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Oil and Gas Industry Primer

Energy is one of the most important industries in Canada, as Canada has one of the largest energy resources in the world after Saudi Arabia and Venezuela (Venezuelan reserves are widely accepted by energy professionals to be overstated).

Energy companies are some of Canada’s largest by market cap and revenue, with prominent names including Suncor, Imperial Oil, Cenovus, Encana, Crescent Point, MEG Energy and Canadian Natural Resources, and have been responsible for some of the largest mergers and corporate finance activity in Canada.

The “oil patch” and industries whose revenues are indirectly driven by oil sales constitute a significant part of the Western Canadian economy and Canadian exports in general, so much to the point that there is a strong correlation between the price of oil and the USDCAD exchange rate.

We segregate our energy coverage into the following:

  1. Exploration & Production (Upstream)
  2. Energy Infrastructure (Midstream)
  3. Refining & Marketing (Downstream)
  4. Oilfield Services

Energy and Oil & Gas Investment Banking

Understanding Oil and Gas

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What is Oil?

Oil is the most important commodity in the world, offering the most liquid and “customizable” (in terms of blends and location benchmarks) market for trade and with a dollar volume moved per day far ahead of iron ore, gold or any other standardized physical good. Over 90 million barrels of oil per day are produced and consumed, with Canada contributing over 4 million barrels of oil per day to that total.

A barrel of oil manifests itself in everyday life in its final consumable form, including ink, soap, clothes, makeup and tables, as well as being the primary feedstock for fuel, whether for a car or for a plane. Petroleum and all its derivatives make up an enormous proportion of the global economy, but in Canada, the focus is on the extraction and transport of the primary good to the refining point. These companies make up the energy industry of Canada, with domestic giants such as Suncor, Cenovus, Canadian Natural, Imperial Oil and Encana leading the charge.

From the resource extraction and transport alone, the revenue is substantial and is a driver for supporting businesses outside of just oil extraction. In addition to oilfield services, ample steel, construction, power and transportation business is amplified by a booming oil patch. Government at the federal, provincial and municipal level all receive direct and indirect additions to their treasuries through taxes from personal and corporate income, royalties and special extraction related taxes.

Canadian oil has traditionally been high cost and unable to clear return hurdles for main oil and gas companies. However, the dominance of oil as a transport fuel in a world with rapidly growing consumption while oil is a finite resource has resulted in oil which is extracted at the lowest costs being depleted, resulting in the supply curve shifting. Technological advances have also made the unit cost of producing a barrel of oil fall dramatically in Canada. The equilibrium price of oil has risen over time, and will continue to do so until other fuels become economically viable. The current equilibrium price of oil supports Canadian oil production.

Classifications and Characteristics of Oil

Oil, in its various forms, is a mix of hydrogen and carbon atoms, known as hydrocarbons. If there are any O’s or N’s in the chain, it is not classified as oil. Petrochemical companies may alter hydrocarbon chains to get to end products (plastics and myriad of other consumables), so oil is a very important compound. As a rule, the more carbon atoms in the chain, the higher the energy content of the hydrocarbon (but to some extent, the more difficult it is to burn).

How does oil get into the ground? Organic matter dies, decomposes and after being “purified” by pressure and heat over millions of years turns into oil. The pressure and the heat comes from layers of rock and soil being layered over the organic matter over time with the increasingly liquid oil seeping into a source rock.

Given that the maturity and other characteristics of any swath of oil will vary greatly from another batch (especially in differing geographies), much attention is paid to the quality of oil. The main qualities to look for are gravity (weight or density), as measured by API (American Petroleum Institute) Gravity, and sweetness.

Light & Medium Crude, Heavy Oil and Bitumen

API gravity is an inverse measure of petroleum’s density relative to that of water, with water at 10 on the spectrum. Anything above 10 will float on water while everything below 10 will sink. Accordingly, the higher the gravity, the lighter and less viscous the oil.

