Osum Oil Sands eyes a bitumen motherlode
Equity investors are turning their attention to the untapped carbonates
Carrion birds scatter as pilot Tony Laface dips his Bell 206B model helicopter in for a close look at what’s left of a dead caribou. “As you can tell we’re pretty much in the middle of nowhere,” a voice crackles, rising above the steady clip of chopper blades.
It belongs to Jen Russel-Houston, geosciences manager at Calgary upstart Osum Oil Sands Corp. She’s wedged on to the helicopter’s back bench, seated next to two public-relations handlers. The geologist and former subsurface team leader at Shell Canada Ltd. can tell clastic rocks from carbonates in a split second, but on this overcast day in late February, from 1,200 feet aboveground, roughly 70 kilometers southwest of Fort McMurray, she is having trouble distinguishing one exploration lease from another. “I don’t quite know where one begins and one ends,” she says over the headset.
Suddenly a misshapen grid pops into view. On the forest floor, squiggly lines cut through stands of black spruce and poplar, forming what looks like a giant tic-tac-toe board in the northern woods. In fact, the pattern is a $10-million, 3-D seismic program. The rock underneath is a thin end of a bitumen wedge estimated to contain some 400 billion barrels of oil in place.
Osum holds 175,000 net acres in the trend, better known to geologists as the Grosmont carbonates. The privately held fi rm believes the property could eventually yield 73,000 barrels of oil per day. Another independently owned lease to the west might eventually produce upwards of 80,000 barrels of crude per day, the company estimates.
There’s just one snag. The Grosmont formation has long shone brightest among the province’s unexploited jewels, to such an extent that geologists and executives are known to whisper its name in the same breath as Ghawar, the supergiant conventional oilfield in eastern Saudi Arabia. Yet the carbonates’ potential is regularly excluded from provincial reserve estimates, in no small part because nobody has yet figured out how to produce a barrel of the super-viscous oil (API gravity of between five and nine) at an economic rate. “Grosmont’s not new. Everybody knew it was here,” says Russel-Houston, as the chopper completes another flyover. “Everybody knew it had bitumen. It just wasn’t considered economic.”
That view might be changing. The appeal among equity investors and deep-pocketed Asian firms for Alberta’s deposits of thick, tarry bitumen is beginning to spill over into the hard-to-crack carbonates. The trickle of interest follows a flood of foreign capital that has, in the last decade, inundated Calgary’s corporate towers. Much of the flow has originated in Asia and the United States. Companies headquartered in both regions are responsible for two-thirds of the $30.3 billion that foreign firms have spent gobbling up ownership stakes in the oil sands since 2003, according to the Canadian Energy Research Institute.
The tide has only recently begun lapping at the elusive motherlode of raw bitumen embedded in the carbonates, which Alberta’s Energy Resources Conservation Board (ERCB) estimates could hold some 447 billion barrels of oil in place, or 26 per cent of the province’s total bitumen resources. “We’re believers that this resource will, in the fullness of time, be commercialized,” says David Krieger, managing director with Warburg Pincus LLC in New York, and an Osum director, in an interview.
He is not alone. In addition to Warburg, itself a participant in three rounds of financing going back to 2008 that netted Osum a combined $815 million, the oil sands upstart counts among its backers Blackstone Capital Partners, Camcor Partners Inc., KERN Partners, Goldman Sachs and the investment arms of both the governments of Singapore and South Korea.
The Korea Investment Corporation, which in 2010 exchanged $100 million for a minority equity stake in Osum, has likewise pumped $50 million into Laricina Energy Ltd., another carbonate hopeful that counts the Canada Pension Plan Investment Board among its major shareholders.
Laricina and Osum are partners on a planned 12,500-barrel-per-day commercial demonstration in the Grosmont. If it’s successful, observers say, the project would go some way toward convincing outsiders that there is more to Alberta’s oil sands – much more, the companies say – than what’s currently scraped and gouged from Fort McMurray-area strip mines.
Asian investors in particular are “beginning to understand that it’s a large resource base, and obviously there’s a demand in that part of the world for that product,” says Rick Pawluk, a partner at McCarthy Tetrault LLP in Calgary and lead counsel for Sunshine Oilsands Ltd.
