Largest change in oil royalties in decades hoped to incentivize activity and production

Multilateral well drilled in Saskatchewan by Lycos Energy Inc. in northwest Saskatchewan. The 29 leg frond design well targets a 5 metre thick Sparky sand and drains almost half a section from over 16 km of open hole. Image courtesy Chinook Geosteering Services, using publicly available data

This multilateral thing seems to have legs, as it were

REGINA – What is the “next big thing” in Saskatchewan’s oil and gas development?

Revolutions like horizontal drilling have universally benefitted the industry to the point where next to no vertical wells are drilled anymore. Multi-stage fracking fueled the “Bakken Boom,” although there’s a lot less of that going on these days. Polycrystalline diamond cutter bits dramatically improved drilling. The progressing cavity pump allowed cold heavy oil production with sand in northwest Saskatchewan, but that has been surpassed by thermal projects using steam-assisted gravity drainage. (SAGD). But what is the next big thing, beyond all of these, and something that could be applied all over?

It might just be multi-lateral wells, and the government of Saskatchewan is betting heavily on just that.

A little over a week before the provincial budget was announced, a new “Multi-Lateral Well Program” was announced on March 11. Further details were released in the budget on March 20. Pipeline Online spoke to Energy and Resources Minister Jim Reiter in depth about the program at the Legislature on March 21. It’s the largest change in oil royalties in Saskatchewan in decades.

And that’s significant, since one of the hallmarks of the Saskatchewan Party government has been to not mess with royalties at all. But instead of increasing them, they’re reducing them, but only in very specific circumstances, in a drive to increase production and activity.

What is a multi-lateral well?

First of all, what is a multi-lateral well, and what’s new? Multi-lateral wells have multiple horizontal legs going into the target formation. The concept had been around a long time. Even as far back as 2009, PetroBank’s standard Bakken well had two legs. Three legs are pretty common, too. But this new generation of multilaterals takes it up considerably. And it’s not just large companies doing it, either.

Here’s the program’s eligibility criteria, according to the Ministry of Energy and Resources:

  1. Eligible oil wells include MLWs drilled on or after April 1, 2024, and on or before March 31, 2028.
  2. If the MLW is of a pitchfork configuration, or a variation of the pitchfork configuration, the well must contain a minimum of three laterals, including the initial wellbore, of 500 metres or longer to qualify for additional volumetric incentive.
  3. If the MLW is of a fishbone configuration, or a variation of a fishbone configuration, the well must contain a minimum of ten additional laterals, off the main wellbore, of at least 200 metres in length to qualify for an additional volumetric incentive.

Basically, it’s a well with a lot of horizontal legs. The more legs, the more incentive provided, up to a point.

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So far, there has been some experimentation with these sort of wells in Saskatchewan, prior to any incentive program being publicly announced.

Here are some Bakken multilaterals from Hazelwood/11-6W2, from Cache Island and Crescent Point. Image courtesy Chinook Geosteering Services, using publicly available data

 

According to Chinook Geosteering Services, using publicly available data, In southeast Saskatchewan, Cache Island Corp. was one of the first to start developing this idea in the Corning area, followed shortly by Crescent Point Energy (soon to be Veren Inc.). Several other companies have been trying it out as well.

But in northwest Saskatchewan, Lycos Energy Inc. has been going to town, with as many as 39, yes, 39 legs. According to Chinook Geosteering Services, using publicly available data, the company has drilled seven wells Britannia to Cut Knife and Manitou Lake that each had between 28 and 39 legs. They look like palm fronds, in what is referred to as a “fishbone configuration.”

Image courtesy Chinook Geosteering Services, using publicly available data

Baytex Energy has drilled 19 and 13 leg wells. Cenovus Energy Inc. drilled a 12 leg well at Turtle River and a 10 leg at Mervin. Canadian Natural Resources Limited, Novus Energy Inc. and Rife Resources Ltd. have all drilled wells with ten legs in northwest Saskatchewan in the last year.