Light oil has an API gravity between 31.1 and 45.4 degrees, with anything higher than 45 degrees usually trading closely to condensate in the regional market it is sold in.

Medium oil’s API gravity ranges between 22 to 30 and heavy oil ranges from 10 to 21. Bitumen is denser than heavy oil and water (think peanut butter) and sinks, which explains much of the environmental opposition towards the shipping of raw bitumen over tanker (hypothetically, a spill could have serious ramifications).

Both heavy oil and bitumen will often need to be blended by diluent (usually condensate) to form “dilbit” before it can be transported via pipeline. For upstream companies, sometimes the cost of the condensate is included in the revenue line as well as a transportation and blending expense, as when the condensate is separated when the oil gets to the destination it can be resold.

Bitumen is a very sticky and viscous semi-solid heavy oil mixture. In its unrefined state, it cannot be transported via pipeline and trades at a deep discount to WTI. Blended bitumen can be upgraded to synthetic crude oil (SCO) via an upgrader.

SCO is created via upgraders that inject hydrogen and remove carbon from complex hydrocarbon chains, creating lighter oil. SCO’s qualities and ease of refinement entail that it trades at a premium to WTI absent transportation costs and capacity constraints.

Condensate is a light hydrocarbon mix (API of over 45). Energy companies will sometimes use the terms plant condensate and wellhead or lease condensate. Plant condensate is condensate that is extracted from a wet gas stream at a gas processing plant. Wellhead condensate is stripped at the wellhead (at the point of production) using a condensate splitter – today, this distinction is less relevant as before when there used to be ramifications for export due to the US oil embargo (the US was not allowed to export its crude).

Sweet Crude versus Sour Crude

Oil is then segregated between sweet and sour crude. How “sour” crude is determined by the amount of sulfur present in the mix. Sulfur requires additional refining as it should not be in end products. However, the extraction of sulfur can be used in other compounds for industrial use.

Although light oil tends to trade at a premium to heavy oil, this does not necessarily entail that light oil is “better”. However, light oil yields more natural gasoline and kerosene/paraffin (used widely for heating and jet fuel) and is easier to transport (moves faster through pipelines and can be moved without blending). Light oil is also easier to extract, while heavier oil requires more stimulation and engineering savvy. Improving technology has begun to narrow this gap.

In Canada, bitumen comprises most of the country’s oil reserves and resources. However light, medium and heavy oil constitute a significant amount of production. Conventional oil production, offshore production (Newfoundland) and shale and tight oil production (primarily Alberta, Saskatchewan and BC) generally yield light oil. Heavy oil extraction takes place primarily in Alberta, with new technologies helping to enhance oil recovery and stimulate reservoirs (example play: Pelican Lake operated by Canadian Natural Resources).

What is Natural Gas?

Natural gas is methane (CH4). In its natural state, the methane is usually mixed with water and impurities (CO2, nitrogen, sulfur), which may include natural gas liquids (NGLs) including ethane, propane, butane and pentane. The methane must be stripped from all other components before it can be shipped via national pipelines.

Natural gas is widely used as a fuel for residential, commercial and industrial heating as well as power generation (gas fired power plants). Methane is also the primary feedstock for methanol and various other petrochemicals with a diverse range of end uses.

The abundance of natural gas in Canada after new low cost discoveries and new supply sources such as the Marcellus saturating traditional demand markets in the US Midwest has resulted in a ceiling on prices. However, certain gas plays can be exploited below breakeven prices for gas alone, due to the attractive economics on the by-product NGLs. Natural gas with sufficient NGL content are often described as “liquids rich” and is frequently cited in investor presentations to market companies who operate these wells.

Global Oil and Gas Supply and Demand

Oil supply is driven by OPEC, geopolitics and new technology. Oil demand is driven by consumption (driving, transportation), where China and other Emerging Markets make up a large percentage of incremental growth.

