Waterfloods: The next big profit phase of the shale oil revolution

Keith Schaefer
0 Comments|August 14, 2012

Waterflooding has been around for 70 years or more, but the big question over the last five years has been—can you do it effectively with tight oil?

Dear OGIB Reader,

The cheapest and most profitable oil North America has ever seen is now “flooding” into the market, as producers once again use old technology to create a wave of new profits.

Producers are using “waterfloodsA method in which water is injected into the reservoir formation to displace residual oil.”—pushing water into underground formations to flush a large amount of oil out to nearby producing wells—to increase production and profits. It’s the next big money-making phase of the Shale Revolution.

Waterflooding has been around for 70 years or more, but the Big Question over the last five years has been—can you do it effectively with tight oil?

The answer is a Big Yes, and waterfloodFlood the well in order to recover or extract more oil potential has become so important that institutional investors now see them as major share price catalysts for junior producers—and track them closely.

WaterfloodsA method in which water is injected into the reservoir formation to displace residual oil. start 1-2 years after drilling the well, in a time window producers call “secondary recoveryWhen producers try to stimulate the oil formation with water or carbon dioxide or other chemicals.” (Drilling is primary recovery.) WaterfloodsA method in which water is injected into the reservoir formation to displace residual oil. are cheap to try and cheap to run (with most operations costing just $5-10 per barrel!), and now the industry is seeing that they are sometimes doubling reserves from a well.

“Secondary recoveryWhen producers try to stimulate the oil formation with water or carbon dioxide or other chemicals is where you really make all your money in this industry,” says Dan Toews, VP Finance and CFO of Pinecrest Energy Inc. (TSX: V.PRY, Stock Forum).

Pinecrest is very vocal about their waterfloodFlood the well in order to recover or extract more oil potential. They say they can double the amount of oil they recover (called the Recovery FactorPercentage of oil recoverable vs. what is the Oil Originally In Place, or RF) from a well—at less than $15/barrel—half the price of primary recovery costs, which are over $30/barrel.

“Everyone is trying to find a new resource play,” says Toews. “First you find a resource, and then you drill it like crazy. But the second stage is to go in for your secondary recoveryWhen producers try to stimulate the oil formation with water or carbon dioxide or other chemicals, through waterflooding of some kind if possible.”

To date, Pinecrest isn’t yet flowing even one barrel of waterflooded oil—so their powerpoint slide is just projections. Toews and his team expect to be waterflooding all of their operations by the end of this quarter. But analysts are already seeing the waterfloodsA method in which water is injected into the reservoir formation to displace residual oil. as a share price catalyst.

“Just about every investor and institution we talk to wants to know the status with our waterfloods,” says Toews. “The buyside (fund managers= buyside, brokerage firms=sell side—ed.) is very savvy on waterfloods. Once we apply the method, this is what has the potential to shoot up our share prices.”

Realistically, the effects can be seen within 2-3 months, but it’s best to give them a year—or more—of operations before judging their impact. Waterfloods can last up to 20 years or more.

Another Canadian oil junior, Raging River Exploration Inc. (TSX: T.RRX, Stock Forum), also explains the waterfloodFlood the well in order to recover or extract more oil potential in their powerpoint. They expect to be swimming in 1 million EXTRA recoverable barrels of oilA term used to describe the amount of resources identified in a reserve that is technologically or economically feasible to extract. A new reserve can be discovered, but if the resource cannot be extracted by any known technological methods, then it would not be considered part of recoverable reserves. Recoverable reserves is also often called proved reserves. per square mile, courtesy of waterfloods—at an even cheaper cost of $5-10 barrel, vs $30 barrel for the first 600,000 barrels.

Raging River is developing the Viking formation in SW Saskatchewan—a large, tight oil playTight oil is a Petroleum play that consists of light crude oil contained in petroleum-bearing formations of relatively low porosity and permeability (shales). It uses the same horizontal well and hydraulic fracturing technology used in recent boom in production of shale gas. It should not be confused with oil shale and shale oil as it differs by the API gravity and viscosity of the fluids, as well as the method of extraction. Tight oil formations include the Bakken Shale. that since the 1950s has had an improved outlook from 2 billion barrels of oil to an estimated 6 billion barrels of oil in place, all thanks to horizontal drilling.

Raging River expects waterflooding to increase its RF from 8% from primary recovery methods (drilling vertical and horizontal wells) using 16 wells/section, to 16-20%. The simple math says that will increase the number of barrels recovered from 480 million at 8% to 1.25 billion at 20% RF.

If Raging River—or any producer—can show a steady RF for over a year, I would suggest to investors those barrels will be worth $10-$15 each—creating huge value to shareholders on a buyout.

Some Viking waterfloods have even seen results as high as 30% RF.

“A small change of recovery over a large oil field is significant and adds a tremendous amount of value,” says Scott Saxberg, President and CEO of Crescent Point Energy Corp. (TSX: T.CPG, Stock Forum), arguably seen as the industry leader in the waterflooding revival.

“A lot of these unconventional plays (tight oil) are in high decline. By implementing waterfloods, we can lower the declines in the field, and increase reserves. There’s huge value to that.”

Crescent Point started waterflooding its properties five years ago when multi-stage fracking (MSF) was new on the scene. Now they have five years of knowledge that the method works, and that they can use it across all of their fields.

“We recognized right away to implement a strategy to increase the recovery factorPercentage of oil recoverable vs. what is the Oil Originally In Place on a multi billion barrel pool,” says Saxberg. “If you change even 1%, that ends up being huge.”

“Waterflooding is the next step past in-fill drilling (ie. drilling more holes in less space to increase ultimate recovery). It takes a lot of time to accrue knowledge and data on how to properly implement it. The sooner you start, the better data you have.”

According to Saxberg, waterflooding is more than just a cheap way to float balance sheets.

Over the course of Crescent Point’s five-year waterflooding program, they’ve developed hundreds of different combinations of waterflooding techniques coupled with fracking techniques, well spacing and plenty of other factors.

“Water flooding is basic, in that you pump water into the ground,” says Saxberg. “So to enhance that, you have to look at what type of patterns are in your reservoir. Now these are unconventional tight reservoirs, so the question was, can they actually be water flooded?”

Again, the Big Answer is Yes, and management teams are now using the promise of waterfloods as a cheap way to float their balance sheets earlier in a resource play. But Saxberg says waterfloods are truly more long-term value.

“They are a long term day-after-day technical grind and process. So it’s not the same as drilling a well and seeing 100bbls/day. It’s a lot of ups and downs and a lot of long term view.”

There’s only one negative here that I see—how will all that cheap oil affect North American pricing, when the continent is already swimming in the stuff?

In the short term, the pro-forma economics of waterfloods are making a splash with both management teams and the market.

But medium term and beyond, it will create a quandary for juniors—the easy money comes after huge capital spending.


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