Resource Plays - the Way of the Future

Recently, we were having a discussion about well costs and rates of return in the Canadian Oil Industry. We had spent the last couple of years developing Cardium projects in the W5 area of Alberta. If you are not familiar with the Cardium at an estimated 1.6 billion barrels recoverable, it was largest oil/condensate field discovered in Canada and is basically the last giant (a giant oilfield is traditionally thought to contain greater than 500 MM Barrels of oil/gas equivalent recoverable)oilfield discovered in Alberta. Discovered in the 50's, by Socony-Vacuum (which became Mobil) and Arne Neilson (who became it's president) most of the easy production had been discovered and produced. The conventional vertical drilling techniques where no longer proving to be economic. The revitalization of the play would have to come from the development of new drilling techniques, horizontal drilling and sequential fracing which would allow the tighter portions of the reservoir to produce hydrocarbons which had traditionally been unrecoverable with conventional vertical drilling. Continuing with our discussion was the problem of costs versus return and the concept of risk. Big problem with the Cardium is that for the most part it is too deep which forces costs up and lowers the rate of return.

The question of rate of return is key, what is the expected rate (IRR) of return a company must generate to be successful? Larger companies use 20% juniors strive for higher at 40%. With the problem with well performance that is seen by industry currently, how can you achieve such a high IRR?