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Contender in oil sands stakes MEG Energy shrugs off disappointments of IPO with strong showing in 1st year of operation, spurring on plans for 2 major projects Gary Park For Petroleum News
MEG Energy, having stumbled out of the starting gates as Canada’s newest publicly traded oil sands company, is now in full stride.
The startup has made what it somewhat immodestly claims to be the “fastest, most efficient” beginning of any in-situ project. And, so far, no one is taking issue.
MEG (which has state-owned China National Offshore Oil Corp. as a 16.69 percent partner) has reported glowing results from the first year of commercial operation at its Christina Lake project in northern Alberta by exceeding design capacity.
Company Chairman Bill McCaffery said that as a result MEG is setting its sights on more than doubling production to 60,000 barrels per day, coming onstream in 2013, and is entering the regulatory process with its planned 100,000 bpd Surmont project, expected to start production in 2018.
Backed by estimates from GLJ Petroleum Consultants, an independent reservoir engineering firm, that its leases contain about 1.7 billion barrels of proved and probable bitumen reserves and 3.7 billion barrels of contingent resources, MEG is more certain than ever that it can ultimately achieve combined output of 260,000 bpd over 30 years.
Analyst says data supports MEG Chris Feltin, an analyst with Macquarie Securities, said the public information available from the first year of production at Christina Lake support MEG’s view that it has made the fastest startup in the in-situ sector, currently about 26,000 bpd.
“They acquired their land early and got into a sweet spot in the overall trend with high reservoir quality,” he said. “They’ve done a very efficient job in managing the steam injection rates and ramping up the project.”
Using the steam-assisted gravity drainage technology, MEG injects steam into a horizontal well to melt the viscous heavy oil resource, which is then brought to the surface through a parallel well.
Thus the steam-to-oil ratio is a vital indicator of plant efficiency, measuring how much water and fuel must be used to recover each barrel of bitumen.
MEG produces steam at an 85 megawatt cogeneration power plant at Christina Lake, delivering 70 percent to the project and the rest into the Alberta power grid, with those revenues helping reduce operating costs.
MEG’s Chief Financial Officer Dale Hohm said Christina Lake performed better than expected in the first half of 2010, with the per barrel steam-oil ratio and operating costs easing as production volumes rose.
The steam-oil-ratio dropped from 3.1 in the first quarter to 2.5 in the second quarter and 2.4 in May and June.
Operating costs, including the cost of gas consumed for cogeneration, plunged from C$39.01 per barrel in the first quarter to C$18.80 in the second and C$16.40 (C$10.42 for non-energy costs and C$5.98 per barrel of oil equivalent for gas) in June.
126,000 contiguous acres Christina Lake sits on 126,000 contiguous acres, adjacent to Cenovus Energy’s own Christina Lake project and northeast of Devon Canada’s Jackfish project.
While ready to move ahead with construction of its second phase, MEG has filed a regulatory application for Phase 3, targeting staged development of 150,000 bpd, aiming to bring 50,000 bpd onstream in 2016 and two more additions of 50,000 bpd each in two- to three-year intervals.
The Surmont project is 30 miles north of Christina Lake and is adjacent to oil sands leases operated by ConocoPhillips Canada. GLJ has assigned combined proved and probable reserves and contingent resources of 647 million barrels to the lease.
A detailed environmental impact assessment has almost been completed and MEG expects to submit its regulatory proposal in 2011.
Just to round out its solid underpinnings, MEG has growth properties west of Christina Lake and Surmont, covering 471,000 acres of 100 percent owned leases, with several large contiguous blocks the company believes could support standalone commercial enhanced oil recovery operations.
As well, MEG and Devon are joint owners of a 215-mile pipeline system between Christina Lake and the Edmonton area — including a 24-inch line to transport diluted bitumen to a blending and storage facility.
IPO scaled back All this helps disperse the one blotch hanging over MEG, which scaled back its initial public offering, which started trading at the end of July, from C$1.1 billion to about C$700 million, cutting its share price to C$35-$39 from a hoped-for C$42-$48.
The IPO price came in at C$35 and has since slipped under C$32, partly due to the dismal performance of peer-company Athabasca Oil Sands, which raised C$1.35 billion in an IPO in February, but has since seen its market price slide from C$18 to under C$12.
While Athabasca left a bad taste in the mouths of oil sands investors, MEG has been undeterred, raising its 2010 capital budget to C$629 million from C$439 million in preparation for detailed engineering and major equipment purchases for the next phase of Christina Lake and the addition of new Surmont leases.
Hohm, based on a one-month road trip before the IPO, said the big question for MEG is how much of the company’s future growth investors will pay for up front.
“Investors really like what the company is doing and they see the potential going forward, but they’d like to profit from it as well,” he said.
Market uncertain for others However, the market uncertainty has posed questions for other privately owned oil sands players eying IPOs.
The next potential candidates are:
• Laricina Energy, founded in 2005 and holding more than 180,000 acres and C$450 million of equity capital. Its major original shareholders were Warburg Pincus and The Blackstone Group. They were joined in July by the government’s Canada Pension Plan Investment Board, which made a private placement of C$200 million to take a 17.1 percent equity stake.
• Grizzly Oil Sands, formed in 2006, with more than 500,000 acres of leases and permits. It is 75 percent owned by Wexford Capital and 25 percent by Oklahoma-based Gulfport Energy.
• Sunshine Oilsands, founded in 2007, with the purchase of four leases, to which it has gradually added.
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