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Clearwater play influence

Saskatchewan is just starting to ride the multi-lateral wave that really took off in the Clearwater play of northwest Alberta. There, multi-lateral wells with massive numbers of legs have become the norm. Baytex’s operations there went from zero in 2021 to over 16,000 barrels per day today. And what’s clear from well maps is that there are so many legs being drilled, at certain resolutions of a map, it looks like a kid took a crayon to fill in the section.

Indeed, Crescent Point released its March 20 Investor Day presentation the same day as the provincial budget. It showed its Bakken multilaterals near Corning have gone from a total of four legs going through each section to 32, from 400 metre horizontal spacings to 50 metres.

This slide from Crescent Point’s March 20 investor day slide deck shows the current configuration, on the left in blue, and the new open hole multi-lateral design, in red. The graphic on the right shows how fracking into a water-bearing zone could be problematic. Crescent Point Energy Corp.

 

One thing is clear: The net result is dramatically more contact with the reservoir. Again, their map also looked like colouring the square with a crayon.

Scott Saxberg, chief executive officer of Cache Island, told Pipeline Online by chat on March 25, “I would say that the rationale for the multi-legs in the Bakken was to get away from fracking into the Lodgepole above and in the long term for water flooding the Bakken. This opened up an area that was not economically prospective before. The royalty (incentive) expands the size of the pools and allow for long term reserves through water flooding.”

And keeping up with Alberta is a key consideration for the Saskatchewan government, which does not want to be left behind when it comes to investment.

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Minister explains

Several years ago, the Saskatchewan Party government set a goal of increasing oil production by roughly a third by 2030, from roughly 150,000 barrels per day to 600,000 barrels per day.

Premier Scott Moe told Pipeline Online on March 21, “What we are trying to do is ensure that we have the most attractive regulatory investment environment for that industry provincially so that we can do what we can pull the strings that we can to attract that investment to achieve our growth plan target. And I think we can go beyond that.”

Asked about the 600,000 barrel per day goal, Reiter said it’s not the only effort the province is making, as they’ve been doing other things like trying to help companies raise capital. “But this is going to be a key part of it, the multilateral.

“As technology changes, basically, what it amounts to is we’re not getting the number of holes drilled a year that we want. And we need to, frankly, be competitive with our neighbors and friends in Alberta. That’s where a lot of it’s been going. That’s what we’re hearing from industry, is that the incentives they have in place there, while we’ve had some multilaterals, developed, it’s not a lot. And we’re being told by industry, ‘You’re going to have to be competitive with the Alberta structure.’

“We think this is going to do that.”

Saskatchewan Minister of Energy and Resources Jim Reiter, left, was shown the site of the first planned lithium production facility by Zach Maurer in November. Photo by Brian Zinchuk

 

As for where the idea came from, Reiter said it was “discussions with industry.”

“I do a lot of meetings with industry. We do a lot of roundtables with them. And I started to hear that over a year ago, and I just heard it more and more, because my question for industry is, ‘What do we need to do?’ We’re trying to be competitive. We’re trying to be business friendly. We’re not getting the kind of development done that we want. What do we need? And this was kind of front and center that we were hearing from industry.”

Asked how much additional oil production the government thinks might come of this, Reiter said, “The estimates that the Ministry of done, they’re talking about 50,000 barrels per day they think this is going to add to. The timeframe is a little hard to tell. It depends how much of the pick up. But, you know, I’m optimistic within the next few years that it’ll get up to that level.”

For perspective, Saskatchewan’s oil production is currently 463,000 barrels per day as of December, a level that has been largely consistent for nearly two decades. It did rise to around 537,000 barrels per day in December, 2014, just as the seven-year oil downturn started to take hold. Also, the “Bakken Boom,” as it were, saw Bakken production rise from a few hundred barrels per day to around 70,000 barrels per day at its height.

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Inspiration

Reiter clarified that this is not a royalty holiday program, but a royalty incentive. It is a reduced royalty rate until certain volumes of production are met for a particular well. “There’s still a two-and-a-half per cent charge they’re going to be paying.”

Once the volumetric limit is met, royalties revert to usual levels. Saskatchewan royalties are price- and volumetric-sensitive.

