POINT OF VIEW: Canadian Superior looks at size of the prize in Trinidad, Nova Scotia

Calgary’s Canadian Superior Energy Inc., an aggressive independent, operates in Western Canada, the Maritimes, and off Trinidad and Tobago.

In April 2006, Mike Coolen was named president and chief operating officer of Canadian Superior. He had been vice-president in charge of offshore operations and a member of the company’s board for several years.

At the company’s Halifax offices, Coolen told OGJ that he spent 20 years at Mobil Oil Canada and saw the pace change after moving from a major to a smaller independent. “One of the differences is your ability to implement change rapidly. A large company has more structure and bureaucracy and can’t operate on an ad hoc basis. At a smaller company everyone can take on a lot more initiative to make changes and add value. This is a real advantage for us. We can be very responsive to changes in oil and gas prices and tax regime.”

The hurdles to fund projects can be rigorous, Coolen noted. But business fundamentals don’t change, whether you’re at a little company or a big company. “We must manage the portfolio within our ability to fund projects.”

“It’s funny-people wonder how a small Canadian company can have the technical ability to drill these offshore wells. But it’s not the size of the company that matters-we’re the same size as any other company’s team looking after a particular basin.”

Canadian Superior has about 50 employees, with more added during offshore drilling, a “great staff of day-to-day operations people,” he said. They were all experienced hires, with many on the offshore team having 20-30 years in the North Sea and elsewhere, now focused on rapidly preparing and drilling prospects off Nova Scotia and Trinidad.

Trinidad

Drillers can face high pressures off Trinidad. “We can design for high temperatures, Coolen said, “but we have to watch high pressures more carefully.” The rock is young, with a narrow margin between pore pressure and fracture gradient.

The physical environment off Trinidad also involves high currents, raising concerns about vortex-induced vibrations (VIV), induced fatigue damage, and straight load on the riser.

Coolen said his staff “has more experience than many other companies,” noting that two engineering managers, Mark Gillis and Patrick Maris, worked in the North Sea for BPAmoco and for BG, respectively. Canadian Superior’s Trinidad & Tobago country manager, Roger De Freitas, came from GlobalSantaFe.

Canadian Superior holds acreage on two plays in the Columbus basin off southeast Trinidad:

• Mayaro-Guayaguayare “M/G” near-shore blocks, 55,000 acres, joint venture with national oil company, Petroleum Co. of Trinidad and Tobago Ltd. (Petrotrin).
• Block 5(c) “Intrepid,” 80,041 acres, awarded May 2004; production-sharing contract (PSC) signed July 20, 2005.

Coolen feels positive about the company’s prospects in Trinidad. He noted that 15 of BP’s top 25 producing wells worldwide are located in Trinidad. Canadian Superior’s Block 5(c) offsets BG and ChevronTexaco’s Dolphin and Dolphin Deep gas discoveries, as well as BPTT’s Chacalaca gas discovery.

Block 5(c) may contain more than 4 tcf unproven, unrisked reserves, and the company has three well locations selected based on a 3D seismic survey. “Hopefully we’ll be successful in all the wells-we’re not waiting for the third to hit.”

Canadian Superior will use the Kan Tan IV semisubmersible to drill three back-to-back wells off Trinidad in 2007. (The company announced the third well for Block 5(c) on Nov. 14.)

The rig is a third generation, enhanced Pacesetter design, and will be delivered to Canadian Superior in early first-quarter 2007, following its current refurbishment at the AmFELS yard in Brownsville, Tex. The Kan Tan IV will have a new accommodation unit, updated BOP equipment, 1 million lb Varco top drive, and a Vetco riser.

After commissioning and field testing, the rig will be towed to Trinidad.

The Kan Tan IV is managed by A.P. Moller-Maersk AS of Copenhagen and owned by Beijing Zhiyuan Industries Co. Ltd., a Sinopec Group company.

Offshore Trinidad

Canadian Superior will spud the first well on the offshore Intrepid Block 5(c) in first-quarter 2007. Canadian exploration company Challenger Energy Corp. will pay for a third of the exploration program to obtain 25% of the prospect.

Coolen anticipates 80 days to drill the well, a straight hole to 16,000 ft proposed TD and then test for 20 days. The company is targeting 14 sands, with expected porosities of more than 20% and permaeabilities of several hundred md.

