Packers Plus leads drilling revolution

July 14, 2009

Don’t blame Dan Themig for falling natural gas prices.

The founder and CEO of Calgary-based Packers Plus Energy Services never imagined that his
new way of drilling oil and gas wells would revolutionize an industry
struggling to find and replace production of reserves.

Three years ago, North Americans were struggling with the very real prospect of freezing in
the dark. Even last year as natural gas climbed to all-time highs, industry
observers were suggesting that double-digit prices were here to stay as
production failed to keep pace with ever-rising demand.

But that was then.

In the past year, Themig’s multistage fracturing technology has opened up major new supply
basins on both sides of the border, potentially unlocking hundreds of trillions
of cubic feet of new gas reserves in places like Horn River, Louisiana,
Pennsylvania and even Quebec.

Where analysts once warned of looming gas shortages and the need for massive imports from
offshore, now they’re complaining of a popped gas bubble that has driven places
to decade lows, down more than 75 per cent from last summer. Some say $10 is a
distant memory, never to return.

“I won’t take the blame for it,” Themig says from his Calgary office. “But basically, the
technology has made access to natural gas reserves economic again.

“I’m surprised it didn’t happen earlier, I would have thought gas prices would have declined
three years ago.”

“If you make too many great wells, it’s supply and demand. Prices will go down,” says
Themig.”

Fracturing tight rock to release oil and gas is nothing new—the basic concept has been
used since the 1950s. Hydraulic fracturing –using water to force open fissures
in producing reservoirs –allowed commercial development of some of Alberta’s
earliest and biggest oil discoveries.

Applying the basic theory to horizontal wells by isolating sections or “stages” to break
rock along the entire length of the well bore has come along only since 2003.
The key to making it work is a ceramic sphere, or packer, about the size of a billiard
ball, that is used to divide the length of the well into more manageable
segments that be individually treated.

Three years ago, Packers could insert half-dozen or so “stages” into a single well. As
horizontal wells got longer, that number has grown to 22, and Themig says new
advancements will allow virtually “unlimited” stages in a single well. That, in
turn, has resulted in an order-of-magnitude higher production for a basic well
that costs only about twice as much to drill.

The average conventional gas well in Western Canada produces about 250,000 cubic feet of
gas a day. EnCana Corp. CEO Randy Eresman said in releasing the company’s
second-quarter results this week that its latest Horn River wells that use the
multistage technology are coming on at initial rates of up to 11 million cubic
feet per day.

“If you can get more bang per well, it becomes more efficient to exploit and root out the
basin,” says Bill Gwozd, a gas supply analyst for Ziff Energy in Calgary. “We’re
bullish, but some producers are even more bullish than that.”

“Basically, it’s a no-brainer,” Themig adds. “In the past, if you worked for an oil company and
you wanted to do a horizontal well, you’d have to justify why you’d want to spend
that money to do it. Now, if you want to drill a well and you want to drill a
vertical well to do it, you have to justify why you wouldn’t want to use a
horizontal.”

Drilling results from the new shale basins are just started to trickle in, but reserve
replacement south of the border seems to validate the notion that fewer wells
are producing more gas, even in the midst of a downturn.

American gas reserves grew almost 40 per cent last year and production in the Lower 48
states posted the biggest increase since the Eisenhower years, mostly due to
new fracture technology. In June, the U. S. Potential Gas Committee issued a
report that suggested more than a third of new gas reserves—some 600 trillion
cubic feet—are found in shales that need extensive stimulation to be
productive. According to Ziff Energy, Canada replaced about 91 per cent of
production, even as producers slashed drilling to decade lows.

And that could be the tip of the iceberg. Eresman said North America now has enough gas to
last a century at current consumption rates.

“The emergence of shale gas has changed the landscape for North American natural gas,” he told
a conference call to discuss the company’s second quarter results.

Duane Mather, president of Nabors Canada, said the company’s experience south of the border
prompted his company to apply the technology to wells in Horn River.

“We’re big fans of Packers Plus. The track record is there; it works. It does what it’s
supposed to do. It’s fair to say from our experience this is the more economic
way to drill those wells.”

Ziff’s Gwozd says he expects shales will account for about 20 per cent of Canadian gas
supply by 2020, about a tenfold increase.

In his most recent numbers –which are about two years old—suggest shale gas could be
economic at prices of $6 to $8, compared with a current price of about $4. But
that hasn’t stopped companies such as Encana, Nexen, Devon, Apache, ConocoPhillips
and EOG from moving ahead with major drilling efforts near Fort Nelson, B. C.

Last month, Exxon and its Canadian subsidiary, Imperial Oil, teamed up to spend almost $175
million to acquire drilling rights in the Horn River area. Even TAQA, the Abu
Dhabi state oil company, got into the game by laying out $65 million for a
single parcel in Horn River.

Themig shrugs when asked about the new converts to unconventional gas.

“Early on, it was a real struggle to get companies to believe you could actually do this. The
industry didn’t believe it was possible.”

“Three years ago, one of the vice-presidents of one of the largest service companies in the
world said that doesn’t really work. It’s all smoke and mirrors. It’s too expensive,
it’s not reliable. I don’t think anybody is saying that anymore.”

One of the earliest converts to Packers was Petrobank Energy, which used the technology to
create a dominant position in the Bakken oil play. Like shale gas in northeast
B. C., rocks in southeast Saskatchewan require the same drilling techniques to
make the oil flow, according to Gregg Smith, the company’s chief operating
officer. Three years ago, the company was producing 100 barrels a day from the
unconventional oil play. Today that number is around 17,000.

“The Bakken play six years ago was not economic. With the advent of Packers Plus, it’s
tremendously economic.”

Success has had a dramatic impact on Packers as a company. Formed in 2000, it has doubled
in size every year for the past five years and employs about 350 people in
offices around the globe. Themig has no plans to take the company public.

“We don’t spend our time protecting the share value of our stock. We’re able to invest in
R&D (research and development) without having to pay dividends or anything
like that…it’s been fun.”

While other companies slash head counts and reduce costs, Themig sees dramatic structural
changes for the industry.

“I didn’t think this would become universally accepted,” he says. “Once we were doing this for
three years or so, I became a real believer….It’s the only technology that’s
significantly going to add reserves to the world.”

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