There is differentiation for type, depth, number of legs, development versus appraisal wells. But the program does not have a specified limit to how many wells, how much per company or how much overall. It’s agnostic to all of that. It applies anywhere in the province, any formation.

That’s a little different from the Oil and Gas Processing Investment Incentive (OGPII), which has increased by $130 million to $500 million, and the Saskatchewan Petroleum Innovation Incentive (SPII), which has increased by $70 million to $100 million in overall limits. These amounts go until 2029. The Multi-lateral Well Program does not have an overall limit on dollar value allowed.

This program is in addition to existing incentives.

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More drilling, but less services otherwise

Reiter acknowledges there are impacts on the oilfield services industry.

That’s a reference to the fact that, in southeast Saskatchewan, drilling rigs that would otherwise typically be drilling six-day holes are now doing 28-day wells doing extensive multi-lateral wells. While that’s great for the drilling rig company when it comes to drilling days, that means for many of the other services that would otherwise be at that rig four times in one month, they’re reduced to roughly once a month.

That means for each rig doing this type of work, there’s one lease built per month, not four. The rig moves once per month instead of four times. Trucks deliver casing once instead of four times. Tong hands run casing once. There’s one batch of mud, and so on.

The net effect is that for many of the oilfield service companies, month-long wells could see a reduction in demand for their services by as much as three-quarters. One oilfield service company told Pipeline Online that November “felt like spring breakup.”

The answer to that? Drill more holes. Get more drilling rigs going. Reiter said, “Frankly, we’re just not getting the wells drilled that we need to. I realize technologies changed with the multi-laterals, and there’s issues around that, for sure. But we got to start getting more holes drilled.”

He said, “When the choice is don’t do the incentive and get and get very few multi-laterals drilled, or do the incentive, still get some royalties still help the service industry? You know, it’s, to me, it’s a no brainer.”

Additionally, drilling last November saw only 13 rigs working in southeast Saskatchewan when the minister toured various energy projects in the region with Pipeline Online. About a quarter of those were drilling multi-laterals. At the time, there wasn’t one rig in the region drilling west of Estevan. So when the minister referenced “just not getting the wells drilled,” this is part of what he was referring to.

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Scenario

Pipeline Online asked the minister about a scenario, using this year’s budget assumptions, that would show how much royalties will be forgone in an example well.

The minister directed several ministry officials to assist Pipeline Online with the example, which they did on March 22. However, as the minister is the voice of the Ministry, those people are referred to as “ministry officials” in this story.

“We have a price and production sensitive royalty system,” said one of the officials, who added that 15 to 20 per cent would be a reasonable average royalty. So for this example, we’ll use 17.5 per cent.

First of all, there’s already a 6,000 cubic metre (37,739 barrels) volumetric drilling incentive for a horizontal well, regardless. That number has been around since 2002, brought in under the prior New Democratic Party government when horizontal wells weren’t commonplace. Now nearly every well is horizontal, but the legacy horizontal drilling incentive still exists.

The additional royalty incentive for multi-lateral wells kicks in based on the number of legs and depth, as indicated in the chart below, which came from the ministry website for the program.

 

Development Multi-Lateral Wells (Pitchfork)
Non-Deep Deep
Total Incentive Volume (m3) Total Incentive Volume (m3)
1 Leg 6,000 1 Leg 16,000
2 Leg 6,000 2 Leg 16,000
3 Leg 8,000 3 Leg 17,000
4 Leg 12,000 4 Leg 19,000
5 Leg + 16,000 5 Leg + 21,000
Development Multi-Lateral Wells (Fishbone)
Non-Deep Deep
Total Incentive Volume (m3) Total Incentive Volume (m3)
1 – 9 Leg 6,000 1 – 9 Leg 16,000
10 Leg + 16,000 10 Leg + 21,000

 

