Weyburnā When oil prices drop over 70 per cent from what the industry has become used to over the last five years, there are a lot of considerations for oil companies as to what they should do now. This is especially important for junior oil producers, small operations were individual wells make a difference.
On Feb. 17 Pipeline News spoke to Michael Mainil of Weyburn-based Caprice Resources Ltd., a longtime family-owned and operated junior producer. The company has 50-60 wells.
āIt started out as some offset well drills. We acquired some land offsetting production and drilled it,ā he said. That was done by company president (and Michaelās father), Jerry Mainil, and some partners back in the early 1980s. The company was fairly inactive for a number of years until Jerry decided to drill some more and bought out his partners.
The company has four battery facilities. They have five office staff plus additional contract operators.
āOur main area is southeast Saskatchewan. Our main production is south of Weyburn. Weāve expanded to Macoun and north of Estevan in the View Hill area.
āWe would target three to five wells a year to drill, depending on opportunities,ā Mainil said of their activity levels before the crash in prices.
In November and December 2014, when oil prices took a nosedive, he said, āYou could tell the industry put the brakes on.
āWe didnāt really alter anything, really. We werenāt overly aggressive. At that time it was still US$60 oil, which was still decent return. We finished our drilling plans for the near term then reviewed 2015. Breakup hits and you donāt do anything during it. We were at a point where I think we planned to drill at least two wells. We had some expiries. We cut that down to one.
āWe were usually three to five, we cut it to two, and only drilled one.ā
It was drilled in November 2015. Everything since then has been on hold, as Mainil said, āUntil we know whatās going on.ā
What price level do they need to see to resume drilling?
āI wouldnāt put a dollar figure on it. You need to see where itās going, and where the bottom is. No one wants to drill now, and have $20 oil in three months. Once you start seeing it stabilize, and a slight increase ā¦ You want to see some stability in the price so you can do the math and calculate the return,ā he said.
(The day of this interview, the price of WTI oil had just climbed above the US$30 point, before dropping below it again, two days later.)
Hypothetical examples
As a thought exercise, he went over some scenarios that go into the thinking behind whether or not you should drill a new well.
When we discussed this it was an exercise in risk management. The point was would you except a higher risk if the well had the ability to produce at a higher rate(all or nothing scenario) or is it better to drill a safer well and knowing the odds you would likely produce the well is at a lower rate?
(These numbers are not based on actual Saskatchewan probabilities. They are simply for discussion purposes, to analyze the thought processes.)
In this exercise, a really good parcel, Parcel A, would have an expected 30-day initial production (IP30) of 250 barrels per day. āYouāve got a one in ten chance of hitting a well (like that), Would you drill it?ā he asks.
Parcel B, still a good parcel, with an expected IP30 of 120 bpd, is more of a 50-50 chance.
Parcel C, at with an expected IP30 of 60 bpd, is more of a 90 per cent probability.
Which one of these scenarios would you pick depends on your risk tolerance, according to Mainil.
Most of the production, and money, is made early with a new well.
āThey decline fairly rapidly. Thatās part of the economics. We donāt have any product in the Bakken, but say a production well in the Bakken will IP at 250 barrels per day, but in six months, it could be 40, or even less than that. So in your six month window, the price of oil canāt be $20.ā
The final result could be any combination of these scenarios. āThese are scenarios, as youāre working up plays, you would rank them.ā
Dusters
Then there is also the very real possibility of a āduster.ā
āAny of these could be a duster,ā he said.
A lot of companies put out statements of 100 per cent drilling success, or number close to that. But is that realistic?
āThe first question you ask: are they talking to investors, or the industry? If youāre talking to investors, you hear a lot of āWe didnāt drill one duster in the Bakken field.ā A drill-and-abandon well, where you drill it and abandon it right away, thatās a duster. But if you drill it, and you produce it, thatās a success, right? Well, define a success. Itās being produced after you drilled, so itās not a drill-and-abandon, itās a producing well. However, if that well ever pays out or not, thatās the question.
