Horizontal and Vertical Well Economics Under Various Fiscal Regimes in Western Canada
Authors: Ekelund M.W. , Faltinson J.E. , Taher M.A. , Dittaro D.L. 
Published: December 2007

Horizontal drilling technology has not penetrated evenly across regions. This is due to a mix of geological, economic and access factors. One of the economic factors is the treatment of increased production from a horizontal well in a particular fiscal regime. This can affect the decision of whether to introduce the new technology or stay with the current vertical technology. Modeling of the economics of a number of typical situations across different geological regions of Alberta, and comparison with similar geological regions in British Columbia and Saskatchewan, shows that the geological factors are more critical than differences in fiscal treatment in these existing regimes. However, the fiscal regimes, possibly combined with some geological factors, did impact the rate of penetration of the new technology, particularly where vertical drilling was uneconomic and horizontal drilling was limited by high royalty rates. It appears that that impact will be transitory, as the superior economics of horizontal drilling in appropriate reservoirs will lead to a geologically based suite of drilling decisions. The current fiscal regimes do not appear to be onerous enough to forestall this.

Introduction

The substantial increase in horizontal drilling activity over the past five years is likely to have a major impact on the development profile of Alberta's oil resources.

Higher initial productivity combined with faster decline rates and greater drainage effectiveness present opportunities for minimizing the environmental impacts of drilling and production, increasing the overall recovery of the resource base, and providing new opportunities for the exploitation of marginal properties.

As a new technology with such impact at the producing entity level, it also presents challenges for the industry and the market in terms of scheduling optimal transportation facilities and reservoir valuation for transactions. However, the overall impact of horizontal drilling is expected to be very positive.

Despite the recognized potential of horizontal drilling, the rate of penetration of this new technology has varied from area to area. Areas in relatively close communication, such as the U.S. and Canada have had very different patterns. In the U.S. the application rate peaked early, while in Canada the rate has gradually climbed to the same level over five years (Fig. 1).

Most of the horizontal drilling taking place in the world is being done in Canada and the United States, with the Canadian provinces of Saskatchewan and Alberta having been prime locations. Even between those two adjoining jurisdictions, which cover the same resource basin, there have been different rates of uptake of the technology.

There are at least three significant factors that could influence the rate at which this new technology is implemented. First, and likely foremost is the availability of appropriate geology.

Second is the availability of the technology for implementation. This would depend on both the intellectual property arrangements and the availability of equipment (in this case the limiting factor is likely the particular types of rigs capable of horizontal drilling). Third is the economic gain from using the new technology.

This paper concentrates on the economics of implementing the new technology, and discusses briefly the other two factors.

The economic study behind this paper looked at the economics of drilling horizontal wells rather than vertical wells in three adjoining Canadian provinces, Alberta, British Columbia, and Saskatchewan (Fig. 2).

Alberta covers most of the Western Canadian Sedimentary Basin (WCSB), and its jurisdiction includes a wide range of depth and characteristics of wells and reservoir fluids. The producing area of British Columbia is the northeast, adjoining Alberta and covering the far northwest parts of the WCSB similar to those of Alberta's Deep Basin and Foothills regions. Saskatchewan overlies the eastern part of the WCSB and covers an area with geology similar to that of eastern Alberta, as well as a part of the Williston basin.

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