No ‘time out’ for Alberta oil sands

By Gary Park

For Petroleum News

The Alberta oil sands aren’t exactly frozen in time while the industry awaits word on its royalty future.

EnCana and Canadian Natural Resources, two of the most vigorous opponents of higher royalties, are moving ahead with two C$1 billion projects and two startup operators have rolled out development plans, but the Alberta government has sent another junior into a legal huddle by canceling its plans to remove bitumen from beneath a lake.

EnCana, despite word from Chief Executive Officer Randy Eresman that the company might slash its Alberta spending by C$1 billion in 2008, remains on track with its Borealis in-situ bitumen recovery project, which could come on stream at 35,000 barrels per day in 2012 and grow to 100,000 bpd by 2018, extracting 1.4 billion to 3.4 billion barrels of resources.

A preliminary regulation document has been filed, consistent with the Borealis project schedule, but a final decision on capital investment will be “impacted” by what happens to the royalty recommendations, a company spokesman said.

Although EnCana has not put a price tag on the project, analysts believe the first-phase outlay would be about C$1 billion, now that construction costs for steam-assisted gravity drainage projects are running at C$30,000 per flowing barrel.

Borealis is one of three EnCana ventures that aim for a combined 500,000 bpd of oil sands output by 2015-18 as part of the Canadian independent’s joint-venture arrangement with ConocoPhillips.

Canadian Natural disclosed in a preliminary regulatory filing that it hopes to expand initial production from its Kirby in-situ project to 45,000 bpd from the initial 30,000 bpd, starting with four pads in 2011 and adding eight as part of its eventual goal of producing 100,000 bpd.

The application points to an initial capital investment of C$620 million and C$300 million in royalties and taxes over 20 years.

Alberta cancels lease

• The Alberta government cancelled a lease awarded to OSUM Oil Sands, which planned to test methods of removing bitumen from under a lake in northeastern Alberta.

A month after suspending seismic testing at Marie Lake, Energy Minister Mel Knight decided exploration and development of a potential 252 million barrels was not in the public interest, his office said.

A government spokesman said OSUM would only be eligible for compensation covering the cost of its lease, which is believed to be about C$3.6 million.

The company, which had expected to invest about C$750 million to produce 30,000-40,000 bpd, has raised C$100 million based on the estimated value of its bitumen resource.

An OSUM spokesman said the cancellation amounts to “confiscation” and the unprecedented cancellation of a lease before any work was done. The company is now exploring its legal options.

Meanwhile, Imperial Oil has no plans to develop its own leases either under or close to Marie Lake, although it has been operating close in the area for about 30 years through its Cold Lake heavy oil operation.

• Little-known Patch International is pressing ahead with plans for a 10,000 bpd steam-assisted project at its 80 percent working interest Ells River play.

Targeting initial production by 2010, with a possible expansion to 40,000 bpd, Patch said an independent evaluation points to recoverable resources of 139 million to 203 million barrels.

The company has budgeted C$322 million for its 10,000 bpd pilot project and an extra C$950 million to expand by 30,000 bpd.

Chief Operating Officer Jason Dagenais said there is a “lot of upside opportunity as 75 percent of our acreage has yet to be completely exploited and explored. We have a management estimate of 1.4 billion barrels in place.”

But he conceded Patch is in a “holding pattern” until the royalty issue is resolved.

• MEG Energy, with state-owned China National Offshore Oil Corp. as a 15 percent partner, is applying to hike production from the second phase of its Christina Lake project to 60,000 bpd from 25,000 bpd.

The first phase of 3,000 bpd is scheduled to reach full output within about a year. Recoverable bitumen from the lease is estimated at 2 billion barrels.

• OSUM and MEG, along with Athabasca Oil Sands Corp and Laricina Energy have made a joint appeal to the Alberta government for fiscal stability after paying C$300 million for oil sands leases, investing a combined C$2.5 billion in seismic, core hole drilling, plant construction and steam-assisted drilling activities and planning an overall outlay of C$7 billion by about 2012.

The four companies have formed an alliance to make a public case against recommended royalty hikes, arguing that because they have no cash flow they need stability to raise capital.

OSUM Chairman Richard Todd said his company is “completely dependent on foreign equity. Of the billions we need to raise, 90 percent or more comes from international sources.”