Oil and Gas Price Equilibrium Overview

The US$ price of oil itself has been in the news lately, and is driven by the global supply-demand dynamic. Demand growth is driven by the need for transportation and that is highly correlated with economic growth (movement of goods and services). Currently, there is no scalable substitute for gasoline as a fuel for transportation. If China’s economy is growing rapidly, oil demand can be expected to grow faster. Incremental oil demand growth tends to be from emerging markets as they industrialize and their needs align with those of developed markets.

On the supply side, we need to think of individual oil projects as finite. As such, the aggregation of producing projects will make up total production and accordingly supply. Macro forecasters will look at oil production by country, perceived supply curtailments (war, terrorism, political effects, unexpected maintenance) and when projects (particularly million barrel per day of production plus projects) start to decline. A major supply shock that is commonly discussed is an OPEC production cut, given OPEC’s share of global production. We will discuss the feasibility of this in a later article.

The last part of the equation is storage. When there is an oversupply of oil, oil can be stored in tankers and batteries. If tanker volumes start to become too high, that puts pressure on the oil price. When inventory volumes see drawdowns and storage levels fall, that will support the oil price. However, a lot of expectations are priced into the price of oil (and oil futures), so if there is a drawdown and expectations were for a larger drawdown, this could cause a selloff.

Oil and Gas Supply Side

Oil supply is a function of oil production and inventory levels.

Oil production supply growth is dependent on a variety of factors. Historically, oil and gas projects had varying lead times and would be sanctioned based on long-term oil price forecasts that ensured an appropriate return on capital for stakeholders in the projects.

For instance, a large oil sands project in Alberta would take a considerable amount of time for resource estimation, various stages of engineering and infrastructure planning. From proposal to actual production, the process may take over 5 years.

The time frame differs as oil is located across a range of geologies, and as such production and cash flow profiles differ across different basins whether shale, conventional, shallow water, deep water, mining or thermal production.

Given the profiles of oil and gas megaprojects, a certain amount of oil supply can be reasonably forecast over the medium term (short term accuracy may be marred by various factors, including unplanned shut downs for technical, regulatory or geopolitical reasons).

OPEC Policy and Oil Prices

However, OPEC nations have a large amount of oil where production can be brought on or off very quickly (major oil projects in the oil sands cannot, as they have extremely high fixed costs to start up and may be worth running at a loss per barrel for some period until oil prices recover). OPEC producers will often have spare capacity that they can choose to utilize if prices are acceptable to them.

OPEC members base production decisions on national interest, which is primarily dictated by revenue but will consider foreign policy goals as well. Previously, given OPEC’s considerable ownership of the world’s total oil reserves, the OPEC’s influence on the supply curve was considerable.

Here is an expository post on OPEC decision making.

Shale Oil Production and Technology

Shale production has since changed this. Shale return forecasts are precise and production can be brought online in a matter of weeks. In addition to this, technology for the hydraulic fracturing methods used in shale drilling are improving at a rapid pace, continuously pushing down the breakeven price for production.

Only the US has successfully achieved widespread commercial shale production, but the US alone has changed the supply paradigm as any cut from OPEC will result in an opportunistic increase in production in the US as investment hurdles are met at every higher oil price. This brings the world to a more stable equilibrium function.

However, shale oil reserves are enormous globally, with large deposits in China (Sichuan) and Argentina (Vaca Muerta) that have not been commercialized yet. Should shale production become a global phenomenon, the supply curve could change drastically over the next decade (via a large shift to the right).

Oil and Gas Regulation – Environment and Production Sharing

Environmentalist resistance has been one of the largest impediments to oil and gas production growth in Canada (and less so the US). North America has seen numerous pipeline projects delayed or cancelled due to strong social pressure (Northern Gateway, Keystone XL – although this has been revived under Donald Trump). Without a reasonable transport option, even the cheapest oil to extract is not economical as there is no sale realized. As such, what a government sanctions is key in production growth, although this is very long-term (regulatory body decisions and construction both have extremely long lead times).

