Unconventional Oil

[johnlw]

March 28, 2007
Oilsands frontier grows
UTS drilling reveals potential of properties further north
By DINA O'MEARA, THE CANADIAN PRESS

CALGARY -- Strong initial drilling results from a new play by UTS Energy Corp. (TSX:UTS) are pushing the boundaries of Alberta's oilsands further north, and could substantially increase the company's financial standing, according to experts.

UTS's positive outlook gives rise to the possibility of opening a new oilsands area with the potential to support additional projects, Mark Friesen, with FirstEnergy Capital said yesterday.

"This has stretched land acquisitions northward, and may continue to do that," Friesen said.

However, he added, "more overriding, macro factors are going to keep excitement levels more muted than they were on land activity."

UTS, which is developing the Fort Hills oilsands project with partners Petro-Canada (TSX:PCA) and Teck Cominco (TSX:TCK), released preliminary drilling results for its Lease 14 and Lease 311 acreages in northeastern Alberta's oilsands region Monday.

The company said recent drilling results support its plans for a separate 50,000 barrel per day stand-alone oilsands mining project on Lease 14, adding an independent estimate will be released at the end of the year.

However, the lease is widely seen as an asset waiting for the proper offer, to help fund Fort Hills, the cornerstone project for UTS.

William Roach, president and CEO of UTS, said additional exploration properties recently acquired with Teck Cominco has increased UTS's net acreage to eight times what's at the Fort Hills project.

"The numbers are pretty large," Roach said yesterday. "We now have more resources outside Fort Hills than inside it, which is a pretty staggering thought looking back three years."

UTS initiated its first public offering to finance the 100,000 barrel per day synthetic crude Fort Hills project in 2004. UTS currently owns a 30% working interest in Fort Hills. Petro-Canada owns 55% and Teck Cominco the rest.

UTS expects to release final costs numbers for Fort Hills, estimated around $4 billion to $5 billion, in June. The project is expected to be commercial by mid 2011. Cost estimates of $100,000 per flowing barrel of synthetic crude are slightly below industry standards of around $110,000 per flowing barrel, mostly due to updated technology.

"The key challenge here is being able to strike the right balance between initial costs, project size and most importantly, execution risk," Roach said.

Uncertainty surrounding federal and provincial environmental regulations cloud oil sands planning, as do looming changes to provincial royalty regimes, and the elimination of tax breaks on capital investments.

High energy costs to run operations, the shortage of skilled labour and associated high costs also combine with volatile oil prices to erode investor confidence in the oil sands Roach said.

"Individually, none of these are catastrophic," he said. "But when taken together, they represent significant uncertainty just at the time we're looking for fiscal stability."

The upside is the long lifespan of oil sands projects can overcome periods of uncertainty as long as oil prices remain above US$40 per barrel, Roach said.

The company's Lease 14, 100% owned by UTS, was used as collateral in the acquisition of exploration lands with Teck Cominco.

"It is worthwhile remembering the role of Lease 14 as the asset underpinning our Fort Hills project," Roach said.