In situ production growing – but beware of reservoir quality
Not all reservoirs are created equal, Peters & Co. warns
The common image of oil sands extraction involving massive truck and shovel operations that scrape the northern Alberta muskeg needs a reboot.
In a research note to clients yesterday, Calgary investment bank Peters & Co. says oil sands production from steam assisted gravity drainage (SAGD) averaged 487,000 barrels per day (bpd) in April and the total production from in situ (non-mining) oil sands operations averaged a record 750,000 bpd that month.
The increased production rates from in situ extraction methods demonstrates where oil sands production is heading.
You’ve no doubt heard Alberta has 169 billion barrels of oil sands reserves waiting to be produced. But most of those reserves are only considered recoverable through in situ methods because the resource is too far underground to mine.
In the research note, Peters says the increase in SAGD production has been especially rapid. In 2007, SAGD operations pumped out an average of 125,000 bpd. Now the total is close to 500,000 bpd, and Peters is forecasting SAGD production will average 550,000 bpd in 2013 and 600,000 in 2014.
But investors not familiar with companies involved in the bitumen business, and especially those firms whose assets are largely in situ, need to do their homework before buying up shares in every oily entity with a toehold in the oil sands.
Peters notes that not all in situ projects are created equal. Reservoir quality matters, and investors must be careful to separate the wheat from the chaff or else run the risk of being stung by an Opti-like fiasco.
To drive home the point, Peters compares the production performance of Cenovus Energy Inc.’s Foster Creek project (currently producing 117,200 bpd with a capacity for 120,000 bpd) and Connacher Oil and Gas Ltd.’s Great Divide project (currently producing 5,700 bpd with a capacity of 10,000 bpd).
The Foster Creek project has consistently had an average utilization rate of over 90 %, while production at the Great Divide project has averaged 60 % utilization and has been declining, resulting from well declines and a lack of capital investment on new wells. This difference in well performance highlights how operating results can change depending on reservoir quality and the importance of investing in companies/projects that are developing projects in higher quality reservoirs.