|The Watson Flats well is drilled against the backdrop of the Eastern Slope of the Rockies. Sun Times photo by Darryl L. Flowers
Insiders, Stockholder bullish on Canadian Exploration Firm
By Darryl L. Flowers
It has been one of the worst kept secrets in the Oil Patch, and has led to all types of speculation on the world wide web, in both blogs as well as online reports by “respected” analysts within the industry.
For the first time, The Sun Times is able to report that the “JV” or “Joint Venture” partner that now owns 32.5 percent of Primary Petroleum Company is OXY USA Inc.
The Sun Times uncovered details of the transaction two weeks ago when researching documents related to oil and gas exploration in Teton County. Since the deal took place last year, the rumor mills have been rampant. For the most part, the speculation was close, but not on target.
When the agreement was made last year, The Sun Times was advised by reliable sources that Occidental Petroleum Corporation, based in Los Angeles, California was the new partner. However, the California headquarters refused to confirm the deal when contacted, so it was decided not to go with the story.
The documents recently discovered show that the JV partner is in fact OXY USA Inc., headquartered in Houston, Texas. When contacted by the Sun Times, a spokesperson at the Houston headquarters confirmed that OXY USA Inc. is a “wholly owned subsidiary” of Occidental Petroleum Corporation.
The parent company is one of the world’s largest oil firms, with 40,000 employees and contractors worldwide. Occidental was founded in 1920.
OXY USA is listed as the operator on three Teton County wells, all classified as “dry holes.” The wells were drilled in 1974 and are listed by the Montana Board of Oil and Gas Conservation as the Bannatyne 1; the Bannatyne B-1 and the Bannatyne 1-A. The wells are located in Section 12, Township 24 North and Range 2 West.
The document detailing the agreement between Primary and OXY was recorded as a Deed of Conveyance and Assignment and Bill of Sale. According to the agreement, which was recorded on November 16, 2012, OXY was assigned 32.5 percent of “the leasehold interests under the oil and gas leases and oil, gas and mineral leases set forth…” Further, the document assigns 32.5 percent of “all rights and interests in any pooled area…”; “all equipment, facilities, pipelines, pipeline laterals, gathering systems, platforms, tank batteries, improvements, fixtures and buildings, and inventory…”
The details of the deal are coming out after a Friday night press release issued by Primary earlier this month that seems to have put the Canadian oil exploration company’s stock in a dive. The release came out just as OXY begins consideration of a second phase of investments into Primary.
Absent from the Primary statement are any details of the results of the first drilling program, launched just over one year ago.
In fact, the Sun Times has learned, through confidential sources with detailed knowledge of Primary’s operations in the Southern Alberta Bakken, that they have indeed “struck oil.”
According to the sources, the Spring Hill 1 well, which is one of three wells that was “fracked” last fall, will be able to produce “200 barrels per day of deliverable oil.” One of the Rockport Colony wells is expected to produce approximately 150 barrels of oil per day. The Spring Hill well has been “on pump” for some time.
Some Primary watchers have been frustrated with the production problems at the well. However, the source, as well as others with expertise in the oil field, have told the Sun Times that this is perfectly normal. “You don’t just pull out the drilling rig and stick a pump on,” said one geologist who works on rigs all over the Western U.S. “It takes time to get the trash worked out of the hole. It’s a perfectly normal process.”
The “oil cut”, or the percentage of oil in the fluid coming out of the Spring Hill well is the real surprise. “It’s 99 percent oil, only one percent water,” the source reported to the Sun Times.
While the news may come as a disappointment to those unfamiliar with a developing play, those with experience in the field see no reason for pessimism. “Primary has almost 400,000 acres of leases in the play, and have only drilled a handful of holes,” said one Primary stockholder contacted by the Sun Times. “I don’t think the talking heads who are ready to abandon the play know anything about the geology or history of the region.”
Bill Hansen, one of the leading Geologists on both the Bakken Formation as well as the Montana Overthrust Belt, operates Jireh Consulting in Great Falls. “The testing has only begun in this area of the play. Primary is the first to test the play, and in an area of unknowns, the first wells are not going to be the best.”
Indeed, the nature of a developing play is a high risk venture. “That’s why they’re known as ‘Poke and Hopes’,” said Joe Large, President of RPM Geologic in Denver. Large, who operates out of Simms, Montana, said the small exploration firms “poke a hole and hope for oil.”
With the lackluster news in the Primary release, some have wondered if OXY will jump in for a second round of investing, and if OXY does not step up to the plate, what will the future hold for Primary?
“Primary is really in a good position,” the source, who requested anonymity, explained to the Sun Times. “They are a tight operation, they do not waste money. They are lean and that is something the big firms can’t compete with.”