Engineering manager Mark Gillis said they have designed the well with six casing strings and plan a comprehensive suite of wireline logs. The biggest challenge is gaining a workable level of confidence in pore pressure prediction, Gillis said. Canadian Superior uses GMI software and Knowledge Systems Inc. personnel will be on site during drilling. The well design is based on activity in surrounding fields and assumes a normal compaction model.

After setting the conductor and running riser, the well will be drilled with water to about 1,000 ft. The company will switch to synthetic mud about 3,200-3,500 ft below the rotary table, and expects to reach 16.5-17 ppg at TD, assuming a pressure ramp in the lower section of the well. Without the ramp, the mud weights could stay around 13 ppg. Baroid is contracted to provide drilling fluids.

After drilling and testing the Intrepid prospect, the rig will be moved to drill the Bounty prospect, anticipated to be another 80 days plus 20 days to test.

They have “an attractive day rate” for the rig, Coolen said, because of Canadian Superior’s flexibility with scheduling around the rig refurbishment. “We started conversations with Maersk in 2005, months before the market started escalating.”

If they are successful, Canadian Superior expects to build a core area in Trinidad over the short and longer term. “Success in Trinidad & Tobago would have a direct and immediate affect on our offshore Nova Scotia business.”

Nova Scotia

In the short term, Coolen said the company will drill another well on the Mariner block. The two main issues are the availability of a jack up rig and the details of a joint venture agreement. It’s important to have a strong joint venture partner, he said.

Canadian Superior is the largest acreage holder off Nova Scotia, with 1.29 net million acres on six exploration licenses. The company has six prospects on the Sable Island Bank, along the Scotian Shelf:

• Marquis (two licenses), 111,000 acres licensed Jan. 1, 2001, drilled in 2002.
• Mayflower, 712,000 acres licensed Jan. 1, 2002.
• Mariner, 101,800 acres licensed Jan. 2, 2002, drilled 2003-04.
• Marauder and Marconi, 371,000 acres licensed Jan. 1, 2004.

There are many play types among the acreage, including deepwater turbidites at Mayflower, shallow water Abenaki reef plays at Marquis, and shallow water Cretaceous plays at Mariner, Marauder, and Marconi.

But the basin has been historically slow to develop. Coolen said that one of the reasons is the prevalence of gas and small reservoirs. The early explorationists-Shell and Mobil-were oil seekers. It took the discovery of Venture, Thebaud, North Triumph, and others, leading to the Sable development project, to get development rolling.

Now, technology is catching up, he says, and people are finding better ways to develop gas and condensate resources on the shelf. Small discoveries have more opportunity to be developed than ever before.

Deep Panuke is a good example of technology allowing companies develop plays efficiently (OGJ, Nov. 20, 2006, p. 47). Using a MOPU will be an advantage over a fixed platform, he said, and expects about 1 tcf in the deep gas reef play; the four wells tested are capable of delivering 400 Mcfd.

The Canada-Nova Scotia Offshore Petroleum Board (C-NSOPB) needs to reevaluate the taxation and royalty regime, Coolen says, and recognize the costs involved in building a multiplatform development on the shelf. Field sizes run 500 bcf-1 tcf and require a disproportionate amount of capex to produce small reserves.

The government needs to look at the realities of the geology and recognize that Nova Scotia needs to offer a competitive edge to attract capital projects.

I-85 well

Canadian Superior and El Paso drilled the Mariner I-85 well from November 2003 to March 2004, using the Rowan Gorilla V jack up, about 290 km (180 miles) southeast of Halifax. They encountered gas pay in multiple zones, based on drill cuttings and fluid analyses, and also experienced high temperatures and bottom hole pressures. When the well was stopped, the costs had run to $45 million, partly due to delays from pack ice, and another $15 million was needed to test.

“It was an unusual case,” Coolen said, “all the technical folks for both partners recommended testing.” But El Paso’s Calgary-based management decided not to proceed, perhaps due to a corporate strategy to leave the basin (OGJ, May 17, 2004, p. 43).

Canadian Superior could have assumed 100% of the expenses and risk to test the well, which included well-control and ice issues, insurance, and the need to post a $30 million letter of credit to the C-NSOPB.

The company decided to save the money for future drilling, Coolen said. They had already learned enough from the wellbore to pick the next drilling location.

