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Over the past few years, US unconventional plays have garnered a great deal of attention, both within the pages of The Energy Letter and in the financial media at large.

At this point, you know the story: Improvements in drilling and completion techniques and technologies enabled US producers to tap natural gas previously trapped in low-porosity and low-permeability shale formations.



Over the past few years, US unconventional plays have garnered a great deal of attention, both within the pages of The Energy Letter and in the financial media at large.

At this point, you know the story: Improvements in drilling and completion techniques and technologies enabled US producers to tap natural gas previously trapped in low-porosity and low-permeability shale formations.

This sudden glut of output transformed the US from a country that was expected to import liquefied natural gas into the world’s top gas producer, a rags-to-riches story more suitable to the pages of Horatio Alger. Sort of.

As operators rush to secure leaseholds through production, a surfeit of supply has depressed natural gas prices to record lows, forcing many companies to pursue joint ventures to ensure ongoing development. Meanwhile, many investors underestimated the shale gas phenomenon and expected natural gas prices to revert to historical norms.

Although natural gas prices should improve modestly once leasehold drilling slows, elevated oil prices and recovering demand--not to mention the fallout from the Macondo disaster--have increased the profile of and investment in US shale oil plays.

Much of this interest has focused on the emerging Eagle Ford Shale in Texas and the Bakken Shale, a low-cost play that, as my colleague Elliott H. Gue noted in Oil Shale versus Shale Oil , offers producers internal returns of more than 100 percent. Continental Resources (NYSE: CLR) the leading player in the Bakken, pegs the region’s recoverable reserves at 24 billion barrels.

The share prices of many of the Bakken’s leading producers--and more speculative names-- suggest that investors are familiar with the region and its sanguine outlook. But some US investors might be surprised to learn that the Bakken fairway also extends north into Saskatchewan and Alberta, where Canadian exploration and production (E&P) firms enjoy attractive per-well returns.

Whereas the US portion of the Bakken has a longer history of horizontal wells and hydraulic fracturing, Canadian operators began using these advanced techniques in 2004. After a period of consolidation in 2005-06, two clear leaders have emerged: Crescent Point Energy Corp (TSX: CPG, OTC: CSCTF) and PetroBakken Energy (TSX: PBN), both of which have amassed substantial land holdings and continue to hone their production techniques.

According to Crescent Point Energy, the typical Bakken well flows roughly 210 barrels of oil per day in the first month, amounting to a better than 300 percent return when the price of West Texas Intermediate is at $300.

Boasting extensive leaseholds and drilling inventories, both names stand to benefit over the long term as increasing demand from emerging markets send soil prices higher.

Though the Bakken is the most established and lowest-cost play in Canada, it’s not the only shale oil field in development. Over the past year and a half, the Cardium play in west-central Albert, Canada has attracted a great deal of attention.

The Cardium was first discovered in the 1950s, when producers typically drilled vertical wells into permeable and porous conglomerate rock. These days, producers are targeting tight sands that are estimated to contain 10 million barrels of light oil. Much of the focus as centered on the Pembina and Garrington areas, though some producers are exploring beyond this region.

Drilling activity has picked up substantially since the back half of 2009, with Daylight Energy  and NAL Oil and Gas Trust  leading the way in terms of well completions.

Results thus far indicate that the well economics, though attractive, fall short of those in the Bakken.

That being said, the play is still in its infancy; production costs should decline and ultimate recovery rates should increase as operators become more accustomed to the geology and identify the best drilling techniques. For example, many producers in the region continue to use oil as a fracking fluid, an approach that works but is far more expensive than a water-based solution. Early well results from companies that have made the switch have been on par with previous production rates.

Prospective investors should note that, like most shale or tight oil plays, the field is far from uniform, containing both highly productive patches and duds. Certain areas also contain higher percentages of natural gas, which, given the current pricing environment, is hardly a bonus.

As the play is de-risked, the biggest winners will emerge and consolidation will accelerate. Already we’ve seen some thinning of the ranks, with PetroBakken Energy acquiring three smaller producers in the field in 2010.

Penn West Energy Trust , a favorite of Canadian Edge   editor Roger S. Conrad, is the top landholder in the region, largely because of its acquisition of BP Amoco’s Pembina assets over a decade ago.

By virtue of its extensive acreage, Penn West Energy has the luxury of focusing only on the most prospective areas while other operators effectively de-risk the play. Management has noted that competitors have drilled roughly 100 wells within a mile or two of its properties. In the US, Anadarko Petroleum Corp is following a similar approach to its legacy assets in Colorado’s emerging Niobrara Shale.

Source: Investing Daily

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