Thursday, November 25, 1999
Canadian juniors drive U.S. gas play
Entrepreneurial edge: Massive sums being sunk into potentially massive gas pools
John Schreiner
Financial Post
Henry A Barrios, The Bakersfield Californian
A fire, visible from 60km, raged for two weeks after the gas blowout last November near Bakersfield, Calif.
The covey of Canadian juniors and intermediates driving a major California deep gas play will get bigger on Dec. 6 when nine juniors, grouped in what they call the EKHO Project consortium, begin drilling what could be a $10-million (US) well.
The play now includes everyone from aggressive Calgary oilmen to Vancouver mining promoters smelling an area play. Robert Friedland of Voisey's Bay fame is there with his Ivanhoe Energy Corp., which is spending $7.5-million (US) on seismic work alone to prepare for next year's drilling.
"I'm just delighted to be associated with a Canadian company," said David Martin, chairman of Ivanhoe and a former chief executive of Occidental Oil & Gas Co. "There's more of an entrepreneurial aspect to the Canadian companies. Some of that has disappeared in the U.S."
The leader of two major consortia is Berkley Petroleum Corp., a Calgary-based intermediate close to completing several deep wells (17,000 feet) whose results should confirm the future of the play.
The play is in the San Joaquin Valley north of Bakersfield, Calif., where oil has been produced in prodigious quantities for 100 years. The Canadians are targeting potentially massive gas pools three miles down, well below the oil-producing strata, and have been raising massive amounts of equity. Berkley just raised $125.5-million, and the groups it leads are expected to spend $200-million (US) on drilling wells in the next year.
A spectacular blowout last November of a gas well drilled by Berkley and its partners brought attention to wildcat exploration by the Canadian juniors. A well called Bellevue 1-17 that had been drilled to 17,500 feet went out of control, initially flaring gas at a rate of 100 million cubic feet a day. The gas flow was not brought under control until May.
The Berkley consortium completed a relief well and a second deep well nearby has been drilled to about 15,500 feet. Both are undergoing production testing.
The Berkley group was brought to the Bakersfield prospect by two Denver companies, Armstrong Resources LLC and PYR Energy Corp. They had acquired the exploration leases in 1997 from the majors with oil production there, and tapped the Canadians to fund the drilling. Little deep drilling had been done in the productive but shallow San Joaquin area for 30 years but Armstrong had developed new geological theories and wanted to test them with modern drilling technology.
"The prevailing wisdom was that the deeper formations were too tight to produce gas," Mr. Martin said, explaining the lack of deep exploration even though the basin hosts six massive and comparatively shallow oil fields. The majors that control the leases now are allowing the juniors to farm in and take the risk of deep wildcat wells. Invariably, the majors are retaining royalty and participating interests.
Richard Oddy, an oil analyst with Haywood Securities Inc. in Vancouver, who wrote a report on the play in August (and has updated it since), has warned that "the risk is relatively high." The wells cost about $10-million (US) each; the drilling is technically challenging and the seismic signals from the target zones are complex. Weighed against that is the prospect of a significant discovery in the heart of one of the best natural gas markets in the United States. "The pipelines are in place and the markets are in place," Mr. Martin said.
The Canadian players are:
- The East Lost Hills joint venture that drilled Bellevue 1-17 and the relief well. This group, besides PYR of Denver, consists of Berkley, Elk Point Resources Inc., Richland Petroleum Corp., Paramount Resources Ltd., Westminster Resources Ltd., Kookaburra Resources Ltd., all listed on Toronto; and Vancouver-listed Hilton Petroleum Ltd. and Trimark Oil & Gas Ltd.
- The Great San Joaquin Basin joint venture is led by Berkley and includes all the partners from the other venture except Richland and Kookaburra. This group is now completing a 15,000-foot well called Cal Canal.
- Mr. Friedland's Toronto-listed Ivanhoe Energy (formerly Black Sea Energy Ltd.) became active in the Bakersfield area in 1998, initially with oil in mind, at the recommendation of Mr. Martin who had joined Ivanhoe after leaving Occidental. "I look at the San Joaquin basin as low risk," he said. "You know you've got reserve rocks. All you've got to do is find the structures."
In July, Ivanhoe acquired control of a Bakersfield company, Diatom Petroleum Inc., and retained that company's management and technical team because Diatom had reached similar conclusions to Armstrong about the prospect for deep gas discoveries.
Ivanhoe, which has varying exploration interests in about 130,000 acres, is planning to drill its own deep well next year. Meanwhile, it has a 12.5% interest in the Lucky Dog prospect, one of three wells planned by the Berkley-led San Joaquin consortium.
- The EKHO Project consortium is led by Aster Ventures Corp., a Vancouver-listed junior whose president, David Patterson, chairs the consortium. With the exception of Alberta-listed Prairie Pacific Energy Corp., all of the consortium's members trade on the VSE. The juniors in this group primarily are companies that have moved from mining exploration to oil and gas because it is easier to raise money. They include Curion Venture Corp., Lucre Ventures Ltd., Berkshire International Mining Ltd., CVL Resources Ltd., Consolidated Bradbury International Equities Ltd., Curlew Lake Resources Inc. and Pan Ocean Explorations.
The group was drawn to the gas play by the data on previous deep wells. Three were drilled in the 1970s but the operators were unable to cope with the high gas pressures. The group has advanced $9.5-million (US) to its U.S. operator, Tri-Valley Oil & Gas Co. of Bakersfield, which will drill its well. |
