015
Back To Basics: Why Conventional Drilling Makes Sense in 2015
This New Year, an old trend may become a new trend as
conventional drilling in North America is once again in the spotlight at
a time when oil prices continue their slump and the unconventional
becomes increasingly uneconomical.
Advanced horizontal drilling
and hydraulic fracking for extraction is much more expensive than
conventional drilling. While these high-cost methods are the technology
that ushered in the North American shale boom, in times of oil price
troubles, plenty are moving back to the basics. Unexplored conventional
plays are set for a mini-boom of their own.
The surge in
high-tech exploration and production has been led by small to mid-sized
independent companies who could foot the bill for expensive drilling and
extraction as long as oil prices were high and the risk-to-reward ratio
favorable. This was a great plan when oil prices were over $100 a
Most independent drillers hit a break-even
point around $80-$85 per barrel for shale drilling.
this, shale wells deplete much faster and during peak production, they
leveraged to the prevailing energy price”. So when you sink millions
into a shale well for quick reward when oil is at $100 a barrel and it
suddenly plummets to $60 per barrel—you’re out a lot of cash and it is
no longer feasible to produce.
One way for investors to hedge
their bets is to look away from the shale cash cows and towards
underexplored conventional plays that don’t require expensive horizontal
drilling or fracking for extraction.
Going vertical is the safer
bet, and there are two key areas that stand out: The all-time favorite
Permian Basin in West Texas, and the prolific and still underexplored
Saskatchewan province in Canada.
In the US, nearly
95% of new oil production between 2011 and 2013 was from seven key
regions where horizontal drilling and fracking rule the day, led by
North Dakota’s Bakken, South Texas’ Eagle Ford, and the Permian Basin in
West Texas and New Mexico.
But what you may not know is that the
Permian Basin isn’t all horizontal. In fact, just before the oil price
slump, it was just getting to the point where horizontal drilling was
starting to outpace vertical drilling.
rates for these key regions speak volumes. The Eagle Ford region has
an approximately 62% decline rate, the Bakken region 54%, and the
Permian—where vertical plays a key role—has only a 33% decline rate.
In September, Encana Corp. (NYSE:ECA) agreed
to acquire Athlon Energy’s (NASDAQ:ATHL) Permian basin assets for
$7.1 billion. While horizontal wells are the longer-term plan, current
production is almost entirely from vertical wells and Athlon had 1,121
vertical wells versus 17 producing horizontal wells on its acreage.
At the other end of North America, all eyes are on Canada’s
Saskatchewan province, where Suncor Energy (SU) and Cenovus Energy
of the biggest oil sands producers in Canada—maintain significant
profit margins despite all.
More narrowly, market attention is
latching on to the Williston Basin, which is already producing 1 million
barrels of light crude oil per day and is on track to double this with
new wells coming online. Yet there remains a great deal of exploration
to do here, and this basin is expected to come up with another major
Within this prospective sweet spot lies the Little
Swan, whose name belies its potential to be the next major discovery
with an extremely attractive risk-to-reward ratio. This is, after all,
the single-largest oil permit in Saskatchewan.
Recently acquired in part by a small, fiery independent company
called Bayhorse Silver Inc. (TSX
Ventue:BHS), Little Swan, in the prolific Williston Basin is a
253,000-acre oil and gas prospect that is an extension of oil bearing
formations of North Dakota and Montana, according to geological reports
that indicate high potential for a new discovery.
What makes this
area particularly attractive to prospective investors who are
shell-shocked by the oil price slump is that drilling will be cheap.
Bayhorse estimates that a 1,200ft-well would cost only $500,000 because
there is no need for horizontal drilling or fracking.
Canada--the world’s fifth-largest oil producer and a country with more
proven crude oil reserves than anywhere outside of Saudi Arabia and
Venezuela—is shaping up to become a better
bet for anyone who recognizes that the frackers are now a gamble,
and even more of a gamble than expensive oil sands, which take a lot of
upfront investment but don’t decline like shale.
By James Stafford of Oilprice.com