A property-buying boom and drilling frenzy has established Canada as one of the world's exploration and production hot spots. Forest Oil Corp. Chairman and Chief Executive Officer Robert S. "Bob" Boswell was one of the first US executives to see the opportunities north of the border.
"In 1995 Forest devised its North American gas strategy. From a macro point of view, we recognized that demand for natural gas was growing at a 2%-plus rate in the US while wellhead production was operating at 98% of capacity. Most of the country's increase in demand for natural gas had been met by growing imports from Canada. Over the prior several years Canadian imports had grown from supplying approximately 7% to 8% of the US consumption of natural gas to roughly 15%," Boswell said.
The increase in production in Canada to supply growing US demand caused its natural gas reserve life index to decrease from about 25 years to roughly 10 years, close to the average reserve life of a hard rock reservoir. This indicated increased supply from Canada in the future would have to come from new drilling, which would only increase in scale if prices improved.
Concurrently, an expansion of the Northern Tier pipeline and the construction of the Alliance pipeline created additional pipeline capacity. This allowed for the transmission of more Canadian gas to the midcontinent and eastern markets, thereby creating more access to higher-price markets and releasing the gridlock of Canadian gas going primarily to California and other western markets. Canada offered some real advantages. "We saw the market fundamentals for Canadian gas improving and recognized it as unexplored part of North America relative to the Lower 48," he said.
That set of circumstances formed the foundation for Boswell's belief that prices would rise and encourage more exploration and production. "We took a position in advance of these market fundamentals being broadly recognized in what we believed were the highest-potential areas for natural gas in North America, so that when supply and demand balanced, we would be in an excellent position from a strategic point of view," he added.
Right places
In North America, those high-potential areas are the Gulf of Mexico - the shelf and deep water - the Rocky Mountains, Alaska and Canada. Forest acquired its Alaska properties with the purchase of Forcenergy, and it was one of the early independents working in the Gulf of Mexico.
It used the same strategy in Canada and north of the 60th parallel - the northern border of the lower tier of Canadian provinces.
"We were in there early and acquired positions in front of others - in the Foothills Play, in the Northwest Territories and now most recently in Alaska," Boswell said.
Asked to rank the plays in Canada, he said, "Near-term, the two most prospective plays in Canada are the Foothills play and the east coast Sable Island play, which have great resource potential, infrastructure in place and active drilling. Forest has a significant position in the Canadian Foothills play and a small interest in the Sable Island area. In the longer term, the Northwest Territories and Alaska have some of the highest potential for future gas supply, but a large part of this resource base is not accessible because of the lack of gas pipelines. However, we are currently active in the southern portion of the Northwest Territories, where there is some of the highest remaining onshore gas potential in North America with pipeline access."
Traditional western Canada
The Foothills play has become the most attractive gas play in the Western Canada Sedimentary Basin.
Even though some of the shallow Canadian properties experience the same high production decline rates as US properties, Canada maintains an advantage that allows a company to grow through the drill bit because of its relatively unexplored deep potential.
"If you examine the pieces of the Canadian gas decline, the largest part of it is coming from shallow gas, which is predominantly in the lower Alberta and Saskatchewan areas. The shallow gas plays are less risky, but they have rapid decline rates, and a lot of those lands were drilled up during low gas prices, because they were less risky and the economics would work," he said.
"There is excellent opportunity in the deeper sands, below 5,000 ft (1,525 m). And studies show that the deeper part of the Alberta Basin has not been drilled significantly. We are evaluating opportunities in basin-centered gas at deeper depths in Canada. We are also currently drilling the thrust and fault plays, which are the primary Foothills plays, where we already hold a significant acreage position," he added.
"The more attractive plays from an economic point of view are the conventional plays in Canada. So I think you'll see more conventional exploration at deeper depths looking for gas, in both Alberta and British Columbia and to a lesser degree, Saskatchewan," he said.
Northwest Territories
If a person examines North American geology looking for the areas of highest potential, the Northwest Territories of Canada will be high on the list.
"It's an area that is very difficult to work in from an operations point of view, because of the vast changes in climate, its remoteness and terrain. It's virtually undeveloped. There's no real infrastructure. There are some roads, not many," he said. Because of the rivers, operators have to barge equipment to drill sites in summer and build ice bridges in winter.
"The prize, however, is large. And if you look at the conventional resource potential of the Northwest Territories vis à vis the remaining resource potential of the Lower 48, it compares quite favorably. The individual plays and prospects are large from a field-size-distribution standpoint. Consequently it's a good area to go prospecting," he added.
North of the 60th parallel lies roughly 45% of Canada's land area, with fewer than 120,000 people and fewer than 1,500 wells drilled.
Liard Plateau
Forest took an early position in the Liard Plateau area, just north of the Alberta-British Columbia northern border in 1996 and 1997 with some 250,000 acres of land. Until recently, production came from Amoco's Pointed Mountain field in the Northwest Territories and Anderson Exploration's Kotaneelee field immediately to the west in the Yukon with 350 Bcf and 200 Bcf of gas, respectively. Pipelines were built to Pointed Mountain some 25 years ago.
Chevron recently put its K-29 and M-25 wells onto production at a combined rate of 70 MMcf/d to 100 MMcf/d from a reservoir that has an estimated 600 Bcf in gas reserves.
Those wells are immediately southwest of some of Forest's properties. "These are mountain-front plays where you've had these big thrusts that have developed as the continents have moved. Worldwide this is the type of area where large reserves of high-productivity gas have been found.
"You utilize seismic to find the structures, then the challenge becomes to understand how the structure migrates at depth so you can design a program to drill the well to hit the structure in the optimal position from a fracturing standpoint," he said.
Forest has drilled six wells in the complex geological area with three producers and three dry holes. The first to go on production was the P-66. It started out at about 36 MMcf/d but has dropped to about 5 MMcf/d because of water interference.
The company has identified 11 carbonate thrust features on its licenses and more outside its property. It will go after that land when it becomes available.
Northern potential
Farther north, Norman Wells field has been producing oil since about World War II through a pipeline to Alberta.
Forest has two licenses in this area, and the company will look for oil, initially, on its half interest in 450,000 acres, less some acreage that it relinquished.
This area also has potential for gas exploration, which will most likely occur when a pipeline is built from the Mackenzie Delta down past Norman Wells and through the Mackenzie Valley to Alberta. Officials and oil companies expect an application for that line to be filed this year. Operators have discovered more than 6 Tcf of gas and 2.5 billion bbl of oil on licenses on which Forest has interests. The company has small interests in 20 significant discovery licenses. Still, it's a small percentage of a big pie. Forest's partners are some of Canada's biggest companies, including Gulf Canada, Chevron and Imperial Oil of Canada.
The world knows the oil and gas is there, but until recently, economics hadn't allowed companies to bring it to market.
Now, producers are talking about a line from Alaska as well as the Canadian line. "There'll be a need for two, definitely. If you look at the resource potential at Prudhoe Bay (on the North Slope of Alaska), the Mackenzie Delta and the Beaufort Sea, what we know today in terms of productive capacity is that two pipelines will need to be built to meet anticipated demands."
Returns
Boswell anticipates high returns from Alaskan and Canadian oil and gas production. The company looks for a minimum 20% return on its projects before taxes.
"If you look at just strictly financial theory and rate of return on a projects, yes, we've achieved in excess of 20% rates of return on the projects we've undertaken in Canada. With improved pricing today, the rates of return on projects have increased significantly as reflected in returns on equity approaching 30% in our business. Returns at this level are required to attract capital and to spur investment to meet growing energy demands," he said.