In fact, later that year, in September 2004, Canadian Superior announced the purchase of El Paso Corp.’s exploration and production assets off Nova Scotia. The acquisition included El Paso’s interests in the Marquis blocks (EL 2401 and 2402) and Marquis L-35/L-35A well data, the Mariner block (EL 2409) and Mariner I-85 well data, all of El Paso’s seismic data, and all shared geophysical, geotechnical and environmental data.

Coolen said the acquisition gave Canadian Superior additional flexibility in exploration and development of these prospects, and the company is now focused on further drilling on Mariner.

SD licenses

On Oct. 5, Coolen participated in a panel discussion on the status of “significant discovery licenses” at the CORE.06 conference in Halifax. These licenses were issued for an indefinite length of time to a number of companies operating off Nova Scotia, predominantly ExxonMobil, Shell, Imperial Oil, and Pengrowth Corp, several of which have not drilled for more than 10 years.

“If you discover something and there’s no cost to hold onto it, why would you give it back to the Crown?,” he asked the audience.

Compared to licensing regimes around the world, Nova Scotia has the simplest-and most outdated-Coolen said. It puts new, smaller companies at a disadvantage.

Although it’s clear that the Ministry won’t do anything on a retroactive basis, he thinks there’s an opportunity under existing legislation to make improvements for the future. There’s lots of room to negotiate on the definition of “commerciality,” for instance. And legislation can put the onus on the industry to prove up commerciality.

Coolen suggested that Nova Scotia analyze the Australian model, which includes “retention” licenses that are similar to SDLs in Atlantic Canada. Operators must demonstrate potential for commercial production within 15 years, and must reanalyze every 5 years, demonstrating that it is still not commercially viable.

However, Coolen recognized that Nova Scotia needs to offer a licensing regime that will make it attractive for operators to work in deep water, including longer-term exploration licenses and appropriate tax credits. Deep water holds the promise of larger discoveries off Nova Scotia, but the wells are likely to cost $150 million to drill.

Pure exploration licenses off Nova Scotia run 5 years, not enough time, he says, to acquire and process seismic, analyze, pick prospects, and schedule a rig in a basin so far from most of the available fleet. Environmental approval alone can take a year, he noted.

Although Coolen noted that “government has been very responsive to industry,” he suggests that government look at various additional incentives that have been offered to encourage deepwater drilling in the US Gulf of Mexico, where shallow-water licenses run 5-8 years, and deepwater licenses run 10 years.

Western Canada

Canadian Superior is growing its business in the Western Canadian Sedimentary Basin. Coolen said the company has a high success rate, drilling 60-70 wells/year, a mix of conventional and coalbed methane.

About 90% of production comes from the Drumheller area in south-central Alberta, where the company has 174,003 gross acres (112,902 net acres).

By the end of 2006, Canadian Superior will tie in more than 25 nonoperated Horseshoe Canyon CBM wells with a JV partner.

In northern Alberta and British Columbia, the company holds acreage and has seismic or drilling activity in the Windfall, Pine Creek, and Giroux Lake areas, as well as Boundary Lake, Cecil, Teepee, and East Ladyfern. The company is looking at future exploration in the Alberta foothills.

All of the company’s revenue comes from western Canada production. Canadian Superior was producing about 3,330 boe/d at the end of third-quarter 2006.

Canada Southern

In June 2006, Canadian Superior began to acquire outstanding shares of Canada Southern Petroleum Ltd. with an offer of cash and stock. In August, Canadian Superior made an offer including cash, common shares of Canadian Superior and new Special Trust Units with an estimated total value of $14.97/share, in response to a parallel takeover attempt by Canadian Oil Sands Trust.

By early September, two subsidiaries of Canadian Oil Sands Trust, Canadian Oil Sands Ltd. and Alberta Ltd., had acquired 11.7 million common shares of Canada Southern, representing about 78% of outstanding shares with a totally cash offer at $13.10/share, ending Canadian Superior’s takeover attempt.

New capital

As of June 30, Canadian Superior had a market capitalization of $272 million. On Nov. 13, Canadian Superior announced the completion of $15.4 million in financing through the issue of flow-through common shares. The new capital will be used to fund multiwell drilling in Trinidad and Tobago, among other projects.