Keeping the Eyes on the Prize. I apologize in advance if there is too much detail in this post, but hopefully it will be useful for those willing to slog through it.
The potential prize for MGM is huge and we will not have to wait long for test results. It is possible that Husky may release before MGM as they will be finished sooner. I believe that the test will be material for Husky, although they can "tight hole" the information for up to two years. Hard to see why they would want to do this as there are no land sales on the horizon.
To follow up on Sigma Kappa's comment about the Canol being huge, here are Husky's comments at the NY January presentation, I am paraphrasing:
"There is oil there, and lots of it. The question is whether we can economically recover it with our technology. We think we can. In order for this play to be economic it can't just produce 5,000 bopd, we need a magnitude bigger than this."
The latter comment is why all the companies have entered into discussions with Enbridge to expand the pipeline beyone 50,000 bopd.
Husky is the one with the most information on the play. If the cores from their two wells were marginal and they had large doubts, I don't think they would commit $60 million to building an all weather road, airstrip and 200 person camp. The only way that this makes sense is if they are going to be drilling lots of wells and test all year round. I would want extended testing to develop type curves and hence determine recovery factors. This means an increased amount of information flow which means our usual MGM news drought after the winter drilling season will be at an end - hopefully. Information drives stock prices. I think this is great news.
As I have said before, I am sure the oil is there because MGM is drilling a well between two existing wells and those logs look hot. The issue is can MGM get a good test. This is the issue I would like to address now. Glacierman was kind enough to send me stuff on an emerging shale oil play in Alaska and asked me about pressure and how it affects well flow rates which I thought eveyone might be interested in as that is what we are waiting for.
- The first thing to know is that this is a vertical, not a horizontal well. So the test results are going to be much lower than a horizontal. Tudor Pickering has done a study and shown that horizontals flow 3 to 7 times as much as vertical. So lets use 5 as a rule of thumb. That means 100 bopd from a vertical translates into 500 from a horizontal.
- There are some things going for us in the MGM well which should result in good flows. However, one never knows about geology. My ability to predict its behaviour is less than my abililty to make predictions about women.
Flow rate = permeability x thickness x pressure drop
viscosity
So if you double, perm, thickness or pressure you double the flow.
We have a very thick section in the Canol. Perhaps double the Eagle Ford and four times the Bakken. Good news.
I think we will also have good matrix perm (for a shale) as we have higher porosity and higher TOC than others. Both of these parameters have been positively correlated with perm. Perhaps even more important is the perm created by the hydraulic fracturing. The Canol is much more brittle than the Eagle Ford and hence will shatter like glass into lots of little pieces. This is great as it dramatically increases perm. As well there are other technical positives about the Canol which should make it a better great frac candidate. All the above make the Canol potentially better than the Eagle Ford or Bakken.
The negative is that the Canol is shallow and hence has lower pressure than its two southern competitors. There is a small offset to this as drilling and fracturing costs are lower, but I would prefer to have higher pressure.
This brings us to a big one: viscosity. Viscosity can be correlated to the quality of the oil. Bitumen is 9 API, a moderate quality oil is 25 API and Norman Wells oil is 43 API. The key point is that the Canol is in the sweet spot for viscosity. For example, 25 API oil is 30 times as viscous as 43 API oil. This means that 25 API oil would flow at 1/30 the rate if all other things were equal. The Canol is expected to have 43 API with a GOR of 1,000 and NGLs of 140 bbls/ MMcf based upon the Esso study done on the Norman Wells field.
The sweet spot for shale is around 43 to 50 API due to reduced viscosity and just the right amount of gas dissolved in the oil. The latter is important because as the pressure drops the gas expands and pushes the oil out. This is known as solution gas drive. If you have lower API the oil is more viscous and there is less gas in the oil. If you have higher API, there is too much gas and you get reduced perms due to two phased flow. Again good news we are in the Goldilocks spot.
So we have lots of positives and one negative. While all this theory is great because it give us bulls a rational basis for our long position, ultimately the test will be the final judge and the theory may prove to be hooey.