CSEG/CSPG ‘94 Exploration Update

Opening Session of Joint Convention

The opening session of the joint CSEG/CSPG Exploration Update convention held in Calgary in May consisted of three panel sessions. Prominent speakers from a variety of Calgary based companies were invited to present their views on three separate subjects. The session attracted about 1000 convention registrants eager to hear the speakers and ask questions at the end of each panel session. Seldom does the normal explorationist get an opportunity to see and hear numerous senior oil executives giving their views on the future potential of the industry. The majority of the speakers were extremely positive about their company's future in the oil and gas industry.

The following is a summary of comments made by each of the panel participants. Please note that this article was written from notes taken at the session by the writer.

PANEL 1: "CALGARY: A FUTURE IN WESTERN CANADIAN AND/OR INTERNATIONAL OPPORTUNITIES."

Moderator: Robert Halpin, President,
Halpin Resources Ltd.

David O'Brien
Chairman, President, & C.E.O., PanCanadian Petroleum Limited

Mr. O'Brien explained why his company plans to be active in both the Western Canadian and the International arenas in the foreseeable future. In Western Canada, PanCanadian owns a very strategic land base. While estimates of geological potential do not predict huge pools, it is estimated that about 50% of the total ultimate Western Canada gas reserves and 20% of the ultimate light oil reserves remain to be discovered. PCP predicts that a third of these reserves will be discovered in the next 10 years. Western Canada offers well developed infrastructure, excellent data access, an efficient service and supply sector, as well as excellent pipeline access to the largest oil market in the world - USA. Seismic 3-D, horizontal drilling, and new pump technologies will help to keep Western Canadian plays commercial even for companies the size of PCP.

International basins present a different set of opportunities and challenges. Most international basins have much lower drilling densities and present higher undiscovered reserve potential. Many regimes offer quick cost recovery on new discoveries. However, infrastructure is generally poorer and political risks are much higher. In international plays it takes more than just good geology to be profitable. Playing the international game requires patience and staying power. In the end, PCP believes than the return on investment internationally will probably be similar to that in Canada.

Guy Turcotte
Chairman & C.E.O, Chauvco Resources Ltd.

As an intermediate producer, Chauvco lacks the extensive land base that PCP controls. Chauvco is looking at its existing strengths for new ways to double and redouble shareholder value. This will be done with acquisitions and exploration in both Western Canada and internationally. Chauvco will continue its Western Canadian activities as it has for the past ten years. But, it also intends to make use of the new technologies that have been proven successful in Western Canada in adding value to international projects. There have been relatively few significant pools found in the last ten years in Western Canada while land costs and drilling costs have increased substantially. Currently Chauvco is concentrating on taking 3-D seismic and horizontal drilling technologies to new international prospects where these technologies have the capability to keep costs low and increase recoverable reserves thereby significantly improving project economics.

Dr. Jim Buckie
President, & CEO, Talisman Energy Inc.

Dr. Buckie used graphs showing pool size distribution to explain why Talisman sees good reserve potential remaining in Western Canada. Historically, most basins follow a distinctive trend in which pool discoveries trend from the larger discoveries early in the exploration cycle to many smaller pool discoveries late in the basin history. The overall shape of the USA pool size distribution curve and the Western Canada pool size distribution curve are very similar. However, the Western Canada curve shows some areas of immaturity with respect to the number of pool discoveries to date. In analyzing the geologic ages, Talisman believes that the Mississippian and Devonian curves have significant gaps in the pool size distribution curves. It is these ages that Talisman is concentrating on exploring in Western Canada. Overall Talisman is targeting a finding and developing (F&D) cost of $5.00/bbl but is willing to accept costs up to $8.00/bbl.

On the topic of international exploration, Talisman sees excellent potential. In comparing the average size of new discoveries, Western Canada averages .25MM bbls, while international discoveries average 7MM bbls. For this reason, Talisman will also be targeting international jurisdictions. Currently active operations are Algeria and Cuba. (Since the May 10, 1994 presentation, Talisman made a successful acquisition of Bow Valley Energy Inc. and picked up two additional operating areas North Sea and Indonesia.)

Grant Emms
Vice President, Canadian Occidental Petroleum Ltd.

