Tiny Surmont Energy enters the oil sands

Can an upstart firm find its way in the bitumen belt?

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April 27, 2012

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Surmont Energy CEO Mark Smith
Photograph Bookstrucker

If Alberta’s oil sands development were compared to a dog fight, Surmont Energy Ltd. would be the comically undersized pit bull. With only a handful of employees, the junior oil company is pursuing a gutsy drilling project in the heart of oil sands country, 70 kilometers south of Fort McMurray. Surmont is currently in the midst of a core sampling program. It hopes to have a full-fledged steam-assisted gravity drainage (SAGD) operation in place by the summer of 2013.

Making a go of it in the oil sands is an undertaking usually left to Big Oil. Surmont is surrounded by constant reminders of its size disadvantage, with ConocoPhillips, Nexen Inc. and Statoil ASA located mere kilometers from its 19 sections of land totaling 12,000 gross acres. But Surmont CEO Mark Smith says the risk is well worth it.

The privately owned company has farmed into the 19 sections under Bounty Developments Ltd. for an 80 per cent interest stake. It hopes to be producing between 10,000 and 12,000 barrels of oil per day by 2014. It’s an ambitious goal for a small company with no production, but the company has embarked on a $6-million drilling program where it will extract 12 core samples. “We’re trying to squeeze two seasons into one,” Smith says. “It’s been extremely exciting.”

Forays into the oil sands are not for the faint of heart. The resource is huge but it’s also expensive to develop and high oil prices – in the US$70 and above range – are required for most projects to be economic. Still, the potential to make profits has been luring entrepreneurs to northern Alberta. The ability to tap 170 billion barrels of oil sands reserves has piqued the interest of investors, who are drawn to firms operating in Alberta’s bitumen belt that offer the potential of attractive payouts, even if they have a comparatively small grubstake.

Smith – along with his three other counterparts Bill Cooper, Gordon Holden and Leith Pedersen – recently completed a 3-D seismic program on four of the sections. Since November they have pushed the project forward briskly. In a whirlwind four months, the owners managed to collect $11 million in capital strictly from family, friends and business associates.

“What I’m surprised by is the amount [of capital] available for the right projects. I think this is attractive; it appeals to a lot of people,” Smith says. That figure would have been closer to $16 million, if not for an unexpected fallout with a Houston-based investment fund that backed out during the final stages of the deal in February.

Those struggles come with the territory, Smith says. Still, the odds of succeeding in a high-cost business like the oil sands are long. Regardless, the four directors are quite comfortable having the odds stacked against them. They have plenty of experience working together. In 1996 Smith worked as CEO for Scimitar Hydrocarbons Corp., a Calgary-based producer with operations in the United Arab Emirates, Egypt, Mozambique and Western Canada.

Holden was the chief operating officer at the time and Cooper was a resource investor. The company was doing similar work there, drilling on then-unproven reserves. But was it as risky as Surmont’s current exploration? “It was different risk,” Smith says. “We had country risk when we were dealing internationally, which you don’t have here.”

But if history is any indication, Surmont stands a chance of success. Scimitar was producing around 1,000 barrels of oil per day when Smith left it in 1998. In 2002, it was struck a deal to merge with Rally Energy Corp. for $900 million.

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