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Oil Formation: Cardium

Putting Alberta Back into the Oil Game

Written by Keith Kohl
Posted January 11, 2010

When it comes to the Canadian oil and gas industry, I'll be the first to admit that my attention has been shifting away from Alberta.

Let's face it... if you've trying to stay ahead of the game, I'll bet that you've done the same thing. After all, we've seen a lot of Alberta companies jumping the fence to the greener pastures of Saskatchewan.

Over the last two years, the Bakken formation has become one the most profitable oil plays in Canada. I can't remember the last time I've seen better.

British Columbia, Alberta's western neighbor, has also been stealing the spotlight with its natural gas boom in the Horn River basin. If you remember the last time I talked about Canada's troubles with peak natural gas, you might recall that much of the trouble was taking place in Alberta.

Even the latest interest from China wasn't enough for me to get excited. China is looking to spend approximately $1.7 billion for a 60% stake in two Alberta oil sands projects. Although I still believe the oil sands are going to play a much bigger role in the future, I'll save that discussion for another time.

Alberta, however, is holding an ace up its sleeve... one that could be even more profitable than your Saskatchewan players.

Believe me, dear reader. You're going to be hearing a lot more about this oil play once the herd catches wind of it.

It's called the Cardium oil formation.

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The Cardium Oil Formation

Before I go any further, it's important to understand why this oil play is so important for Alberta — and why it may prove to be less risky than your investments in Alberta's neighboring provinces.

As you know, Alberta is the powerhouse of Canada's energy industry due to its vast oil reserves.

Much of the Western Sedimentary Basin (WCSB) stretches across Alberta, which holds one of the largest oil and natural gas reserves in the world.

But as you know, the WCSB is a mature area and production has been declining for years. Production of light-medium crude was projected to decline by nearly 40% between 2006 and 2016.

Alberta's oil industry isn't out for the count, though. Not yet.

Over the next few years, we're going to see a resurgence of activity, and I'm not just talking about the oil sands. This time, I'm referring to the growing interest in the Cardium oil formation, which holds some similarity to the now-famous Bakken formation.

My readers of the $20 Trillion Report already have a stake in both the Bakken and Cardium oil play. In fact, those readers have been on a hot streak, pulling in 24 winning trades since last February. One of their latest Bakken plays is up 50% in a matter of weeks. To learn more about these gains, simply click on this free report.

And if there's one lesson we've learned from the Bakken's success, it's that it's never too late. Remember, oil companies have known about the Bakken for five decades but have only recently begun to tap into its potential.

Unlike the Bakken, companies have had a lot of success producing oil from the Cardium formation in the past. Out of the initial 2.7 billion barrels of oil of recoverable reserves thought to be contained in the Cardium formation, more than 70% has been produced as of 2008.

Like I said, this isn't a new play.

What is new, however, is that companies are utilizing the same drilling technologies on Cardium wells that have been used in the Bakken. In other words, companies are taking advantage of new horizontal drilling and hydraulic fracturing techniques.—

This renewed interest has made the Cardium oil formation Canada's second-hottest oil play.

Investing in the Cardium Formation

One of the advantages of the Cardium formation is that there is less risk, meaning that the geologists know there's oil in the ground. The WCSB is a mature area for exploration.

Unfortunately, it's not as easy as blindly throwing a dart at a list of companies. While that may have worked back in March 2009, when nearly everyone hit rock bottom... those days are behind us.

For me, the first red flag on my checklist is experience. We're not talking about simply drilling a vertical well to a specific depth and expecting a Spindletop-like gusher. Those days are long gone. These wells can cost between $3-6 million each.

That's also one reason to be on the lookout for more Bakken drillers to get involved.

For an example, look no further than Petrobakken (TSX: PBN). A week ago, the company made a move into the Cardium oil play after buying Berens, a junior oil and gas producer. Petrobakken — a play my readers know well — is a combination of TriStar Oil and Gas and Petrobank's Canadian Business Unit.

Although the additional 3,650 boepd gained is mostly natural gas, the $271 million deal also provides Petrobakken over 100 drilling locations in the Cardium play.

Of course, there's another roadblock that has made investors cautious... and why it may not make a difference for your Cardium plays.

The Royalty Roadblock

Restructuring their oil and gas royalties is one thing that has Alberta companies looking for more profitable opportunities in neighboring provinces. It's also one of the reasons why Alberta's energy industry is asking the government to rethink some changes.

Even with the billions of royalty breaks doled out to companies in the oil and gas sector, it isn't enough if Alberta expects to stay competitive.

Later this month, a study will be released to help revamp the province's royalty structure. For now, I'll reserve judgment and keep you updated on any news that comes out.

Here's the catch: Alberta's royalty roadblock won't stop companies from grabbing more Cardium assets. With oil prices well above $70 per barrel, the Cardium formation will remain profitable — without any royalty breaks.

Until next time,

keith kohl

Keith Kohl

Energy and Capital

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