Capital is mobile and oil and gas companies look at how much the government takes. Most developed countries have royalty regimes where the risks and rewards of development lie with the oil producer. However, in most OPEC countries, producers are subject to a production sharing agreement (PSA) whereby production is split with the country after costs are recovered. Profits after that are taxed after as well.

This impacts economics and adds a layer of cost – more generous extraction rules will increase supply and vice versa.

Oil Inventory Levels

Oil is stored in oil batteries and tankers at sea. Oil is stored by a variety of stakeholders, from refineries who want to keep a reserve of throughput, to governments keeping a strategic amount of oil for national security (the US and China have by far the biggest storages, with the geography of China’s holdings not very transparent), to physical arbitrageurs looking to capture financial profits.

When inventory levels fall, this pushes oil prices up as it means that demand is exceeding supply where consumers of oil must draw on inventory levels.

In looking at oil inventory data, # of days of oil supply in inventory levels is a good relative indicator for whether there will be pressure on the oil price. Also, storage availability is a downside risk. If storage capacity approaches, oil prices will fall as this will mean that oil producers may have difficulties storing excess oil cheaply. Tanker prices for overseas movement are also an indicator of oil demand.

Natural Gas Supply and Demand

Is gas a substitute for oil? The gap is narrowing, but gas consumption fills a different niche from oil. Until recently, the difficulties in moving gas across water (gas takes up a much larger volume than liquid oil and needs to be compressed or liquefied) as well as more rudimentary technologies in using gas as a transport fuel have limited gas to a more regional commodity, meaning that the differential between the same gas in different jurisdictions (America where gas is abundant and Japan where gas is scarce) became a multiple of the lower price.

Advances have been made in terms of using gas as a transportation fuel (a tradeable unit of natural gas is one thousand cubic feet or 1mcf, which holds 1/6 the energy content of a barrel of oil), but it remains to be seen if penetration will be fast enough to have its time in the sun before the proliferation of clean energy retires the hydrocarbon age and relegates oil and gas end use outside of transportation fuels.

Natural Gas Supply

Natural gas is abundant in the US and Canada, with global reserves multiplying due to advances from shale technology. However, whether or not certain supply will be provided is dependent on several factors, including:

Natural gas offtake (pipelines to move the gas out) – Unlike oil, which is liquid and relatively easy to transport, gas requires pressurized pipelines or containers to be moved around, making it inflexible pertaining to moving without the appropriate infrastructure. Additionally, gas that cannot be moved must be flared (burned) because methane floating out to the environment is far worse than burning it (the greenhouse effect and global warming).

Weather – Natural gas demand also depends heavily on the weather and is a seasonal commodity. If the winter is colder than expected, gas will be more expensive and vice versa. The converse is true for the summer. Although oil trading gets far more attention than natural gas, gas is far more volatile than oil due to the limited transportation options and regional constraints. If it is a bad winter and gas cannot be transported in large quantities to the Northeast USA, prices can spike to several multiples of what it was prior to the extreme weather spike.

Location – If an area is abundant in natural gas and infrastructure is built out, any price spike will be quelled quickly because gas is drilled and brought online quickly.

Natural Gas Demand

Natural gas demand is driven by industrial use, residential use and power generation.

Industrial use is focused on heating and cooling. Industrial natural gas demand is driven by the health of the economy and is the least “sticky”.

Industrial use can also include transforming methane into petrochemicals such as methanol. Methanol is in turn transformed into other petrochemicals, which have varying industrial end uses such as plastic and antifreeze. This demand is contingent on petrochemical projects in the proximity and the cost competitiveness of natural gas.

Residential use is for heating, cooling and stoves (gas fired stoves). Regardless of how the economy is doing, homes will require heating during the winter and cooling during the summer while cooking and other domestic needs are year-round. Residential natural gas demand is therefore more affected by factors such as population growth or changes in population density.

