US Oil Sands Inc. bets big on Utah
The Calgary company eyes an American oil sands frontier
Cameron Todd says scarcity brought US Oil Sands Inc. to the arid Uinta basin in northeastern Utah. The Calgary-based junior’s CEO, who leads a company that plans to mine bitumen, says Alberta is no longer the land of opportunity for new entrants breaking into the oil sands mining business.
“There are enormous resources in the Athabasca, but all the lands in the mining region are taken,” Todd says. “If you want to do work, you’ve either got to persuade somebody to allow you to work on their land, spend a lot of money trying to buy it from someone or go someplace else to do it.”
That reality has led US Oil Sands Inc. to the state of Utah. Since 2005, the company has acquired a 32,000-acre land position in the state’s Uinta Basin. On what it calls its PR Spring block alone, it says it has approximately 190 million barrels of discovered bitumen in place. The company is also on the cusp of doing something no one else has done – operate an oil sands mine in the United States.
That mine, the PR Spring Project, promises to be unique in other ways as well. It will be small (initial production will be 2,000 barrels per day), relatively cheap to build at a cost of US$30 million, and it will not require toxic tailings ponds. “We expect this will be a great business for us in the U.S.,” Todd says.
The term “oil sands” has become synonymous with Alberta. But it’s not a resource that only exists in this province. In fact, the fundamentals that create oil sands crop up all over the world. But what does make Alberta’s oil sands unique are their size. The 169 billion barrels of proven oil sands reserves in Alberta are too large to ignore in a world fueled by hydrocarbons.
Yet most places that do have oil sands reserves haven’t hit the geological lottery like Alberta has. And because mining and in situ oil sands projects in Alberta are expensive – running into the hundreds of millions and billions of dollars to develop – industry hasn’t developed smaller projects elsewhere.
Todd is a newcomer to the company. He became the CEO in April of 2011. But he’s no heavy oil neophyte. He got his start with Amoco Canada in 1980 and moved to its heavy oil and oil sands group in 1985. He came to US Oil Sands after spending five years as the senior vice-president, operations, refining and marketing, with another oil sands producer – Connacher Oil and Gas Ltd.
Todd says taking the CEO job at a small junior company with a market capitalization of just $56 million appealed to him, “I became convinced this is a breakthrough in the business.”
That breakthrough is largely dependent on a novel extraction process the company – originally called Earth Energy Resources Inc. – has been working on since it was incorporated in 2003. Developed in Grande Prairie 15 years ago, the process consists of using d-limonene to extract the bitumen. D-limonene is a chemical produced from the oil extracted from citrus peels, particularly orange peels. It is most commonly used in industrial and household cleaning products.
At its PR Spring Project, which received regulatory approval from Utah’s Division of Oil, Gas and Mining in May 2009, US Oil Sands plans to strip the ore from its 61.5 acre North pit. It will then be trucked to a processing facility that will loosen most of the bitumen from marble-sized chunks or ore. The final stage of the extraction process involves adding d-limonene instead of just hot water, which completes the separation. The company says the solvent will be recovered and recycled and the leftover sand can be placed in the mined-out sections at the site immediately for reclamation. No tailings ponds will be required.
Todd says the process has worked on pilot tests that have ranged from 24 to 500 barrels per day in size. The project has other advantages, too. Standard mining equipment will be used and the modules to process the bitumen are being manufactured in fabrication shops and will be trucked to the mine site and assembled there – keeping capital costs down. And unlike Alberta’s Athabasca region, there is no muskeg or heavy forest to remove to get at the bitumen. The PR Spring block is 2,438 meters (8,000 feet) above sea level on an arid plateau. “There is a very hard, thin layer of cap rock on top of the resource,” Todd says. “It’s only about 20 feet down until you hit the first beds of oil sands. So you don’t have to go as deep and you don’t have to deal with all the muskeg problems.”
With the development permits in place, the company plans to start production by the fourth quarter of 2013. It also plans to ramp up output at the PR Spring site quickly – to 20,000 bpd by the end of 2017. Within 10 years, the corporate goal is to produce 50,000 bpd from the PR Spring block, exploration blocks and new lands it has not yet acquired. Along the way the company plans to set a new standard for oil sands mining – one with low capital costs, high recovery rates, no tailings ponds and quick reclamation. “This will be the best, environmentally responsible oil sands project that has ever been built,” Todd crows.
