Oil drilling: Making Bakken

How new technology is getting oil — and money — from Prairie stone.

The rolling grasslands of southeastern Saskatchewan have long held a special place in the Canadian psyche. The fields and grain elevators represent the homeland of writer W. O. Mitchell, and the region has long been mythologized as a pastoral oasis where stoic farmers tend the land their forefathers settled. None of the easy money or big hats of Calgary here — this is the quiet side of the Prairies.

But Canadians may have to update their romantic view — because this region is changing rapidly. And it’s all thanks to a 350-million-year-old, 150-foot-thick layer of Paleozoic rock sitting more than a kilometre below the grasslands and bluffs. The Bakken Formation has recently begun giving up its gold — the black variety. The light, sweet crude in the Bakken has turned this part of Saskatchewan into Canada’s newest oil region. Dozens of wells now dot the landscape, as a Canadian version of The Beverly Hillbillies unfolds.

This spring, the U.S. Geological Survey suggested in a report that 3.65 billion barrels of oil are locked in the Bakken. In an era of $120 oil, that’s a ticket to economic indulgence. Many of those stoic farmers are already cashing royalty cheques, while Weyburn, a town of almost 10,000, has seen home prices increase by 300% in just two years. The province — already booming on the back of rising grain, potash and uranium prices — will also reap the benefits that follow on the $18 billion worth of capital spending estimated to hit the region over the next 10 years. Meanwhile, Bakken promises a revival in the Canadian conventional oil industry, after a rough couple of years of high labour costs and royalty reviews.

So how did the industry miss this thing? How come it’s finding a multibillion-barrel reserve in an area that had already been heavily prospected, in a basin that is generally considered mature? The quick answer: the Bakken Formation isn’t actually a new find. Geologists have known about it since the ’50s, but it’s only now that the technology has been developed to pull the oil up from its resting place.

It’s an extremely tough chunk of rock to drill — it’s what is known in the industry as a tight formation. Early wells didn’t generate enough profit, or flows were too small, to make the drilling worth it. Of course, high prices have made every little bit of oil more valuable, and that’s driving some of the interest in the Bakken. But the real keys to the new activity here are a couple of neat technological innovations — one of them developed in Calgary — that have literally unlocked this long-unproducible bounty.

The importance of those technologies might well transcend Bakken. They might help boost production elsewhere as well. And they might be just the thing the global economy needs right now. So, in this era of no-more-easy-oil, it’s not that crazy to ask: Can Dan Themig save the world?

Themig is the CEO of Packers Plus, a privately held, Calgary-based oil services firm that takes a good chunk of credit for the good news flowing out of Saskatchewan these days. Born in Minnesota, he grew up around the industry. His dad was a pipeline operator, whose handiness with tools rubbed off on the kid. After taking a degree in mechanical engineering, Themig moved on to a career in oilfield services, and toured the globe with the biggest names in the business. But when the company he worked for, Dresser Industries, was acquired by Houston-based giant Halliburton in 1998, Themig stuck around until 2000, but eventually fled the clash of cultures and created Packers Plus along with two others.

The plan was to focus on Western Canada and its harder-to-drill formations, which seemed to offer a wealth of opportunities for someone with Themig’s unique skill set. Over the years, he has worked both as a “fracing” engineer (someone who knows how to use high-pressure liquids to crack open, or fracture, rock to get oil to flow better) and in the “down-hole tools” end of the industry (drill bits and the like). Normally, these two disciplines are separate. But Themig’s experience on both sides of the fence has been key to his success.

Conventional wisdom about conventional oil is that it is an extremely mature industry. The epicentre of the oil industry in Canada has moved to the tarsands and away from conventional production, which has been in decline in North America for well over 25 years. Four out of five traditional wells drilled in the West today are for natural gas, and it’s widely assumed the easy oil has been drained. What’s left is the stuff in formations that could never be tapped before — places like the Bakken.

In terms of geology, the formation is just one of more than 30 layers of rock that make up the Williston Basin, a massive area that underpins much of the U.S. and Canadian central plains. Think of the Williston as a big layer cake, and of the Bakken as a thick, organic-rich layer in the lower third (just above the Three Forks formation, but below the Lodgepole). Geologists have always suspected it contains oil, but it’s always been hard to get out, and for a very specific reason. Oil reservoirs don’t form in big underground caverns. The biomass that becomes oil is mixed up with the mud, sand and silt that will become rock, and that means oil actually forms within the rock in little pockets, à la Swiss cheese or the spaces between marbles in a jar. When drillers pierce the hard rock cap that typically exists over a reservoir, pent up pressure is released and the oil is pushed toward the lower-pressure area around the well. Depending on the size of the pockets in the rock, either a lot of oil will flow out of the well or not much at all.

Geologists measure this trait, known as permeability, with a unit of measurement called the millidarcy. Higher-millidarcy reservoirs are more permeable, lower millidarcy reservoirs less. Traditional onshore reservoirs have a millidarcy between one and five. The Bakken has a millidarcy of less than one — almost impermeable. According to those familiar with samples, if you look at rock from the Bakken, you wouldn’t even think there was oil in it.