The popularity of natural gas for power generation is growing due to its reputation as a cleaner fuel (versus coal). Mandatory coal shutdowns around the world have made natural gas an immediate substitute as it is quick to bring online and the feedstock is relatively cheap. Natural gas is also more reliable than solar or wind at the moment and is an excellent backup power source that can be used as baseload power or a secondary platform.

One additional demand source that balances natural gas production and sales is exports via liquefied natural gas (LNG). As cost competitive plants are built in jurisdictions far from production (excess demand in Asia and excess gas in the USA), LNG exports will grow.

Contango and Backwardation in Oil Markets and Hedging

Contango is when the futures price (recall what this is in our sales & trading questions) is higher than the expected future spot price. Backwardation is when the futures price is lower than the expected future spot price.

Oil traders and producers pay close attention to the relationship between spot oil price s (current oil prices) and the futures price – for oil producers, their projects have budgeted cash flows just like any other business that sells something.

However, while for a toy company prices are fixed but volumes are not known, oil and gas companies have a good idea of what volume (production) will be but have less certainty on price (due to the final product being a global commodity). As such, to be assured of cash flow needs or project return hurdles for shareholders, oil producers will hedge.

On the other side of the coin, consumers of oil such as refineries will hedge for the same reason, except oil is the cost instead of the revenue.

Spot prices are as a result of current supply and demand. If production is not meeting demand, inventories will be drawn on and the price will go up. If stockpiles rise, and oil is plentiful, spot prices will fall. The expected future spot will reflect the same supply-demand dynamics.

However, futures prices are less so about actual future supply and demand and more so on hedging activity. As such, if producers are rushing to hedge (US shale drillers see the future price above $45 per barrel and try to lock in as much as possible), the futures price will fall.

If refiners see that feedstock can be locked in cheaply in the future, they may overhedge.

Contango leads to physical arbitrage activity by oil traders – if the futures price is higher than spot plus carrying costs (storing it in a tanker or oil battery) and interest, they can purchase the cheaper spot barrel now and lock in a profit by selling at the contracted future price later.

Oil and Gas Global Benchmarks

As crude composition varies greatly, benchmarks are required to standardize global trade. Oil does not naturally form into major tradeable benchmarks. The two main global benchmarks for crude oil are West Texas Intermediate (settled in Cushing, Oklaholma) and Brent (based on 4 North Sea light crudes).

In Canada, the main benchmarks are Edmonton Light Sweet (for light oil) and Western Canadian Select (for heavy oil). WCS is a relatively new benchmark brought to market by major Canadian oil producers to better market Canadian oil and realize better pricing. Edmonton is a light oil with similar characteristics to WTI while WCS is heavy and sour.

West Texas Intermediate

WTI is considered the North American standard while Brent is the benchmark for any oil that makes it to a coast (and thus is available to the rest of the world via tanker). Usually, WTI will trade lower than Brent, with the difference explained by the cost of transportation in getting oil to tidewater.

Before the recent lifting of the US oil embargo that restricted the export of oil in the mainland United States (ex-Alaska), WTI traded at a discount to Brent that exceeded the incremental cost of transportation to a coast when there was a continental oversupply in North America. However, this delta has narrowed since the cancellation of the embargo.

Brent Crude

Brent is the major global oil benchmark along with WTI. Most oil traders feel that Brent is the only actual global benchmark while WTI is more representative of North America. Brent is a light, sweet crude, similar to WTI – although WTI is actually of slightly higher quality than Brent (in terms of API gravity as well as sulphur content), Brent tends to trade to a premium to WTI that is equal to the cost of transportation from Cushing (where WTI is settled) to the Gulf Coast. Once oil reaches water and tankers, it is compared against Brent.

Brent is a North Sea barrel (between Scotland and Norway) and comprises of four blends – Brent, Forties, Oseberg and Ekofisk (collectively known as BFOE). There has been talk of Brent’s effectiveness as a benchmark now that North Sea production has steadily declined.

