Canada
Andora Energy Corporation, a 71.8% owned subsidiary of Pan Orient, is focused on developing the bitumen resources at the Sawn Lake property in the Peace River Oil Sands Region using SAGD development. The first step towards determining the commercial viability of the SAGD recovery process at Sawn Lake is a demonstration project to establish that the SAGD process works in the Bluesky formation reservoir and to provide an indication of the productivity of the reservoir and the amount of steam injection required to produce the bitumen.
Andora is the operator and holds a 50% working interest in the demonstration project, located in the Central Block of Sawn Lake, which commenced in 2013. For Phase 1 of the SAGD demonstration project, one SAGD well pair was drilled in the fourth quarter of 2013 to a depth of 650 meters and a horizontal length of 780 meters. Construction of the SAGD facility for steam generation, water handling and bitumen treating was completed in 2014, steam injection commenced May 21, 2014 and bitumen production commenced September 16, 2014. Capital expenditures at the Sawn Lake SAGD demonstration project were $11.3 million during 2014 related to construction of the SAGD facility, installation of the water source and disposal facilities, recompletion of the SAGD producing well for production and capitalization of expenses and revenue. The Sawn Lake Demonstration Project has not yet proven that it is commercially viable and all related costs and revenues are being capitalized as exploration and evaluation assets until commercial viability is achieved.
The results to date of the first SAGD well pair indicate that the SAGD process works in the Bluesky formation reservoir. The well is still in its ramp-up phase and Andora is now focused on reaching bitumen production of between 345 and 449 barrels of bitumen per day, with an associated SOR of between 4.0 and 3.1. These bitumen production parameters correspond to the Best and High case estimates used by Sproule in the December 31, 2014 contingent resource evaluation for the 16-30-91-12W5M well pair which was drilled in a 15 to 20 meter thick reservoir with no bottom or top water. The Company expects the steam chamber to reach the top of the Bluesky formation sandstone reservoir in April 2015 and maximum production is anticipated to occur in approximately September 2015, corresponding to the end of the first year of production. Production results to date are not necessarily indicative of long-term performance or of ultimate recovery and the Sawn Lake demonstration project has not yet proven that it is commercially viable.
The oil sands project at Sawn Lake Alberta as at December 31, 2014 was evaluated by Sproule Unconventional Limited ("Sproule Unconventional") based on development using SAGD. This evaluation does not evaluate the exploitation potential through the use of cyclic steam stimulation. Contingent resources are those quantities of petroleum estimated, as of a given date, to be potentially recoverable from known accumulations using established technology or technology under development, but which are not currently considered to be commercially recoverable due to one or more contingencies. The contingent resource volumes estimated in the Sproule Unconventional report are considered contingent until such time as commercial recovery has been confirmed with SAGD production rates from a SAGD pilot, regulatory approvals for commercial SAGD development have been obtained and the company has a firm commercial development plan and funding for the commercial development. Contingent Resources are further classified as "High", "Best" and "Low" in accordance with the level of certainty. There is no certainty that it will be economically viable to produce any of the reported contingent resource volumes.
The December 31, 2014 contingent resource report by Sproule represents a mechanical update of the prior year's report updated for December 31, 2014 price forecasts for crude oil, bitumen, natural gas and exchange rates, and a revised date of 2019 for the estimated commencement of commercial operations, which is three years later than the date assumed in the resource report of December 31, 2013. There is no change from the estimate of company gross contingent resource volumes from the December 31, 2013 contingent resource report prepared by Sproule, which was also a mechanical update. The December 31, 2014 contingent resource report does not incorporate the results to date of the Sawn Lake demonstration project since those results are very early stage as the steam chamber continues to build and it is not expected that the maximum bitumen production level or a stabilized SOR will be reached until the third quarter of 2015.
The "Best Case" company gross contingent resources at Sawn Lake are 214 million barrels of bitumen recoverable attributed to Andora's working interests, which is 154 million barrels attributed to the 71.8% ownership interest of Pan Orient in Andora. The net present value of the "Best Case" (discounted at 10% before income tax using forecast prices) attributed to Sawn Lake contingent resources is $469 million for Andora. The amount attributed to the 71.8% ownership interest of Pan Orient in Andora is $337 million. The net present value of the "Best Case" (discounted at 10% before income tax using forecast prices) attributed to Andora's Sawn Lake contingent resources decreased by $88 million, or 16% to $469 million at December 31, 2014 from $557 million at December 31, 2013. This reduction was attributable primarily to an estimated three year delay in the expected timing for commercial operations and a repurchased by a joint venture partner in March 2014 of the 3% gross overriding royalty on a portion of the non-owned working interests in 36.5 sections that enabled the joint venture partners to fund their 50% share of the demonstration project and allow the demonstration project to move forward.
