EPAC 2017 Top Intermediate/Senior Producer award sponsored by DeGolyer and MacNaughton Canada.
The falling price of crude oil has attracted much of the media’s attention over the last three years, since OPEC decided it would protect market share at the expense of $100-plus oil, but gas producers, especially in western Canada, have been hit just as hard, if not harder.
Darren Gee, president and chief executive officer of Peyto Exploration & Development, winner of the 2017 EPAC Award in the Intermediate/Senior Producer category, says 2016 was particularly tough on gas-weighted producers, with price volatility at AECO ranging as high as 500 per cent and prices ranging from an average of just $1.55/gigajoule (gj) in the first half of last year to $3.23/gj in December. AECO gas averaged just $2.06/gj last year, down from $2.57/gj in 2015, the lowest annual average since 1998, when it averaged $1.96/gj, according to CanOils data.
“Oil prices started to look better in the fall, as did gas. Unfortunately, not as much of that enthusiasm carried through to the first quarter here, but it did look pretty good for a little while there,” Gee says.
With the price recovery in the second half of the year, Peyto started bringing on much of the gas it had developed earlier in the year, but wasn’t interested in pushing into a $1 market. The result? A substantial increase in third-quarter production year-over-year, to 96,365 boe/d from 81,208 boe/d in the comparable 2015 period. As of early January, production was averaging 105,000 boe/d, with some 3,000 boe/d still behind the pipe.
“It was not a normal year for us,” Gee says. “It took a lot of juggling on our part to mitigate some of those risks of commodity price and takeaway capacity and some of the other things that were impacting our business that aren’t typically inside our control.”
With outside factors pressuring the company, Peyto did what it has always done—it went contrarian. As other operators were calling a halt to spending and rig contractors were racking rigs by the dozen, Peyto kept working its key Deep Basin acreage, spending $470 million (down from nearly $600 million in 2015) and drilling 129 horizontal wells.
And it maintained—and perhaps even enhanced—its entrenched position as arguably Canada’s lowest-cost gas producer, keeping cash costs well under $1/mcfe and earning a tidy profit of $1.38/mcfe on a sales price of $3.83/mcfe. That put it head and shoulders above other key shale gas producers like Seven Generations Energy (which lost $0.46/mcf of Montney gas it sold last year) or Tourmaline Oil (which generated a profit of just $0.23/mcfe on its mix of Deep Basin and Montney production).
One key to Peyto’s continued cost-reduction efforts, Gee says, is its steady ability to cut the time it takes to drill a long-reach horizontal well. Six years ago, when it started its Deep Basin horizontal program in earnest, it took about 28 days and nearly $3 million to drill and case a typical 4,000-metre Wilrich Spirit River well. By the fourth quarter of last year, that average well was drilled in 16 days and cost just $1.75 million.
“That was driven by a number of variables,” Gee says. “We’ve gained experience; we’ve optimized bits, muds and directional drilling assemblies. We had been drilling vertical in the same area for years before that, so we know penetration rates. We have good seismic; we have lots of logs.”
Factor in average monthly completion costs that were even lower year-over-year than drilling costs, reaching just $600,000 per month in the trough of activity last summer compared to about $1.8 million in late 2014, and it’s pretty easy to see why Gee wasn’t terribly concerned that Peyto’s return on equity hovered around 10 per cent in 2015 and 2016.
“We are super nimble, and if we see service cost increases without commodity price increases, we would get pretty concerned at the potential erosion of the returns we would be getting,” he says. “If that happens, we would look to change the pace of our activity and the pace of our spending.”
Conversely, if rigs start to shut down—perhaps because commodity prices retreat—Peyto will, as it always has, ramp activity higher, perhaps to the high end of its $550 million to $600 million capital plan for this year.
“We’re still in that counter-cyclical mode, and those cycles are coming at us fast and furious, so we have to be tuned all the time to what the industry is doing,” Gee notes. “At the end of the day, we don’t worry too much about trying to forecast commodity prices, we just know that industry activity is going to follow commodity prices, and we want to be going the other way.”
The EPAC 2017 Award Winners
Top Intermediate/Senior Producer: Peyto Exploration & Development
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