Traditional wells haven’t produced much. And no wonder. Vertical wells could face on only the 150-foot height of the formation, and that left relatively little area for oil to pass from rock to well. About 20 years ago, horizontal drilling came along, and today drill bits sent down from a rig can be driven around underground. It’s now possible to go down the kilometre and a half to the Bakken, turn 90 degrees, and then drill laterally. That massively increases the interface area between well and formation.

Still, prices in the ’90s precluded anyone from doing anything big. And so while a few old vertical wells sunk 50 years ago continue to bring up 10 barrels a day, most of the billions of barrels in the Bakken — oil of exceptionally fine quality — has just been sitting there, like money buried in concrete.

When Themig took a call early in this decade from a petroleum industry consultant working for a Texas oil company, things began to change. As someone in the service side of the industry, Themig is the guy out in the field and actually involved in the work on wells. (Oil companies typically hire out to do the drilling; the companies worry about finding and financing the plays.) The petro consultant wanted to know if Themig had any ideas about a drilling challenge a client of his faced. A meeting with the vice-president of engineering of the client company was arranged. Originally slated for 20 minutes, the meeting went on for two hours, and another one was scheduled with the rest of the engineering group in Texas.

On the way down to that second meeting, Themig scribbled seven ideas onto an airline napkin. When he got there and they ran through his ideas, the executives told Themig they liked No. 4. And that was that. With a commitment in hand, Themig headed back to Calgary, disappeared into his machine shop for two months and fast-tracked the construction of a prototype of the system that has cracked the Bakken. “They came up with the request, and we came up with the tools and manufactured it,” says Themig. “And that was the beginning of multi-stage fracing.”

“Frac” is a term that goes back to the earliest days of the industry, when the owner of a non-producing well would hire someone to come along and dump a bunch of explosives down the hole, light them up, and hope the blast would fracture the rock and release a new flood of oil and gas. The practice is a bit more sophisticated today. Instead of explosives, fracers use pressurized water or other fluids to crack the rock, and then deploy industrial gels or sand to fill the cracks and create underground highways for the oil to flow through. Coupled with horizontal drilling, fracing can boost the exposure of a well to the rock face by several thousand percent. That radically changes the economics of drilling.

Themig’s process takes this to another level. Before, each frac had to be performed individually; that is, a “round trip” down and up the hole had to be made for each frac, which can take 12 to 14 hours. That means it can take a month to frac an average kilometre-long horizontal well. With the cost of a drilling rig running into hundreds of thousands of dollars a day, fully fracing a horizontal well can be an extremely expensive undertaking. Themig’s process, however, allows an entire horizontal well to be fraced in, basically, a day. “We’ve changed the economics of the industry,” he says. “We’ve allowed a whole new generation of reservoirs to be produced.”

Themig’s idea was to create a line of fracs to be packed down the hole in one long section. Triggering them is a matter of dropping various-sized ceramic balls into the well as the high-pressure fluid used to crack the rock is being pumped down. The balls fly down the hole to the end of the well, where each of the frac points has a release that can only be opened up by the correctly sized ball. When that ball arrives, it closes off the toe (the rest of the well), and opens up a slot in the casing that the fluid passes through to frac the rock.

Like most brilliant ideas, it’s simple and utterly effective. When the first system was unleashed on the Bakken, the results were far beyond expectations. “We’ve cut millions of dollars out of the cost of drilling programs,” says Themig. “It takes 10 minutes to inject a ball. Companies are being made by being able to do this.” Wells that were bringing up oil with an 85% water cut are now delivering 70% oil, while the profitability picture around a formation like the Bakken has changed as if by magic. And with oil well over $100, it’s manna from heaven.

Another company making a name for itself in the Bakken is Crescent Point Energy Trust. The CEO of Crescent, Scott Saxberg, is a Manitoba native who began working for SaskOil out of school. He moved to Calgary to make his mark in the industry but kept an eye on some of the early horizontally drilled wells in the region. Despite their paltry output, to Saxberg the fact that they were still producing after so many years suggested a massive reservoir was down there. When he started Crescent, which he co-founded with Paul Colborne in 2001, he quietly began grabbing up what he could around the formation — whether it was drilling rights or the little juniors that have progressively moved back into play. Saxberg figures the company has tied up at least 50% of the play. “We thought we had 80%, but it keeps growing,” he says. “I personally think this could be the biggest find in Canadian history, once we determine its final size.”

His company works with Packers Plus and the other oil service firms that have moved quickly to offer multi-frac services, and Crescent is now the largest producer in the Bakken. Daily production is now at 15,000 barrels a day. But Saxberg thinks he will double or triple that over the next decade, as his company ramps up to spend a billion dollars a year for the next dozen years. At peak, the Bakken is expected to produce 100,000 barrels of oil a day, which is about 4% of Canada’s 2007 total crude oil production of 2.7 million barrels. According to the Canadian Association of Petroleum Producers, the oil from the Bakken won’t be enough to roll back ongoing decline in conventional crude production in Canada.

