Technological Fixes Have John Wright Optimistic About The Future Of PetroBakken and Petrobank

For a man at the helm of two companies fighting for their lives on the stock market, John Wright sounds surprisingly relaxed, and maybe even a bit cavalier. “It’s all good,” he says over the phone. “There’s no business like the oil business.”

PETROBAKKEN
V100 Rank: 70 Revenue: $858,066,000 Net Income: $47,985,000
Number of Employees: 300 Chief Executive Officer: John D. Wright

Wright is the president and CEO of Petrobank Energy and Resources Ltd. and PetroBakken Energy Ltd. The companies share more than a chief executive and a naming prefix, too. Petrobank owns 59 per cent of PetroBakken’s publicly issued shares, and as a result, the two have taken tandem dives on the Toronto Stock Exchange over the last two years. Petrobank has fallen from over $50 a share in 2010 to the mid-teens as of July 2011, while PetroBakken has tumbled from $35 in late 2009 to $13 this past summer.

PetroBakken’s performance is all the more peculiar when viewed alongside its most direct competitor. Like PetroBakken, Crescent Point Energy Corp. deploys horizontal drilling techniques in Saskatchewan’s Bakken oil play. But unlike PetroBakken, Crescent Point’s share price rose from around $31 in July 2009 to the mid-40s in July of this year.

So why does Wright practically radiate optimism?

He might simply be refusing to acknowledge reality, or he might know more than the market does. Determining which will depend heavily on what happens when Petrobank and PetroBakken play the technological trump cards they have stashed up their sleeves.

Fast Forward: John Wright thinks the future holds big things
Photo by John Gaucher

Wright’s first high card is the grey matter carried around in the craniums of his employees. “PetroBakken is a team of technical specialists who have drilled more horizontal wells with multi-stage [hydraulic fractures] than anyone else in Canada,” he says. “That skill set and database of success and failure is unparalleled. There’s nobody who could match that.”

Horizontal wells represent the future of conventional oil extraction in Canada, Wright says. “What we have left in the Canadian basins now –
you’re kind of scraping the bottom of the barrel,” he says. “There’s not a lot of easy resource that you can go capture.” At this point, vertical wells have sucked up more or less everything they can. But billions of barrels still remain in Alberta’s Cardium oil play, and they can be coaxed out of the ground with the sort of expertise in which PetroBakken specializes. Hence Wright’s sunny outlook.

Yet the TSX clearly disagrees with him, and at least part of that has to do with the Cardium acquisitions that PetroBakken made in early 2010. The company paid out $336 million in cash to acquire Berens Energy, $480 million in cash and PetroBakken stock to nab Result Energy and approximately $250 million in cash and company shares to buy out a private Cardium-focused company.

Wright rejects the idea that his company might have overpaid for the properties, which together cost the company just over $1 billion. “You can whine about the deals you didn’t do,” he says, “but if you own the land, you own it forever. We’re not complaining.”

PetroBakken planned to drill additional wells on its new Cardium assets in order to increase production right after it acquired them, but Mother Nature vetoed that with a cold, wet summer. An encore performance for the first half of 2011 meant that PetroBakken’s Cardium assets could not increase production as expected. “There have been floods all over,” Wright says. “We’re expecting locusts next, by the way.”

Alan Knowles, an analyst with Haywood Securities Inc., still believes in PetroBakken’s potential. He says the company will ramp up production in the Cardium by the end of the year, and pump up its share price in doing so. “I have a high degree of confidence that they’ll meet their exit rates for the year,” he says. “I think that will be very positive for the stock.” Knowles thinks PetroBakken’s Cardium assets produce 20,000 barrels of oil per day.

Late Bloomer; Petrobank COO Chris Bloomer says his company’s THAI technology is a replacement for SAGD
Photo by Colin Way

Wright’s next ace in the hole is Petrobank’s Toe to Heel Air Injection (THAI) technology. THAI is a new method of extracting oil from the viscous, deep-down bitumen deposits that comprise most of the Athabasca oil sands. The process injects air through vertical wells into one end of a heavy oil deposit. When the oxygen hits the hydrocarbons at a temperature of around 700 C, it ignites a combustion reaction that creates enough heat and pressure to force the oil into a horizontal collecting well that runs along the bottom of the deposit. From there, the oil gets piped along to the end of the deposit – the “heel” in the moniker – and then up to the surface through vertical production wells.

“We think that THAI is ultimately a replacement for SAGD,” says Chris Bloomer, senior vice-president and chief operating officer of Petrobank. Steam-Assisted Gravity Drainage, the current industry standard for heavy oil extraction, works by running two horizontal wells underneath heavy oil deposits and pumping steam into one of them. The steam heats the oil, reducing its viscosity and letting gravity drain it into the other well, which takes it to the surface.

Bloomer believes that THAI holds some important advantages over SAGD. Since it’s powered by compressed air instead of evaporated water, THAI needs far less initial energy to get the oil moving. Not only does this reduce carbon emissions, it also means THAI extraction can be profitable in places where SAGD’s costs make it uneconomical. And because THAI operates at such high pressure and temperature, it recovers about 20 per cent more oil from a given deposit than SAGD. THAI even produces water that can be used in other industrial processes.

It can be applied far outside of Alberta, too, with substantial deposits of heavy oil in places like Venezuela, China and Alaska. “The issue is technology to get it out of the ground,” says Bloomer. Since Petrobank holds the patents for THAI, it stands to make a great deal of money if the global oil and gas industry adopts the process.

Whether that will happen remains to be seen. “People are committed to SAGD, but we know a lot of people are looking at combustion very seriously now,” Bloomer says. “Petrobank has the only advanced-stage combustion process that has proven that it works. The industry is very slow in picking things up, but once [new technology] reaches a tipping point, it becomes the standard.”

The testing of THAI got started in 2006 with a small pilot project west of Conklin, Alberta. Since then, Petrobank has used THAI at projects in eastern Saskatchewan and central Alberta. By July of 2012, Petrobank could be producing 37,200 barrels of oil a day with the process.

With the THAI process and the Cardium land assets working in their favour, Petro-Bakken and Petrobank could be poised on the verge of major growth. Wright sounds like he wouldn’t have it any other way. “We’ve been sitting on a huge inventory of opportunities, just getting ready to execute,” he says. “It’s now all about converting that into dollars in the bank.”