Canadian Occidental concentrates on two aspects of exploration - keeping F&D costs low and maximizing shareholder value over the long term. Canadian Occidental has had its best success internationally, increasing reserves 600 percent since 1990 at an F&D cost of $2.35/BBL. International projects will remain a substantial part of Canadian Occidental's overall program.

Canadian Occidental has ongoing programs in Yemen, Ecuador, the North Sea, Indonesia, and Romania. Other jurisdictions such as South America, North Africa, Eastern Europe and the Far East are being investigated.

PANEL 2: "ACHIEVING VALUE GROWTH THROUGH EXPLORATION OR ACQUISITION?"

Moderator: Peter Putnam, Vice President,
Petrel Robertson Ltd.

Tom Lindskog
Vice President Exploration, Pinnacle Resources

Over the past eight years, Pinnacle Resources has grown through exploration. The formula has been the acquisition of low cost shallow prospect potential lands in areas offering year round access. Short and medium term prospects are generated internally and refined using seismic data. Pinnacle concentrates efforts in areas of existing infrastructure where staff have a high level of expertise. The company tries to operate and maximize working interest to ensure maximum cost control. Pinnacle is now in a position to increase property acquisition activity but will concentrate on prospects with well defined upside potential. Pinnacle's F&D cost average for the past five years has been $4.75/BOE with 1993 costs of $5.46/BOE.

Don West
Chairman & C.E.O., Rigel Energy Corporation

The decision to grow through exploration or acquisition is not always clearly defined. The full exploration cycle including development of a discovery may take many years. The ability to make effective acquisitions is affected by commodity prices. The decision to go one direction or the other is usually determined by personal perceptions of risk. Rigel has taken the exploration approach to growth but tries to reduce risks through a number of exploration strategies. Rigel attempts to have a balance of oil and gas prospects while concentrating on high quality product. Eighty to eighty-five percent of available cash flow is spent on bread and butter plays. Fifteen to twenty percent of available cash flow is directed toward higher risk, but high reward prospects. Rigel attempts to employ the latest technical advances such as 3-D seismic, and horizontal drilling with a target of adding ten years to the life of conventional reserves. Through the use of horizontal drilling, Rigel was able to increase production in the Manor, Saskatchewan pool from essentially zero to 7000 BOPD.

Rigel currently explores only in Western Canada where it enjoys a strong balance sheet through controlled exploratory activity.

Jeffrey Smith
Senior Vice President Exploration & Land, Northstar Energy Corporation

Northstar does not prefer one activity over the other, but lets opportunity direct its exploration and acquisition activities. The company has expanded from 1987 production levels of 6 mmcf/d and 400 - 500 BOPD to 1994 production levels of 100 mmcf/d and 3000 BOPD. The key is area selection. The company tries to get in early before area activity heats up to keep the entry fee reasonable. The company attempts to gain initial entry to a new area with operatorship and a high working interest. Northstar looks for a facilities opportunities particularly in gas processing where there might be room to expand. Once established, the company maintains an ongoing commitment, trying to control operations in the area by increasing working interests. The original core area is expanded while maintaining or increasing production. The ultimate goal is to minimize operating costs throughout a substantial area.

In Hangingstone, Northstar was able to negotiate a land swap creating a win - win situation for both companies. In Gilby, Northstar successfully waterflooded a glauconite channel reservoir. The object is to add value - adopt a sound game plan and stick with it. Northstar believes that this approach has allowed it to achieve an acceptable F&D cost average of $.35/mcf over the past 5 years.

Duncan McCowan
Vice President Exploration, Tarragon Oil and Gas Limited

Tarragon has achieved production increases from the 1989 level of 800 BOPD to 1993 levels of 12,000 BOPD. The company focuses geographically, tries to increase working interest, and operate. Acquisitions are done on a selective basis.

In Jumpbush, the company purchased 3 glauconite oil wells producing 170 BOPD in 1990. With a 3-D program, 7 infills were drilled increasing production to 700 BOPD. In 1991,60 sections of land and 7 gas wells were purchased. By the end of 1992 Tarragon owned a 90% working interest in 90 sections on land and was producing 7 mmcf/d and 2700 BOPD. In S.E Saskatchewan the company initially made 3 separate purchases acquiring 1700 BOPD production. Now production is over 3400 BOPD and the company owns an 80% working interest in 290 sections of land. In Central Alberta, the purchase of Opinac and an aggressive exploration program added 10,000 BOPD and 110 mmcf/d at an F&D cost of $4.90/BOE.

