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After a 20-year lull, oil and gas companies have made an optimistic return to Yukon exploration, driven by a combination of strong demand and rising market prices in southern producing areas. In doing so, they are bringing new jobs, business opportunities, and the promise of increased royalty revenues. But these companies also approach the Yukon with an understanding that there are no guarantees about how any exploration play is going to, well… play out in the end.
“When companies drill in a frontier region that’s unexplored, they’re elephant hunting,” says John Masterson, director of the Yukon government’s Oil and Gas Management Branch. “In the Yukon and elsewhere in the North, companies expect large finds and are willing to take bigger risks for those large finds.”
Sometimes, they get lucky early on. This is what happened at the Kotaneelee field in the southeast Yukon in 1979, where a marketable reserve of natural gas — an ‘elephant’ in industry terms — was discovered after very limited drilling. Today, the field’s two wells are still producing, with the natural gas being transported to Fort Nelson through a raw gas pipeline.
“Southeast Yukon continues to be a promising area for oil and gas development,” Energy, Mines and Resources Minister Archie Lang commented last August, just as Devon Canada, the operator of the Kotaneelee field, began drilling the Yukon’s first new well in over two decades. “This new well demonstrates industry’s continued confidence in the Yukon’s potential.”
Devon backed its confidence with $29 million in spending on well L-38, a development well. As part of the 200-day drilling program, northern joint venture Akita-Kaska won the contract to supply the drill rig. Yukon firms also provided environmental assessment services, catering and camp services, and some of the site construction. In this case, the calculated gamble paid off; the well began to produce in mid-May.
“It’s a very good well,” says Michel Scott, Devon’s Vice President of Government and Public Affairs. “It certainly met our objectives in terms of the drilling outcome. It’s actually bolstered our production there and it’s going to sustain this facility.” According to production reports on the Yukon government web site, the well has more than doubled the monthly gas production at the Kotaneelee gas field.
Since 1998, when the Yukon assumed responsibility for managing oil and gas, the Kotaneelee field has generated approximately $26 million in royalties. Now, increased production as a result of well L-38 will mean more royalty revenues for Yukon and First Nation governments.
“I also think this is a positive thing because it might generate, in time, more exploration opportunities in that area,” Scott adds.
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Of course, the southeast Yukon isn’t the only area with attractive hydrocarbon potential. The Yukon has eight identified sedimentary basins with a combined potential of 20 trillion cubic feet (Tcf) of natural gas. A great deal of that potential—about 6 Tcf—is thought to exist in the Eagle Plain Basin, where Devon drilled a second well in 2005.
Once again, the company spent a lot of money in the local drilling area, as well as in Dawson City and around the Yukon.
“It was a short program,” recalls Eagle Plain hotel manager Stan McNevin. “But while it lasted, we had more guests, more sales and more staff around here than ever before.”
This time, however, the results were not as rewarding for Devon. After drilling to a depth of 1,300 metres, the company didn’t find the desired hydrocarbon accumulations.
While the outcome was disappointing, dry holes are the risk companies take when they drill costly ‘one-offs’ in remote areas that have huge potential but limited exploration histories. In fact, what might become the biggest natural gas discovery in India’s history—announced just last week—might never have been made if the exploration company had thrown in the towel after the first fruitless well. Generally, the petroleum industry expects up to nine failures for every success in exploration drilling.
“For us, this was just one well,” Scott acknowledges. “It certainly doesn’t condemn the basin. There are hydrocarbons there. If this area was in Alberta, close to facilities, it would be all drilled up.”
This reality helps explain why Devon has no immediate plans to drill again in the Eagle Plain Basin.
“So we find a nice well, then what do we do?” Scott muses. “Expand our exploration program? Wait for decisions on the northern pipeline to progress a bit? In the absence of a pipeline, it’s a tough one.”
If the proposed Mackenzie Gas Pipeline and Alaska Highway Pipeline go forward, the potential for a lateral connection would encourage Devon and others to resume the hunt for that one well in ten that could change everything.
“Industry players tend to pay close attention to what one another are doing in an area of interest,” the Yukon government’s John Masterson observes. “Once you have a success, and particularly a large success, you’ll attract other companies.”
Indeed, when it comes to oil and gas exploration, no one forgets an elephant.
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Last Updated 30-01-2006
