Canada unleashes wave of oil drilling permits in next big play

As oil prices surged this spring, Alberta producers didn’t look to Canada’s long-cycle oil sands. Instead, they rushed to drill the Clearwater formation, a low-cost conventional oil play that lets producers bring on new supply far more quickly.

Alberta issued 1,764 drilling licenses between the start of the year and June 12, the most for a similar period since 2014, provincial data show. Nearly one in five permits targeted the Clearwater formation, the highest share on record.

For decades, Canada’s oil industry has been defined by the oil sands, where multi-billion-dollar projects can take years to build. Clearwater is changing that equation. As the Iran war exposed the vulnerability of global oil supplies, the formation gave Alberta producers the opportunity to respond to higher prices with new production in months, rather than years.

“It doesn’t take a whole bunch of capital to get started, and therefore it’s quite cost efficient,” said Brian Schmidt, chief executive officer of Tamarack Valley Energy Ltd., one of the two largest Clearwater producers. “It’s phenomenal. There’s no conventional play that compares.”

The Clearwater yields dense, high-sulfur crude oil similar to that found in Canada’s oil sands. But unlike the oil sands, the crude can be extracted at a lower cost using conventional multilateral drilling techniques, without the need for pumping steam into the ground. That’s what enables production to be brought on more quickly. 

The formation has attracted some major producers including Canadian Natural Resources Ltd., Canada’s biggest oil company. But the Clearwater has mostly been the playground of smaller firms.

Once minnows, Clearwater drillers Spur Petroleum Ltd. and Tamarack have risen into the ranks of the top 10 oil producers in Alberta, rivaling some oil sands companies. 

Tamarack has received 89 drilling licenses this year, up by 37 from the same period last year, the biggest increase of any company in the province, Alberta Energy Regulator data show. Wells targeting the Clearwater accounted for 80 of those licenses, second only in volume to privately-held Spur Petroleum.

The company sold its position in the Charlie Lake region for C$804 million ($570 million) in May to focus entirely on the Clearwater. Schmidt, the CEO, said by phone that Tamarack has made “modest” increases in its capital budget to between C$430 million and C$450 million. He emphasized that the advent in recent years of multilateral, horizontal drilling has made the Clearwater viable. Tamarack and others have been injecting water into the reservoir to push out more oil.

Headwater Exploration Inc., another major Clearwater producer, increased its capital budget to C$250 million from C$185 after raising the company’s forecast oil price by more than $15 to $78.85 a barrel amid the Iran war. Production will grow by 10% this year, versus 8% in earlier forecasts. Most of the growth is coming from investing in equipment to inject water into the reservoir, which roughly doubles the amount of oil that can be recovered at less than double the cost per well, Jeff Magee, the company’s vice president of engineering, said by phone.

Spur Petroleum didn’t respond to a request for comment.

Located in the boreal forests of north central Alberta, the Clearwater emerged from obscurity in 2017 following a series of high-priced land sales in the Marten Hills and Nipisi region, north of the provincial capital of Edmonton. Production from the formation has surged in less than a decade. 

Clearwater production rose from 30,000 barrels a day in 2017 to 230,000 barrels a day last year, and the formation holds 1.6 billion barrels of oil, AER said last year, citing work by McDaniel & Associates Consultants Ltd. 

Figures citing the total volume of output depend on how Clearwater, which encompass a vast area including some thermal oil sands sites, is defined. For example, Headwater’s Magee defines Clearwater production in more limited terms. He cited the play as currently producing about 175,000 barrels a day, and sees it growing to as much as 250,000 barrels a day by decade end. 

The multitude of Clearwater producers has drawn consolidation in the past, including Tamarack’s takeover of Deltastream Energy Corp. four years ago. More such deals are on the horizon, Schmidt of Tamarack said.

“There’s a number of smaller privates that don’t want to be in the game long,” he said. “There’ll be more consolidation in the Clearwater.”