Appraisal Multi-Lateral Wells (Pitchfork)
Non-Deep Deep
Total Incentive Volume (m3) Total Incentive Volume (m3)
1 Leg 6,000 1 Leg 16,000
2 Leg 6,000 2 Leg 16,000
3 Leg 12,000 3 Leg 21,250
4 Leg 18,000 4 Leg 23,750
5 Leg + 24,000 5 Leg + 26,250
Appraisal Multi-Lateral Wells (Fishbone)
Non-Deep Deep
Total Incentive Volume (m3) Total Incentive Volume (m3)
1 – 9 Leg 6,000 1 – 9 Leg 16,000
10 Leg + 24,000 10 Leg + 26,250

 

 

The maximum incentive for a non-deep well is 16,000 cubic metres, an addition of 10,000 cubic metres over the existing horizontal drilling incentive. The example is based on this volumetric incentive and royalty rates/prices typically seen by a southeast Saskatchewan light oil well.

The gross revenue on 10,000 cubic metres, or 62,898 barrels, at the budget-estimated of US$77.30 per barrel for WTI, and an exchange rate of 74.36 US cents per Canadian dollar gives you $6,353,977. Take 17.5 per cent, subtract the 2.5 per cent, and you get 15 per cent royalty forgone. Multiply that 15 per cent by the $6,353,977 and you get $953,095 of forgone royalties.

Note: that’s the additional royalty incentive. When you factor in the original 6,000 cubic metres (37,730 barrels) horizontal drilling incentive, the total amount is 100,637 barrels can be produced at 2.5 per cent royalty before the royalty rate goes up, as in our example, to 17.5 per cent (or whatever might be applicable at the time).

So when you add that up, 16,000 cubic metres (100,637 barrels) at US$77.30 with an exchange rate of 74.36 US cents per Canadian dollar, and 15 per cent forgone royalty, the net amount is $1,524,951 of forgone royalties before royalties kick in at full rate.

Crescent Point’s March 20 presentation notes a cost of $3 million per well of this type in southeast Saskatchewan. The additional 10,000 cubic metres of royalty incentive would therefore make up 31.7 per cent the cost of a $3 million well, but the total reduced royalty is $1,524,951. That’s 50.8 per cent.

That same presentation noted that of the 12 open hole multi-lateral wells drilled in the Bakken to date, their average cumulative production by 150 days is approximately 4,800 cubic metres, or 30,000 barrels. The company has approximately 130 internally identified locations of this type to date.

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What’s left on the table?

So is the province leaving too much on the table?

Reiter said he’s heard from the industry this is a way to kickstart activity. “If your capital flows to where it can get the best return on investment, and if you’re in the business and you’re going, ‘Are we going to go to Saskatchewan or Alberta, we want to do multi laterals, that’s a new technology,’ and they can make more money in Alberta, obviously, it’s going to go there. So, we need to make sure we’re staying competitive.”

With regards to the possibility that history has shown the cumulative production of some wells, in the Bakken for instance, might never reach those cumulative production numbers of 100,000 barrels, Pipeline Online asked, “If the cumulative production of a well ends up being, let’s say, 75,000 barrels, and you have 100,000 barrel limit for this program, then you’re not going to collect much on royalties at all for the entire life of that well?”

Reiter replied that this is similar to the approach taken in the mining industry. “I like those kinds of incentives, as opposed to government writing cheques to people. What it is, is the development comes, you’re basically kind of collecting a lower tax/royalty rate, but you’re still getting revenue for the province, that likely you’d have gotten nothing before. Because without that incentive, without that lower rate, they probably don’t do the development, whether it’s mining or whether it’s oil or whatever, right?”

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When the program is reviewed in its third year, one of the considerations will be is the incentive the correct size?

And is the government really forgoing royalties if that area might not be developed otherwise? One of the ministry officials pointed out, “The idea that that this program is giving up royalties, I think is not a fair characterization. I think what we’re trying to do is align our royalty system with our competitors in other jurisdictions, so that we can attract that investment into the drilling in the first place.

“So, we have seen some very, what I would describe as minimal multilateral drilling up to date. So, with any program like this, some of that is going to occur anyways, but the analysis that we did internally here, and through conversations with industry, that the program is really designed to be more competitive, relative to some of the other jurisdictions, in particular Alberta, and really attract that investment in the first place. So, to call it royalty revenue that’s being given away, I think, is just not quite a fair characterization of the intent of the program.”