Over the next 5 years Tarragon plans to spend $1 Billion in Western Canada with 70% of expenditures directed toward exploration and 30% directed toward acquisitions.

Walt Deboni
President & C.O.O., Morrison Petroleum Limited

Controlling company activities can be compared to steering a ship. One is always trying for better speed and efficiency. In Morrison, this calls for a successful coexistence of exploratory and reserve acquisition programs. The trick is to avoid the herd mentality that the oil and gas industry is sometimes prone to. Morrison believes that regardless of acquisition activity, an excellent exploration program is essential for long term success. The company must also control area infrastructure in order to maintain low operating costs. Morrison currently operates 12 gas plants producing 90 mmcf/d and is planning expansions in several of these facilities.

PANEL 3: "WESTERN CANADA, OIL VERSUS GAS OPPORTUNITIES INTO THE THIRD MILLENNIUM."

Moderator: Graham Campbell, Director,
National Energy Board

Tom Feuchtwanger
Vice President Exploration, CS Resources

CS Resources sees its niche in the exploitation of heavy oil extraction technologies. As the lighter oil fields deplete, many companies will be faced with attempts to maintain production levels using heavier crudes. With a strong emphasis on teamwork and concerted efforts to improve government relationships CS Resources believes it can be very successful.

In Bodo and Cactus Lake the company has drilled 30 - 40 horizontal wells attempting to move the wellbore closer to the oil. The company is perfecting a technique using multiple laterals to increase efficiency of the main wellbore. CS Resources has applied to take over the Underground Test Facility (UTF) near Fort McMurray which is using a new concept in heavy oil production known as SAGD (steam assisted gravity drainage). CS Resources works to integrate geology, geophysics, and engineering to solve its reservoir problems. CS Resources is also looking for ways to increase research into heavy oil production problems through involvement in the UTF and a recent alliance with IFP, a large French company heavily involved in research projects.

Roger Rector
Vice President International & Technology, Gulf Canada Resources

Gulf sees Western Canada as a world class geological basin with a good amount of potential remaining. Gulf evaluates potential projects on two sets of economic criteria. Oil prospects are evaluated based on the prediction of world oil prices, while gas projects are evaluated based on predictions of North American gas prices. As long as companies can keep their cost of supply (F&D costs plus production costs) reasonable, Western Canada will remain an attractive place to explore. Gulf believes that recent technology improvements in 3-D seismic and horizontal drilling will greatly assist the company in its efforts to reduce costs and increase productivity.

Glenn Tutty
Exploration Manager, Imperial Oil Resources Ltd.

Imperial's analysis of the Western Canada basin has concluded that remaining undiscovered gas reserves are four times as large as the undiscovered oil reserves using a 6: 1 conversion ratio. Stated in a different fashion, undiscovered oil reserves are only 13 percent of the ultimate oil reserves while undiscovered gas reserves represent 35 percent of the undiscovered gas potential. Based on this analysis, Imperial will be concentrating new exploration efforts on gas prospects in the belief that large pool discoveries are still possible. Early recognition of critical play elements are required so that maximum profit from a new discovery can be achieved. New gas volumes are needed now while market conditions are good.

Joel Johnson
Vice President Marketing, Northridge Gas Marketing Inc.

Northridge sees very strong growth potential for natural gas and predicts near term demand shortfalls. The major growth market is the USA with just under 5 percent per year in demand growth predicted. Canada stands to pick up new contracts for up to 50 percent of any increased demand. Northridge sees major growth in the US Northwest and US Northeast regions with only modest growth in California. The US Midwest growth will be pipeline restricted.

Rick Hyndman
Assistant Deputy Minister, Government of Alberta

The Alberta Government is attempting to take a long term and consistent approach to the oil and gas sector. Programs such as Royalty Simplification and the Government's withdrawal from direct crude marketing are two recent initiatives designed to eliminate unnecessary regulations and streamline government paperwork.

Some additional issues that will require resolution include environmental issues, global warming, surface access, and waste disposal. The present government wishes to work cooperatively with all stakeholders - industry, and public, in an effort to set appropriate goals, recognize the economic trade-offs and pursue the goals in an efficient and effective manner.