While US Oil Sands appears to be on its way to producing oil sands in Utah, its plans haven’t been welcomed by everyone in the state. Mining has played an important role in the Utah economy since the 19th century. And in eastern Utah, where the Uinta Basin is located, the oil and gas industry is a major employer. But the state has a sizable tourism industry as well. It’s a prime downhill skiing destination and is home to five national parks.
It also happens to be one of the driest states in the U.S. Although the amount of precipitation can vary depending on what part of Utah one lives in, the wettest year on record was in 1994-95 when the state got an average of 16.67 inches of precipitation.
Of course, oil sands extraction is water intensive. So when Utah’s Division of Oil, Gas and Mining tentatively approved the development of the PR Spring project, it was no surprise that a legal challenge was launched – with water being the crux of the matter.
The 2009 approval was granted on the determination that the project would have de minimus, or insignificant, potential effects on the ground water quality of the region. In February of 2011, US Oil Sands sent a letter to Utah’s Water Quality Board informing them it was planning to modify operations. The letter asked the board to confirm that none of the changes would affect the project’s status. Those modifications included changes to the equipment used to extract the bitumen and de-water the tailings sand and fines, as well as increasing the size of two overburden storage areas and the use of two storage areas to dispose of tailings. It took the board a week to decide that the project could proceed as planned with the modifications.
That decision didn’t sit well with Living Rivers/Colorado Riverkeeper – a Moab, Utah-based environmental organization dedicated to, among other things, reducing water and energy use and impacts on the Colorado River. In March of 2011, Living Rivers challenged the board’s decision, saying that the ruling that the modified PR Spring Project would have no significant effects on groundwater quality was not supported by substantial evidence. Living Rivers contends there is groundwater on the 213-acre mine site and the operation will have significant and adverse effects on that groundwater. “It’s called PR Spring for a reason,” says John Weisheit, conservation director and co-founder of Living Rivers. “There are springs in the vicinity and there is more than one.”
In August, Judge Sandra K. Allen ruled against Living Rivers, stating that “Living Rivers presented no direct evidence supporting the presence of shallow groundwater in the project area”, nor did it show “the project will have a greater than de minimus risk of affecting the quality of that groundwater.” On October 24, the Utah Water Quality Board voted 9-2 to confirm Allen’s ruling.
The decision is a disappointing one for project critics like Weisheit. He’s concerned the d-limonene, which he likens to turpentine, will find its way into the nearby Green River – the chief tributary of the mighty Colorado River – and pollute both waterways. He worries that the water US Oil Sands will use to extract bitumen at the site will further deplete a river system that he says has no more water to give. And he has no doubt what mining 20,000 barrels of bitumen per day will do to the fragile ecosystem that exists in the PR Spring block. “They are going to obliterate the near surface aquifers. They are going to obliterate the soil cover, which is very fragile and poorly developed,” Weisheit says. “It will take thousands of years for this land to recover to what it is today. When they’re done, it’s going to be useless land.”
Legal challenges by environmental groups aren’t the only issue facing Todd and US Oil Sands. There is also the question of money and how the junior is going to get enough of it to fund its PR Spring project. The company doesn’t have the cash flow to develop it on its own and is currently searching for a joint venture partner.
As this magazine went to press, it hadn’t found one yet, but Todd didn’t sound overly concerned during a September interview. “We’ve had very strong interest from a lot of different players,” he said. “If you’ve got oil resources that are developable with existing permits and first production only a year away, it’s a very marketable thing for operating companies.”
That story has yet to tickle the fancy of the markets, however. The company’s stock price on the Toronto Stock Exchange, which hovered in the 19 cents range in November, reflects the skepticism Canadian investors currently have about small companies trying to make a go of it in the oil sands. “If you look at some of the history in Canada with the junior oil sands space, it’s a mixed track record at best,” says Mike Dunn, vice-president of institutional research at Calgary-based FirstEnergy Capital, which does not cover US Oil Sands. “Within Canada there have been a lot of investors who have lost money on previous investments and they are jaded. The market appetite for these kinds of investments in Canada is not there the way it was in the past.”
Todd is not discouraged. If 32 years in the oil and gas industry has taught him anything, it’s that patience is a virtue. Give the company a chance to work on its plot in Utah, and prove to the marketplace that its citrus solvent extraction process works, and Todd thinks it could open up all kinds of oil sands opportunities – for his company and others – around the world. “We’ve got 190 million barrels in place we’ve discovered on our lands. We expect to explore for more. But there are much larger lands in other places that could benefit from this. We think that’s going to resonate with a lot of potential investors over time.”