The Biggest Oil Play You’ve Never Heard Of

They grinned when he starting buying land in a barren section of Western Alberta, but their laughter turned to amazement when his wells starting gushing oil.

By all appearances Brian McLachlan, Chief Executive of Yoho Resources (TSXV: YO), has positioned his company at the heart of Alberta’s next petroleum bonanza. Land the company purchased a few years ago for $20,000 per parcel now fetches up to $2 million at auction.

New estimates suggest that the formation surrounding Yoho’s acreage could hold 62 billion barrels of oil, making it one of the largest shale plays in the world. Now other producers — including Shell Canada, ExxonMobil, and Chevron (NYSE: CVX) — have followed suit, spending more than $3 billion since 2009 snapping up land in the area.

Is this oil field the next Bakken?

Geologists have known for decades that oil and gas was locked inside Alberta’s Duvernay shale, a vast underground rock formation bigger than the country of Portugal that runs along the foothills east of the Rocky Mountains.

The prize up for grabs could be enormous. According to estimates by Alberta’s Geological Survey, the field could hold 62 billion barrels of oil and 443 trillion cubic feet of natural gas. More important, the formation is rich in condensate, an ultra light hydrocarbon used to thin oil sands bitumen that typically sells for a premium relative to other crude blends.

Now after testing those hunches in the field, its starting to appear as if the Duvernay might live up to some of the hype. Over the past few months a number of operators have posted solid production numbers. Drillers are now starting to fine-tune development plans, committing hundreds of millions of dollars to tap the emerging resource play.

Chevron, which owns over 325,000 net acres in the region, has posted excellent drilling figures. Last year, liquids yields on its five exploratory wells ranged from 30% to 70% with initial production rates of up to 7.5 million cubic feet of natural gas and 1,300 barrels of condensate a day. To put these results into perspective, a new well is considered a true gusher if it produces more the 1,000 barrels per day. Duvernay wells are absolutely spectacular.

Chevron says that the initial results from its early exploration program are “encouraging” and calls the Duvernay “a foundation for future growth in Canada.” While the company hasn’t given any hard development plans yet, an endorsement from one of the world’s largest oil companies definitely bodes well for the play.

Encana (TSX: ECA)(NYSE: ECA), which owns about 253,000 acres in the Duvernay, is also reporting impressive numbers. One well in particular posted an initial production rate of 1,400 barrels per day of condensate and four million cubic feet per day of natural gas over its first 30 days of operations. Over five months after completion, the well was still producing 350 barrels of condensate and two million cubic feet of natural gas per day.

Management is clearly bullish on this field. Encana has highlighted the Duvernay as one of its top five plays for expansion and has announced plans to spend between $500 million to $600 million with its partner PetroChina this year.

Rival Talisman (TSX: TLM)(NYSE: TLM) is also optimistic on the Duvernay’s potential. The company recently completed two wells with seven-day initial production rates averaging 2.2 million cubic feet of natural gas and 550 barrels of condensate per day.

Unfortunately for shareholders, developing its Duvernay acreage is just outside of Talisman’s financial capability. The company has been selling land to reduce debt, and is looking for a partner after struggling to find a buyer willing to purchase its entire position outright.

What’s next for the Duvernay?

Mr. McLachlan may have the last laugh when the dust settles over the Duvernay. Almost every oil and gas company operating in the field has reported blow-out numbers and the field could begin transitioning from the exploration to the production phase of development.

Over the next few weeks a number of the region’s big operators — including Vermilion Energy, Talisman, and Encana — will report their quarterly numbers. Investors will be scrutinizing drilling results to get a much better sense of the Duvernay’s potential. If this formation can live up to a fraction of the hype, it could move the needle for every company operating in the area.