Oilsands development in Saskatchewan -
Jun 2007 [Oil & Gas Inquirer]
Godfrey Budd
Saskatchewan has been on a steady upward economic trajectory for the last few years in no small part because of a series of successes in its oil and gas sector. Improved technology for cold heavy oil production in the Lloydminster region helped boost the province's oil production through the late 1990s into the 2000s. Natural gas production is poised for a gradual decline, oil production in recent years has held steady around the 420,000-bbl/d mark. About half of this is heavy oil.
Now, what is perhaps the last great imponderable of the province's petroleum resource-the bitumen deposits of northwest Saskatchewan-is being charted through core drilling and seismic programs operated by Oilsands Quest Inc. Part of the vast oilsands of northeastern Alberta that extends eastward across the provincial border, it is located some 200 km north of Lloydminster and beyond. Although there has been plenty of skepticism about the extent of the resource, some estimates have pegged it as high as 30 Bbbl of recoverable bitumen-if the right technology is applied.
Oilsands Quest, which merged with CanWest Petroleum Corporation last year, announced May 7 this year accelerated time lines for development of its Axe Lake discovery area, in the wake of two successful winter drilling seasons in the west-central part of a land position of 508,000 acres.
The company spent $10 million in winter 2005-2006 setting up infrastructure and drilling 24 holes. Of these, 19 intercepted McMurray bitumen. In the best three-section block, eight holes drilled had an average pay thickness of 19 m with one having a pay thickness of over 28 m. Grades of bitumen saturation by weight of up to 18 per cent were encountered. Company executives were encouraged, and firmed up plans for a second winter of drilling.
Oilsands Quest's land position in Saskatchewan extends from Township 92 to 100. Most of the holes drilled in winter 2006-2007, however, were in what the company refers to as the Axe Lake discovery area, which includes the north half of Township 94 and the south half of Township 95.
The company had as many as eight coring rigs drilling in the area, as well as six seismic rigs operating, and spent about $40 million over about five months on an aggressive winter drilling program and had drilled 150 holes by the end of the season. This program included 34 holes outside the Axe Lake area and 100 square miles of seismic work.
At peak activity last winter, there were about 200 workers running the rigs and doing related work. The Axe Lake area is in a remote region of northwest Saskatchewan, about 100 km northeast of Fort McMurray. Workers were flown in on bush planes that landed on a frozen lake. The extensive lease area required a 300-plus km network of ice roads to be built.
The company was able to save some money by hiring locally from nearby First Nations communities, and taking advantage of avoiding some of the higher costs associated with work on the Alberta side of the border.
The winter activity on the Oilsands Quest lands also included extensive electromagnetic and magnetic surveys that began in early February.
Oilsands Quest management's preliminary estimate of original bitumen resources in place (OBIP) in the Axe Lake discovery area suggests there could be as much as 1.5 Bbbl OBIP. A March 26 press release includes two sets of estimates: a high estimate pegs the OBIP at 1.25 to 1.5 Bbbl, while a best estimate pegs OBIP at 0.6 to 0.75 Bbbl. The estimates, notes the release, are in accordance with the Canadian Oil and Gas Evaluation Handbook (COGEH) under NI 51-101 standards of disclosure for oil and gas activities.
"Axe Lake represents our first discovery. We don't know what the best one will be. It has not been drilled extensively yet. We've done some exploration-34 wells-and seismic outside the Axe area. A lot of exploration data suggests further prospectivity. There are other projects out there. We have established a solid base, and we are now working to establish a commercial operation," says Christopher Hopkins, president and CEO of Oilsands Quest.
In an interview, Hopkins notes that Suncor's Firebag project is just over 20 miles west and EnCana Borealis is "within six miles."
The area of the OBIP within the Axe Lake discovery covers about 36 sections.
The find was made near where Shell Canada found bitumen at a thickness of about 20 m and a depth of 150 m in the 1970s. It was likely judged as not technically feasible to exploit at the time.
Oilsands Quest has announced timelines over the next 12 to 18 months for a number of activities in preparation for a commercial thermal in situ operation. The company has begun a process to assess in situ recovery alternatives. "We are now evaluating what recovery methods are best. We are looking at the next generation of technology, and will take part in a review of the new technologies," says Hopkins.
One of the first things that were done once management was convinced that the drilling program had hit pay dirt was to buy more land. Oilsands Quest spent about $25 million on 67,000 acres-about three townships-of contiguous land on the Alberta side. The Axe Lake discovery area comprises just under 14 per cent of the company's land position in Saskatchewan.
The depth of the Axe Lake resource appears to make it suitable for thermal in situ recovery. The depth of the bitumen pay zone, Hopkins points out, is comparable to other thermal in situ projects in the McMurray formation. Axe Lake depths are in the 185 to 200 m range. Suncor's Firebag is about 250 m deep, the OPTI/Nexen's Long Lake is about 210 m deep, and Husky's Sunrise is 200 m down, says Hopkins.
Although the government of Saskatchewan has introduced a series of measures in its fiscal regime for oil and gas development in recent years, and is now generally regarded as highly competitive, it lacks a current framework for oilsands development. But that's not surprising. As recently as last year, Saskatchewan government officials were pointing out that little exploration work had been done in the region, and that it would be premature to make any strong statements about its resource potential.
To date, the Oilsands Quest permits have been covered under the province's Oil Shale Regulations of 1964. The Saskatchewan government has begun a review and is expected to finalize the terms of a regulatory and fiscal regime for oilsands development soon.
According to a report from Genuity Capital Markets, an investment banking firm, "There is speculation that these terms will be comparable to Alberta's terms."
Oilsands Quest, which has a market capitalization that has been fluctuating around the $700-million mark, has come a long way fast. Beginning in fall 2004, Oilsands Quest, then a subsidiary of CanWest Petroleum, focused on an oilsands exploration program in Saskatchewan. This quickly became the company's major project. Exploration drilling began in late 2005. When the merger between the two companies was finalized late last year, the senior management team of Oilsands Quest became senior management overall under the name Oilsands Quest Inc.
The company is pursuing activities on several fronts to develop its resource. Work is already underway to evaluate drilling data, perform lab studies for bitumen recovery, conduct economic and risk assessment studies, and develop engineering timelines for a pilot plant. Also, in short order the company will undertake reservoir modelling, drill test wells to confirm lab work, and begin negotiations for a joint venture partnership to develop the Axe Lake asset. Hopkins comments, "The challenge is for people to understand how busy we are."