āSo when you say theyāre all successful, theyāre all drilled and successfully put on production, but the question is, at what payout? And itās the price of oil, too. If itās a marginal well and oil is $100, you can still make money at it. If the price of oil is $30, now your payout is that much more, if at all,ā he said.
Will it be a good one?
Does the oil producer have a good idea of a new well will be a good one, before committing?
Mainil responded it comes down to odds. āYou can minimize your risk by gathering as much information as you can. I would say thereās never a guarantee. Never. Back in the day, I can remember an infill well, drilled in the Weyburn Unit; theyāve abandoned it after logging. Surrounded by other producing wells, it just so happened to be that one spot. So thereās always that risk. The more work you put into it, the more geology, your seismic, experience of the geologist; you can minimize your risk, but thereās never a guarantee.
āIf youāre in a producing area, you can have problems with your well and lose your wellbore. You could abandon and re-drill, but you lost the costs of that wellbore.
Itās possible to lose wells mechanically. Liners, for instance, add more complication to a well than open hole.
āIāll estimate a new drill, off of offsetting production, of what my expectations are. Iāll do best case and worst case, and do the risk analysis. Each situation is different. You could have a 60 barrel per day well at one-to-ten odds then ask yourself, āIs it worth the risk?āā
Different formations give different volumes, and certain ones are less risky.
āIf it was easy, everybody would be doing it,ā Mainil said.
āThe highest production is at the beginning of the well. Depending on how good the well is, long-term, will determine the length of the payout, and the price of oil.ā
Do you drill an area with high expectations when oil prices are low to keep revenue coming in, or do you sit on that with the expectation youāll go after the really good stuff when oil is higher?
Mainil replied, āI wish I could give you a straight answer, and I donāt mean to be evasive. Everybodyās different. It all depends. Did you just acquire the land today, and have five years to develop it? Or is it expiring at the end of March? If Iāve got a couple years, then, yes, I will probably wait. If itās expiring now, then Iāll likely drill to hold the minerals.ā
Some companies are getting work done now, while the oilfield services prices are low. Others arenāt doing any development work, accepting the lower payout and rate of return. As an independent, privately owned company, he said, āAs long as banks arenāt knocking on our door, we can go through this time.
There are other things you can spend money on. Everybody talks about drilling. Well, thereās optimization. Thereās abandonment as well that you have to spend money on as part of your obligations.ā
With service work now typically less expensive, it means obligatory work can be done for less money.Ā
āThereās a level where optimization works. Do you do it now, or when the price is looking better?ā he noted.
āWe might be at a level now were even on optimization, it pays to wait.ā
He pointed out a wariness of double, triple or even quadruple dips in the price of oil.
āI would say you, donāt want to risk revenue at a time like this.ā
āItās easier to accept higher risk when your rewards are higher.
āWe manage ourselves to get through slow times like this. My fatherās been through many of these,ā Mainil said.
āIām sure there are people in a survival mode, if theyāre leveraged. If youāre not leveraged, you can just maintain production and, by all accounts, should increase your capital, because if you donāt, youāre in a worse situation then you need to be in,ā he said.
Thereās a fundamental principle ā production always declines.
āA company will eventually deteriorate to nothing if it doesnāt drill or acquire land. It will eventually deplete itself. It will transfer resources into cash, whether it keeps the cash or distributes it,ā Mainil said. Technology changes such as waterflood or carbon dioxide floods can reduce those declines.
What do you shut in?
There comes a point when producers may choose to shut in wells. That can be to reduce costs, or to defer production for times when the price is expected to be higher.
Early candidates for shutting in include wells that have the highest costs, such as those that have their production trucked instead of being tied in by flowlines.
There are many variables to consider. Wells that are marginal at low prices will still have fixed costs, even if shut in.
āYouāve got to be comfortable with risk. If youāre putting out a million dollars to drill a well, you could have an asset that pays off or a liability that costs you $100,000 to abandon,ā he said.Ā