He added, “We think that this program is really going to drive a lot of additional investment and, you know, not only in the Bakken and some of the thin edges, but also up in the Northwest there, as mentioned, in the heavy oil area.”

There’s been a well of this type drilled in southwest Saskatchewan, and a few in west central Saskatchewan, but the ministry does not have a lot of data on them yet.

Additionally, one of these multi-lateral wells could take the place of three standard horizontal wells, one of the officials noted. And each of those three wells would get the standard 6,000 cubic metre horizontal drilling incentive anyhow, totalling 18,000 cubic metres, more than the 16,000 allotted for a multi-lateral well. And in doing so, the ministry official pointed out that would result in a reduction of surface impact.

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Reinvigorating cold heavy oil production?

As for where the ministry expects this program to be applied, that expectation is widespread. Ministry officials said, “Definitely the Bakken. Certainly, there’s a portion of the Bakken which is really well suited to it as this area can’t be drilled with the standard one-leg fracked well due to the limited formation thickness in the area and water issues brought on by fracking. It is expected to work very well there.

This is a typical CHOPS setup – a progressing cavity pump which produces into a storage tank. The product is then shipped by truck, since the oil is too thick to pipeline without diluent. Photo by Brian Zinchuk

 

They said heavy oil is also expected to benefit. “The heavy oil producers see a lot of potential in multilateral wells.

“The DOB did an article recently on the multilateral wells, on the Alberta side, in the Sparky formation. We do have a Sparky. It does cross the border as part of the Mannville. Certainly, there’s a lot of potential up there in the heavy oil for the multilateral wells and in particular what they call a fishbone well.”

These would be cold production wells. That would be a major development, as cold heavy oil production with sand (CHOPS) has been in sharp decline for more than a decade. The largest heavy oil producer for decades, Husky, now Cenovus, had focused most of its drilling activity on thermal, steam-assisted gravity drainage projects for the last decade. For the last ten years, they noted hardly any CHOPS wells have been drilled in Saskatchewan.

Officials said that Rife and Lycos had drilled cold production wells of this new type.

Asked if this is an opportunity to reinvigorate cold production in Northwest Saskatchewan, a ministry official responded, “I think that would be correct.”

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Next big thing?

Could this be the next big thing for Saskatchewan? One of the ministry officials said they thought so. In the Ministry’s discussions with industry, they saw that there were certain areas of existing plays, like the fringes of the Bakken, where they haven’t been able to use traditional techniques in an economic way.

Crescent Point’s map show the halo of the Viewfield Bakken for this sort of development. That’s the edges of the play that are otherwise less economic to develop, if it can be developed at all. As Saxberg, former CEO and co-founder of Crescent Point and current CEO of Cache Island had noted, there are issues with watering out if fracking is used in this area.

Industry has been telling the ministry, in its consultations, there’s areas that are brand new that they hope they can get some successful multilateral wells.

“Ultimately, we see this as a needle mover, in terms of the economics of these wells,” one of the officials said.

Industry reaction

Ask for reaction to the program, Reiter said, “I think we are all pretty excited about the reaction yesterday (Budget day). Lots industry folks were here for the budget. I had a chance to talk to them.

“(We) had a number of folks stop in the office after the budget. I would say the reaction industry has been pretty positive which makes me feel positive because if they’re feeling that way, those are the guys we need to be drilling holes.”

Jon McKenzie, CEO of Cenovus Energy, said in a statement, “The new incentive program for multi-lateral drilling opens up significant new drilling investment opportunities in Saskatchewan for Cenovus.

“It aligns with our focus to strategically build our integrated position in the Lloydminster region, and we anticipate it will have positive impacts for provincial employment, as well as new production growth. We are pleased to see government focus on creative ways to bring more investment to Saskatchewan.”

 

 

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Editor’s note:

More details on the program can be found in the following stories.

Budget 2024: Everything energy in the 2024 Saskatchewan budget

New multi-lateral well program part of Saskatchewan’s new investment attraction strategy