By watching their bottom line, Primary is able to bring in a well much cheaper than is typical for Bakken wells in Eastern Montana and Western North Dakota. “Primary can probably do a well for about $4 million in this region, compared to $10 million for a well in the Williston area. Part of the savings derive from the fact that the oil bearing formations are about half as deep as in Eastern Montana and Western North Dakota. But part of the efficiency comes from a well-planned and executed drilling program.
When it comes to the bottom line, a well that is cheaper to drill means it can turn a quick profit, even with lower production numbers.
Another consideration requires looking at the whole picture as to what is coming out of the borehole.
While many get their hopes up thinking, like the Williston Basin, this region will see 2,000 or 3,000 barrel of oil per day wells, that is not likely. But, if you read the details of all the wells being completed out East, you begin to see that a lot of lower production wells are coming online. “It’s not unusual for wells in the Bakken area to have Initial Production, or IP, rates of 200, 300… up to 600 barrels of oil per day,” said Large.
Many of the high IP wells appear to be better sources of seawater than hydrocarbons. A large percentage of the Bakken area wells produce much more water that oil. Recently, the Sun Times reported on a Bakken Formation well that reported an IP of approximately 1,900 barrels of oil per day. But, as they say, the devil is in the details, and the details showed that the well was also producing over 6,000 barrels of water per day. That’s 264,000 gallons.
The seawater was trapped in the formations as the land was thrust inland millions of years ago. Adding to the cost of operation for the wells, the water must be disposed of. “That’s a huge cost to the operator,” said Large. “In the Bakken, if you find a well that is only 50 percent water, you’ve got a great well.”
At 99 percent oil, the Spring Hill well would not be costly for disposal of the saltwater.
The compact size of Primary would also mean that the exploration firm could, if needed, pivot their operation and also become a production company. “It’s a fairly easy transition,” said one experienced industry insider. “Primary has the know how on the ground to make it happen.”
Adding to the pessimism is the lack of science behind the reporting. Most of the media, or commentators, are far removed from the Eastern Slope of the Rockies. “Few if any of those guys have put their shiny Wall Street ‘pimp pumps’ on the ground out there,” commented the Primary stockholder who is based in the Mid South.
The shareholder, who took it upon himself to do his own research when he noticed the reporting on the Southern Alberta Bakken play offered no details, told the Sun Times that he was struck by the volumes of data available from independent sources, such as universities, U.S. Geological Survey, Montana Geological Society and the American Association of Petroleum Geologists. Commenting on his research, the investor said, “The same formations that have yielded successful fields found in Alberta are equivalently located in Montana; there are plenty areas of interest yet to be explored in Montana. And Primary has a few hundred thousand potentially promising acres… the investment analysts following all of this activity don’t know jack about geology,” the investor added. “Reading the article in the Sun Times [Reading The Rocks In The Hunt For Hyrdocarbons, August 2, 2012 issue] motivated me to dig deeper and research the play.”
He went on to say that from what he has found in his research, that Primary’s “Watson Flats” well might be the “sleeper” of the wells drilled by the company so far.
Of the wells drilled in the first round, the Watson Flats well is the only one that lies in the region known as the “Overthrust Belt.” The area is long known by geologists to be a region of subsurface thrusts and faults. While the belt may offer challenges to drillers, the reward may be worth it. Recently, the Sun Times consulted with Joe Large, the RPM Geologic President, on another Overthrust Belt well, the Steinbach 1 near Augusta.
According to Large, who examined data from the well, the Steinbach showed the potential to be a “Williston” class producer.
The Watson Flats well was recently plugged and abandoned by Primary. While that may sound ominous, the fact is that when a well is not being worked over a lengthy period of time, the State requires, for safety reasons, that the borehole be sealed.
According to multiple conversations with our sources, the well is a candidate for further work, including fracking. “We’re going back there,” stated the insider. Other sources explained that Primary encountered a fault in the well and lost pressure on the drillbit. The bore was sealed and the well completed without further incident. The company has the option of re-entering the hole, or they could move a short distance away and drill a new hole. Sometimes drilling the new location is the most economical method.
Historically, the region near Primary’s leases has some significant discoveries.
In 1958, according to a paper published by J.W. Halverson, a Geologist with the Montana Board of Oil and Gas Conservation, natural gas was discovered in Blackleaf Canyon, near Bynum.
Low gas prices and the lack of access to a market delayed commercial production until 1982. The first producing well, known as the #1-A Blackleaf Federal, was completed in the Madison Group and reported an Initial Potential of 6,293,000 cubic feet of gas per day. In 1959, the second discovery well in the Blackleaf Field was drilled, and showed a potential flow of 969,000 cubic feet of gas per day. The well only produced 104 barrels of water with the gas.