Western Canadian Select (WCS)

WCS is a heavy (~20 API) and sour (3% sulphur) blended crude benchmark typically made up of bitumen diluted with sweet syncrude and condensate. WCS is the primary Canadian heavy oil benchmark and is the primary product of the oil sands, trading at a discount to WTI. As long as the majority of Canadian crude is landlocked (until Kinder Morgan’s TransMountain expansion opens and assuming Northern Gateway stays cancelled) without sufficient refining capacity in Canada, WCS will always be benchmarked to WTI as the US is the only possible point of sale.

The absolute price of WTI and WCS’s differential to WTI both affect revenues for oil producers in Canada and both of those variables impact Canada’s current account as oil is one of Canada’s largest exports. As such, a rise in WTI or a narrowing of a differential usually result in a strengthening of the Canadian dollar and vice versa.

Western Canadian Select is sold spot, month-to-month or on 30-60 day rolling evergreen contracts.

Mars Blend

Mars is the main US domestic medium, sour blend of oil with an API gravity of ~30 and 2% sulphur content. Mars originates from the Gulf of Mexico (offshore US drilling). Major producers of Mars include BP and Shell.

Tapis Light

Tapis or Tapis Light is the primary crude oil benchmark for Singapore (which has very little oil to its own name but is considered an oil capital due to refining capacity and role as a tanker hub due to strong legal frameworks). Most of the world’s Tapis production is actually in Malaysian waters (by Petronas).

Tapis is a very light crude with 43-45 API gravity and has minimal sulphur content. As such, Tapis tends to trade at a premium to Brent due to the higher margin product yield (gasoline versus fuel oil).

Mexican Maya

Maya is the flagship crude of Mexico and is heavy (22 API) and sour (3.5% sulphur content). As such, it is a direct competitor to Canadian WCS for US Gulf Coast complex refinery capacity as light oil refineries are not configured to treat heavier blends.

Similar to Canada, Mexico has large oil resources but ample red tape that constrains production directly or indirectly (through undeveloped infrastructure and refinery capacity), leaving few options other than the US. As such, when takeaway capacity is constrained or refineries go down for maintenance, Maya may trade at a large discount to WTI just like WCS does.

As competitors, they both constitute heavy oil supply (which is limited in the US) – if Maya production falls, the price of WCS will rise.

Henry Hub

Henry Hub is the primary North American benchmark for natural gas and is traded in USD per million British thermal units (which is roughly energy equivalent to one thousand cubic feet or mcf of natural gas). Henry Hub in Louisiana is where NYMEX futures are delivered. All other natural gas benchmarks are priced at a differential to HH. A good summary can be found on Bloomberg via BGAS <GO>.


AECO is the most widely used Canadian benchmark for natural gas and is the quoted price for volumes traded on TransCanada’s Nova Gas Transmission system (NGTL). The price is quoted in gigajoules so an analyst may need to normalize to per million British thermal units or mcf for comparability purposes. The AECO basis is the price differential between AECO and Henry Hub traded on the NYMEX. Generally, the differential will be negative and be the same as the cost of transport to a demand market, however in times of severe electricity undersupply in Alberta (usually a weather shock), AECO prices can shoot to a multiple of its usual trading range.

AECO has suffered over the years because of a lack of end market demand, especially as Northeast demand was pushed out by exponential supply growth from the Marcellus satisfying energy markets there. Historically, the AECO basis has averaged US$0.50, widening to US$1 during the Marcellus’ growth. Attractive royalty and tax incentives have helped to make gas extraction increasingly economic and, coupled with demand growth, has seen the basis begin to narrow again.

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The Permian is the hottest North American play at the moment, with constant updates of new discoveries on a large scale. The Montney and Duvernay are the top two fracturing plays in Canada. The Bakken, Eagle Ford and Marcellus complete the list of the most coveted plays in North America.

Top Tier North American Basins

Permian Basin

Currently, the crown jewel of the basins is the Permian, which is in Texas (remember Friday Night Lights).

