Low-cost production and projects with size and scalability have allowed Galleon Energy Inc. to keep moving forward in a challenging price environment for natural gas and oil, maintains Jim Iverson, vice president of exploration. Galleon has continued to be an aggressive driller and has amassed the largest contiguous land block ever assembled on Alberta’s Peace River Arch.
“One of our initial premises for the company was to get a great land position in a multizone fairway,” Iverson notes. “’We still have that – over 810,000 net acres of land.” This strength in land has allowed Galleon to be an aggressive driller over its seven years of existence and permits the company to point to a drilling inventory of more than 700 locations. Organically generated projects have grown the company’s reserve base to more than 50 million barrels of oil equivalent (BOE) proved plus probable reserves, of which 60 percent is currently gas and 40 percent is oil. The company’s current production is greater than >> 14,000 BOEs and is split 70/30 gas to oil. “Galleon is fortunate to be able to shift focus from gas to oil,” Iverson explains. “Many companies in Alberta can’t do that, so they are stuck struggling with the current low gas prices.” At press time, the natural gas price in Alberta was in the range of $3.50 Canadian per thousand cubic feet (cdn/mcf), a far cry from the high of $13.50 cdn/mcf in December 2005 and even the $11 cdn/mcf in May 2008 Global
Petroleum Marketing. “Galleon is going to focus on its oil properties in the near term,” Iverson points out. “You’re going to see a lot more oil production from Galleon as we move forward. About 72 percent of the 2010 drilling budget is weighted toward drilling oil.”
Oil prices rose to $145 US/bbl in July 2008 and then plunged to $36 US/bbl in January 2009, according to the TFC commodity charts for NYMEX crude oil. They have since stabilized around $75 US/bbl. “People think that’s a good price because the suppliers can find it for that price and still make a profit and yet it doesn’t stifle the economy,” Iverson notes.
Low Operating Cost
Although oil is the commodity of choice currently, Galleon is also fortunate to have some high netback gas projects.
Its two top gas projects which represent approximately 50 percent of total production averaged a netback of $3.18/mcf ($19/BOE) in the first half of 2010. These high netbacks are a function of this gas having associated natural gas liquids (NGLs) which provide a premium price. It also is a function of having very low operating costs. The average operating cost for these two projects is 95 cents/mcf.
Galleon has focused cost efficiency. It produces primarily to its own facilities and has been driving down operating costs. Two significant initiatives in that regard have been getting rid of rental equipment and providing all operators with personal digital assistants.
“They can communicate with each other between shifts so that they don’t have to have the half-day to two-day overlap to catch up on what’s been going on,” Iverson says. “They do that at home, and it saves us money by not having as many hours charged out.”
The theme of cost efficiency flows through to the type of projects that Galleon pursues. For the most part, it targets medium-depth projects. “A good part of our production is coming from depths between 3,000 and 5,000 feet, so drilling costs are low,” Iverson notes. “At the 8,000 foot level, there is a whole range of additional risks introduced both on the drilling side and the producing side, particularly if you are going horizontal. This added risk is not good particularly in a low price environment. So we’ve worked really hard at finding plays that are less expensive to exploit.”
The company also shies away from projects with high “sour” or hydrogen sulfide content. “Our projects are sweet or have less than 0.2 percent hydrogen sulfide,” Iverson points out.
Galleon Energy uses economies of scale when drilling on its two core projects. “We don’t drill one well – we do a program of five to 20 wells, and that causes the overall costs to go down,” Iverson notes. Another efficiency is that the majority of Galleon’s 810,000 net acres are farm land and are consolidated within a 60-square-mile area. “This reduces costs for rig moves, and all services for that matter,” Iverson says.
Mapping and Joint Ventures
Galleon’s cost-saving in recent years also has been aided by not having to buy seismic mapping. “We spent a bunch of flow-through money in 2004 to 2006 to acquire 3-D seismic over 90 percent of our land,” Iverson emphasizes. “The good thing is, now we have the data and don’t need to spend more on seismic in this challenging price environment. The 3-D has been invaluable in maintaining drilling success. Our success rate has been more than 80 percent over the last three years.”
In 2010, Galleon has focused much of its drilling budget on its core development properties. “One important theme is to convert proven undeveloped reserves into proven producing reserves,” Iverson says.
Twenty percent of Galleon’s capital budget is still directed toward exploration. “We have a number of new ideas that will come to the table this year,” Iverson pledges.
The company also has decided to open up some of its approximately 1,300 square miles of land to joint ventures. “In past years, we’ve tried to handle it all ourselves,” he explains. “The reality over the last two years in the oil business, however, is that capital has been a bit scarce because of the recession and the changes in commodity price. The equity markets are not as handy as they used to be and cash flow is down. So we have had to shift our modus operandi to be a little more versatile.”