Production from the field began with the completion, in 1980, of the Blackleaf Federal #1-8. The #1-8 had an Initial Potential of 5,100,000 cubic feet of gas per day. In 1981, the Blackleaf Unit #1-5 well was completed, and showed a potential flow of 9,000,000 cubic feet of gas per day. The Blackleaf Federal #1-19 was also drilled in 1981 and turned in an Initial Potential of 4,074,000 cubic feet of gas per day.
To put the production numbers in a perspective that is easy to understand, the average household, according to a 2009 report by the American Gas Association, consumes 70,500 cubic feet of gas per year.
The Blackleaf Field, during the period from 1984 to 1990, contributed over $1,800,000.00 to Teton County in taxes.
The well was shut down later when the operator at the time, Startech Energy, proposed plans to use a six acre surface area (only one percent of the field area of 600 acres) to drill new wells. Senator Conrad Burns, R-Montana, introduced legislation to remove the Federal minerals from production in the area. Montana’s other Senator, Democrat Max Baucus, took up the bill after Burns’ defeat. “That move cost Burns his re-election,” said Choteau Councilman and gun shop owner Jim Anderson. “Support for Burns collapsed in the region when we lost a major source of revenue for our schools and roads in Teton County.”
Environmentalists and the media championed a letter writing campaign of 49,000 letters sent in support of closing the well established, producing field. What was not as well reported was that less than 1,500 of the letters were from residents within the state of Montana. At the same time, according to media reports, Senator Baucus voted to shut off funding for an environmental study that was being conducted at the time to determine if the Blackleaf improvements would have a detrimental effect on the area.
“The research that was underway in conducting that impact study would have set the gold standard for that type of work,” said Bill Hansen. “It was a shame it was never completed, but the belief at the time was that the study might come down in favor of continued gas production.”
Hansen points out that while the Blackleaf field does not directly correlate with the wells drilled by Primary, it does indicate the presence of commercially producible hydrocarbons in the area.
Documents in possession of the Sun Times indicate “Undiscovered Estimates” of the natural gas potential of the broader region may be as high as 12.6 Trillion Cubic Feet (TCF) of gas. The same set of documents claim the field could have held as much as 2.6 TCF and would have produced for as long as forty years. According to a 2003 report from the Department of Energy, 1 TCF would meet the needs of 15,000,000 homes for one year or would supply the gas demands of the entire state of Montana for three decades.
A few miles to the North of Primary’s wells, Anschutz Exploration continues its drilling program. A privately owned company, Anschutz does not reveal any results of their program, however, the Denver based firm continues to permit new wells in Glacier County.
Just over the border, in Canada, three fields may give some insight as to how the Southern Alberta Bakken play will develop. The Waterton Field, the Pincher Creek Field, and the Lookout Butte Field are all long-term producers of natural gas.
The Canadian well that was most likely responsible for the discovery of Waterton Field may well have been the driving force behind the very first attempt to find commercial oil in Montana.
In 1901, at Cameron Creek, Northwest Territory (now Alberta), the first commercial oil well was drilled in what would become Waterton Park.
According to the National Park Service, as the search was underway for oil in Cameron Creek, the fever caught on in Flathead County and in 1902 the Kintla 1 was drilled at Section 12, Township 36 North and Range 22 West. A year later, the Kintla 2 was completed. The wells never went into production; they were plagued with water intrusion and a fire that destroyed the drilling gear.
“The production at Cameron Creek within the boundaries of Waterton Park and probably partly responsible for the exploration that led to the discovery of Waterton Gas Field in the 1950s, just north of Waterton Park,” Bill Hansen told the Sun Times.
The field is a prolific producer of natural gas. A large “sweetening” plant was constructed in 1960 to remove hydrogen sulfide from the gas.
Back in Teton County, other companies have confidence there is oil and gas to be found in commercial quantities. In 2011, the Sun Times visited a rig drilling an exploratory well at the Theodore Roosevelt Memorial Ranch near Dupuyer. The newspaper was there as Honors Students from Fairfield School began a project with Fairways Exploration and Production to monitor the environment near the well site.
The well was completed, and in the fall of 2012, Fairways returned to do a Three Dimensional Seismic Survey of their leases. The Sun Times was on the ground as the seismic trucks profiled the formations deep below the ground near the site of their exploratory well. While Fairways is tightlipped about their plans, it is believed that the Texas Company is looking over the data from the seismic and developing plans for the future.
In the meantime, other companies picked up leases in Teton County in 2012. In addition to Primary and Fairways, Texas Wildcatter Jim Bass and his Lonesome Dove Resources picked up significant leases in the county, from just to the northwest of Choteau all the way to the southwest of Fairfield. Energy West picked up some leases, as did Mountain View Energy and Wexco.
Another player to enter the area in 2012 is Antares Exploration Fund, LP.