Unconventionals have wrought a massive change in the oil and gas business and in the economy of North America, said Hal Kvisle, president and CEO of Talisman Energy. “We can now look forward to very long-lived supplies of natural gas and crude oil from sources we would not have thought possible a few years ago.”

Kvisle spoke at Hart Energy’s DUG Canada conference and exhibition in Calgary, which Hart co-hosted with the Canadian Society for Unconventional Resources.

“First and foremost, unconventional resource development is a story of technology and innovation,” he said. “This revolution occurred because geologists, engineers and the service sector pushed the limits and made breakthroughs.”
Just 20 years ago, the industry revolved around vertical wells drilled into permeable reservoirs. Today, the focus is on source rocks, and the industry has honed its ability to extract oil and gas from rocks that were previously seen as unproduceable.

Canadian innovation

The technologies of horizontal drilling and fracturing were not new, and the knowledge of the enormous volumes of oil and gas trapped in source rocks was not new either. Although George Mitchell is widely given credit for launching the shale revolution, Kvisle pointed out that workers in the Canadian oil patch were simultaneously developing the same concepts and applying the same technologies to their own low-permeability rocks.

As far back as the 1970s, companies such as Dome Petroleum had identified a large resource base in the lower Cardium. The relatively thick, very tight sandstone, siltstone and shale combination held billions of barrels of oil, but most of that oil was immovable. Separately, in the late 1980s and early 1990s, other firms were focused on drilling horizontal wells in permeable rock.

“Nineteen ninety-two was the first time I had really thought about fracturing a horizontal well,” said Kvisle. “It seemed economically foolish to try and do it in deeper, tight rock. Back then we didn’t really know how to control the placement of the fracs or the conduct of the fracs, or how to get the sand in the right places. I was dismissive, but other people in the industry were putting a lot of thought into it.”

The fields that finally yielded the breakthroughs in Canada, and married the ideas of horizontal drilling and fracturing technologies with tight, hydrocarbon-filled sequences, were Medicine Hat and Elk River. These were predecessors of activity in shale rock.

Supply turnaround

Supply and demand for natural gas had stayed flat throughout the 1990s. North American supply grew very little, and that triggered a period of very high prices. Very aggressive drilling was able to offset annual declines and keep the gas supply flat. But consumption by very large industrial users declined, and fertilizer producers, Dow Chemical and others moved their production facilities offshore. “But then, something remarkable happened,” said Kvisle.

The high gas prices led several independent companies such as Devon Energy, Chesapeake Energy and EOG Resources to try horizontal multi-frac approaches in many different reservoirs. Major oil companies did not participate in this effort; they were more interested in deepwater oil, giant reservoirs and conventional fields around the world. Historically, that’s how the oil industry created value. But this new wave was different: Independents were looking at actual source rock itself, and also at very low-quality reservoirs with substantial unrecoverable hydrocarbons, said Kvisle.

The new techniques worked well, and indeed so well that the gas supply picture has turned on its head.

Price and value outlook

“Now the overabundance of gas has driven the price down to very low levels that five years ago we didn’t think we’d see again.”

Today, both the production side of natural gas and the consumption side have changed. Industrial consumers are coming back to North America, and power plants are switching to natural gas for fuel. “Growth in gas demand will continue, but it will take some time to affect prices,” he said. At the $5- to $6-per-Mcf level, gas is extremely attractive, and that price should be achieved within five years.

Short-term, however, in the current period of $3 gas, producers are learning that only the very best gas fields are going to create value. “Today we know where we have hundreds of Tcfs of gas throughout North America, and we know most of it is uneconomic. Our zeal for development means it’s taking us a while to slow things down and bring supply and demand back into balance.”

Cost management has become crucial. Only the very low-cost producers — those that have low appraisal and development costs, operating costs firmly in control and low overheads — are going to make money in the natural gas business.

On the oil side, surprising new volumes of oil, from both source rocks and very tight oil reservoirs, have become economic. “This period of high prices has spurred this oil revolution. However, unlike gas, the crude oil price globally has not collapsed.” Nonetheless, although oil is a much larger global business and crude is more easily transported to high-value markets, wide differentials have developed as the infrastructure struggles to keep pace with the growing volumes.

Economic engine

Overall, the macroeconomic impacts are incredible. The emergence of a huge resource base in North America will drive enormous economic prosperity. Canada and the United States consume about 20 million barrels of oil and 80 Bcf of gas per day. “We produce all the gas we need, but we only produce about half the oil we consume,” says Kvisle. “And we have the opportunity to add several million barrels a day to our supply.”

There is the obvious benefit of secure, low cost supplies to industrial consumers. But also, oil produced in North America has a great economic benefit for the economy, as the dollars stay on the continent. The money paid per barrel flows to North American service and equipment suppliers and employees, to taxes and royalties, to midstream firms and to corporations.

“When we produce our own oil and gas, we generate at least $70 a barrel of incremental economic benefit in North America,” said Kvisle. That is further levered by an economic multiplier as those dollars circulate the economy. Kvisle figured that the economic impact of added production of 1 million barrels a day is equivalent to $100 billion a year.

“If North America wants a self-sufficient economy capable of competing globally and able to withstand downturns, there’s no better way than to be self-sufficient in energy,” he said. “The resource base is there and we can manage the environmental consequences.” And all of this is driven by innovation and technology and the tireless efforts of thousands of people.