Galleon is allowing other companies to farm in and provide drilling capital so that it can advance some of its identified opportunities. “Galleon continues to be very rich when it comes to viable drilling opportunities,” says Iverson.
Growth is still a big part of Galleon’s future. “We have the land, the drilling inventory, the people and the facilities which will allow Galleon to sustain growth,” Iverson asserts. “We are producing about 70 million cubic feet per day (MMcfd) of gas currently but have Galleon-owned plant capacity of 140 MMcfd. Similarly we are producing about 3,300 barrels of oil per day and have battery capacity of 25,000 barrels of fluid per day. We have more than 700 drilling locations in inventory.
“We’ve are going to continue to drill aggressively,” Iverson insists. “A lot of people are pulling back on drilling, but Galleon is not. We currently have four rigs running. We are drilling a lot of horizontal wells. About 70 percent is horizontals, which will be completed using multistage frac technology.”
By drilling horizontally and using multiple fracture stimulations along the length of the lateral, the exposure to hydrocarbon-bearing rock can be increased dramatically. “Getting more exposure to the rock is what it’s all about,” he notes. “Instead of getting a 20-barrel-a-day well, you’re getting a 150-barrel-a-day well, making the economics better.”
Hedging on the Future
Galleon currently has about half its natural gas production hedged at $5.67 cdn/mcf. This compares to the AECO Alberta natural gas spot price of around $3.50 cdn/mcf. Most of Galleon’s oil is hedged at $82 US/bbl compared to current spot of $75 US/bbl. “We’re ahead of the curve on that one,” Iverson says. “That gives you comfort as to what your cash flow will be – you’re not fluctuating with the market.”
Despite the attractive price, Iverson hesitates to hedge all of Galleon’s production. “You don’t want to lock in all your production in case the overall price goes up,” he cautions. “If the market goes back up to $6, we’ll take advantage of that with our other half. So that’s our strategy – we use hedging as a risk moderator. Our producing cost and crown royalties are around $2/mcf combined, so our profit margins are good even where gas is today.”
Iverson characterizes the company’s organizational structure as very flat. “We try to promote responsibility and accountability,” he notes. “The good thing here is we’ve lived by it.” The company likes to provide options to all employees. “It gives everybody a stake in the company,” Iverson points out. “We’re currently structured in business units, where each business unit is acting as a minicompany. They are given a budget based on the projects they identify and are charged with the management of that budget.”
The recent weakness in natural gas prices is attributable to a decrease in U.S. industrial demand and increased production from the shale gas projects, such as the Marcellus shale in Pennsylvania and New York and the Barnett and Haynesville in Texas and Louisiana, Iverson maintains. “Production from all those big shale gas plays in the U.S. have pushed down natural gas prices,” he stresses. “That is coupled with a real weakness on the demand side. We’re praying that the U.S. economy can get rolling again.”
The Cleanest Fuel
Iverson thinks the United States is making a big mistake by not providing some government support for its natural gas industry. “That’s their best chance for lowering energy costs, reducing greenhouse gas emissions, and having security of supply,” he says. “They have the largest gas reserves in the world, but they aren’t taking advantage of them.”
He suggests the U.S. federal government should be providing incentives for use of natural gas for power generation, manufacturing and even for vehicles. “Natural gas is a hugely green fuel – it’s the cleanest burning fossil fuel that is currently known, much different than oil,” Iverson insists. “It would also create a lot of jobs converting cars to natural gas and service stations from oil to natural gas. It would put a lot of people to work and help with job creation. I really don’t understand why they’re not jumping at it.”
Galleon Energy sends its natural gas through a pipeline to central transmission lines. “All the gas goes from Galleon’s gas plant to a meter station run by the transmission companies,” Iverson explains. “They measure how much you’re contributing to the system and they pay on that basis. Most of it is carried to the Eastern seaboard, and some to California.”
Iverson is bullish on Galleon Energy’s future. “On a go-forward basis we have all the tools we need to continue growth,” he says. “We have the land, strong projects, facilities, people, good balance sheet and cash flow of approximately $110 million, which will allow us to keep drilling and growing. We see ourselves as being in a really good place for sustainability.
“Right now, oil is flat and gas is low, and we see gas has nowhere to go but up,” he asserts. “Our message is that we have really rejuvenated ourselves. We will be bringing more oil production to the table and are well-positioned to benefit from any increase in gas price. We’re very optimistic about the future vision of Galleon. That’s the message that we want to get out there.”