Nevertheless, the find has already made a career for Saxberg, who was working as a manager of business development with Magin Energy Inc. before he started Crescent Point. Now he finds himself living one of those rare and golden opportunities every oil exec dreams about. “I can’t think of another company that has as much of as big a play as this,” he says. “Talisman is going after 100-million-barrel fields in the North Sea. But this is nearly five billion on land, in the middle of all kinds of infrastructure and well-developed roads. And it’s good quality. And we’ve got a lot of it.” To put the Bakken in perspective, it’s roughly three times the size of Hibernia. “This is exciting for southeastern Saskatchewan and the province in general,” says Saxberg. “It’s moved the province to the forefront of the Canadian oil and gas industry after being in the backseat for so long.”

Investors are interested, to say the least, although the federal Conservatives’ backslide on income trusts in 2006 complicated things. To get around some of the restrictions placed on trusts, much of the financing of Crescent Point is being done through a related company, a non-trust vehicle called, appropriately, Shelter Bay. It owns 20% of Crescent, and recently completed a $625-million financing — one of the largest in the oilpatch in a decade. But the income trust decision still riles Saxberg. “We’re in a box in terms of how much equity we can raise, and that’s held us back,” he says. “We could have raised much more in that financing, but oil and gas trusts were rolled in with the Teluses of the world, and now we’re caught up in what is basically a political thing. I’m still mad. The Conservatives just moved on and pretended it didn’t matter, which is how they govern.”

Nevertheless, the future is still bright for Crescent Point. A research report from Haywood Securities expects the company to exit 2008 producing 34,500 barrels a day, and the unit price of Crescent has already passed the brokerage’s price target. There is even talk of the company growing into the next major Canadian independent oil and gas company, a Talisman II. It has 16 years of drilling projects on its books — amazing, considering that the typical junior has just three or four years of projects. “I think we’re going to see a lot more value added to the company over the next year,” Saxberg says.

And Bakken could be just the beginning. Saxberg expects another similar play to emerge in Alberta in the next year or two, as the industry — new tech in hand — goes all out for tight oil and gas. (“In all likelihood, it would have happened already if the royalty review hadn’t knocked everyone back,” he says.) Some of the other plays that are benefitting from multi-fracing are the Barnett Shale and James Lime plays in Texas. “We’ve heard from companies down there that the Packers Plus system saved the James Lime,” says Themig.

The Shaunavon play in southwestern Saskatchewan will also benefit, as will any tight oil or natural gas formation. Longer-term, Themig expects multi-fracing to play a big role in B.C.’s massive shale reserves, and those in the Appalachians. “You can’t do oil shale without multi-stage fracing,” he claims. “Go down the list: Petrolane, Crescent Point, Celtic, Devon, EnCana. Everyone who is really active today is in tight formations and using it.”

It hasn’t taken long for the story to catch on at the international level either. Schlumberger, the French oilfield services giant, has already acquired a minority stake in Packers Plus as well as the international rights to the technology. Packers is now working in 20 formations in the States and doing work for 40 different companies. It’s in Romania, Mexico and several Mideast countries, and it has just done six wells in China for Petro-China — “I never thought we’d be there,” says Themig.

Themig isn’t forthcoming about what Schlumberger paid for its stake. Packers is a private company, after all, and it’s going to stay that way for the foreseeable future. “The visionof the founders was to remain private. We don’t want to waste our time doing press releases,” he says.

But the big question is what effect the technology will have on global production. As it is, oil production seems stalled at around 85 million barrels a day, and that has raised all kinds of alarm about the future of our hydrocarbon-dependent economy. Will Themig’s big idea save us from the kind of meltdown some Peak Oilers warn about? “Will we have an effect on worldwide total production? I’d say yes,” he says.

He has little time to ponder the mysteries of total global oil production, however. To no one’s surprise, it hasn’t taken long for the competition to get their own multi-fracing processes up and running, and Themig is running hard to stay in front. He is sure to point out that Packers Plus has the most experience doing multi-stage fracing: “We’ve done 1,800 wells now and 10,000 fracs. We’ve got the experience. And experience is something you want when you’re worried about accidentally flooding a million-dollar well.”

To maintain Packers’ edge, Themig has made it a key task to spread his knowledge base in down-hole tools and fracing to his employees. But even in the midst of this chaos, Themig maintains a comforting, up-for-it earnestness that you often find in slightly blue-collar guys that have made it big. He calls Calgary home nowadays, has taken out dual citizenship, and likes to get out in the mountains for hiking and snowboarding. But right now, he’s focused on the job. “It’s an exciting place to be,” he says. “An HR consultant recently came through and said you can feel the energy in here.” Considering the company’s place in the new era of energy, that is almost literally true.