The Permian Basin, about 250 miles wide and 300 miles long, covers a portion of western Texas and southeast New Mexico and includes sub-basins like the Northwest Shelf, Delaware Basin, and the Midland Basin. It has been long regarded as one of the most prolific oil and gas plays within the United States. During World War II, the Permian was responsible for producing 25% of the world’s oil and was one of America’s greatest assets. The Permian holds largest crude oil fields in the United States, and at the peak of the Permian’s production, it was producing about 2 million barrels a day. Some reasons revolving around its popularity and profitability stem from two main reasons:

Infrastructure: As the Permian is also one of the oldest plays in the United States, many developments such as pipelines, drilling-rigs, pumps, and support businesses, have already been established. This allows for producers to access equipment and extract oil more efficiently and at a lower cost. It is also able to distribute its oil to trading hubs, allowing it to sell at global prices, which is not something available to every play.

Geographical features: The Permian is unique relative to other plays in that producers can access various layers of oil-bearing rocks from a single region. Ultimately, producers will only need to prepare one drilling site and can expect to extract large amounts of hydrocarbons from various levels of drilling. This greatly enhances the producer’s output and efficiency, while simultaneously reducing risk and resource usage.

Today, horizontal activity has been dominating the Permian and has greatly enhanced the oil output. Some of the major producers in the Permian include names like Chevron, Apache, ExxonMobil, Concho Resources, Occidental Petroleum, Devon Energy, EOG Resources, Pioneer Natural Resources, SM Energy, and many more.

Eagle Ford

The Eagle Ford is a Texas shale that is heavily oil weighted with ample energy infrastructure supporting getting production to end demand markets.

Discovered in 2008, the Eagle Ford is a relatively new shale play that was discovered through horizontal drilling and hydraulic fracturing. The Eagle Ford covers about 20,000 square feet and stretches over 400 miles across Texas. The northern region of the Eagle Ford is relatively more oil-rich, while the southern region is relatively more gas-rich.

The Eagle Ford originally rose in popularity due to its rich oil content, but has since declined from market down turns, declining oil prices, high break-even points and high extraction costs. Nonetheless, it remains a world-class oil and gas play and many producers expect it to return in time. A unique aspect of the Eagle Ford is that its shale is highly carbonated which makes it more frail, allowing it to be easier to fracture. Companies that have dominated the Eagle Ford play include names such as EOG Resources, Chesapeake Energy, and ConocoPhilips.


The Duvernay is a premier play in Canada which is liquids rich.

Major Oil & Gas Basins: Duvernay Formation

Western Canadian Sedimentary Basin

The WCSB has 15bcf per day of gas production, of which 5bcf is used for regional demand (in addition to gas-fired heating and electricity generation for normal residential and commercial business demand, a very large amount of gas is used for industrial purposes in the oil sands). There is ~500bcf of storage capacity in the area, allowing for flexibility in temporary oversupply beyond takeaway capacity.

Currently, condensate demand far outstrips condensate production, so each barrel of condensate will be sold at a dollar value that would cause a blended barrel of heavy crude or bitumen to be saleable in a synthetic crude market. Accordingly, many liquids rich gas fields in Canada are said to have “negative breakevens” because even if they take a loss on their gas production, the sale of the byproduct (condensate) will justify the economics.

The quality of the basin is heavily dependent on existing takeaway capacity. The Horn River and Liard Basins have very low extraction costs, but the gas is not nearly as saleable as the Montney as pipeline infrastructure is not as developed. The Montney does not require new transport capacity to grow.

Related Reading for Energy

Exploration & ProductionSpreading E&P Peer Comparables · Chinese Energy Companies in Canada · Oil and Gas Reserves and Resources · Analyzing Oil Sands Stocks · Bitumen in Canada · Supply ·
Energy InfrastructureOil and the Canadian Economy · Liberalization of Chinese Markets and Oil ·
Refining & Marketing
Oilfield Services

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