That company has zero production of which to speak, but its toehold in the Grosmont formation was among the assets shopped around in the lead-up to a March initial public offering that raised roughly $580 million – covered in large measure by the China Investment Corp. – on the Hong Kong Stock Exchange.
Sunshine’s debut on the Asian bourse is notable, not only for being the first such deal involving an oil sands player, but also because it points to a possible future for the carbonates, and the role national oil companies might play in unlocking the resource’s potential. Sunshine’s chief executive, John Zahary (also an Osum director), has signed a memorandum of understanding to explore potential joint venture opportunities with the China Petroleum & Chemical Corp. (known as Sinopec) with an eye to accelerating development of its in situ oil sands leases.
“The foray of Sunshine into the Hong Kong market is fascinating,” says Osum chief executive officer Steve Spence. “We’re watching very closely how that plays out, frankly not just over the next few weeks, but really how it plays out over the next month, the next year and on from there.”
Spence got an early look at the carbonates in 2006. On May 11 of that year, Shell Canada, through subsidiary BR Oil Sands Corporation, offered $2.6 billion for an all-share takeover of heavy oil middleweight BlackRock Ventures Inc. The deal gave Shell a modest production footprint in Alberta’s Peace River region.
It also gave Spence a tantalizing glimpse at a narrow sliver of the Grosmont trend. At the time, he was assigned the job of integrating BlackRock’s assets – some of them in the southern end of the Grosmont – into Shell’s massive production portfolio. The Canadian arm of the Anglo- Dutch giant saw in the carbonates more or less what everyone else did, he recalls: a long-term prospect whose time had not yet arrived.
The reservoir engineer in Spence saw something entirely different. Surveying the network of fractures and “vugs” – essentially Swiss cheese-like holes that ooze bitumen – that comprise the formation, he thought, “I think we can make money with these today.” “Getting oil to move that doesn’t want to move is kind of what I’ve been doing for the last 25 years,” he says, seated in a small boardroom at Osum’s spacious and airy Bow Valley Square office.
The Grosmont is unique. Spence gets visibly excited just talking about it. If it were a light oil reservoir, the executive says at one point during a lengthy interview, “This would be Saudi Arabia. Saudi Arabia never would have come on the map, frankly. We would have had the best oil reservoir in the world sitting right here.” As it is, the resource is heavy. So heavy, in fact, that early trials of thermal recovery techniques dating back to the 1970s, led variously by the Alberta Oil Sands Technology and Research Authority, Union Oil Canada and Chevron Resources Canada, have produced little in the way of commercial results.
The formation is riddled with fractures, shale barriers and holes big enough to swallow drill pipe whole, notes Les Little, executive director, energy technologies, at the Energy and Environment Solutions branch of Alberta Innovates. The agency has invested $900,000 since 2007 just researching the tough rock. “You need to know your geology,” he says. In some areas, the resource “actually sticks to the sand grains, which means you need more energy to get it off, if you can get it off,” Little says. “It’s just a more difficult nut to crack.”
Wheather or not Osum can solve the complex reservoir is an open question. “The company does not yet have any production and, as a result, its challenge will be to develop producing assets while minimizing [share] dilution and maintaining fi nancial discipline,” Peters & Co. analysts Jeff Martin and Tyler Reardon wrote in March 2011.
In May of that year, the analysts valued the company at between $11.76 and $19.04 per share. That translates to a market capitalization of between $1.6 billion and $2.6 billion, based on the 137 million fully diluted shares it had outstanding as of May 2012.
The company’s more immediate plans involve a decidedly less stubborn oil property in Cold Lake. First oil from a 45,000-barrel-per-day, steam-assisted gravity drainage (SAGD) project called Taiga in the Lower Grand Rapids and Clearwater formations is expected by 2014. Spence says the company “will seek additional funding to sanction the project.”
From where, exactly, it remains to be seen. At McCarthy Tetrault, Pawluk suggests the capital required to bring an oil sands project on stream, especially one located in as complex a reservoir as the carbonates, far outstrips the capacity of North American markets. It’s one reason he expects more companies will follow in Sunshine’s footsteps and choose to list on an overseas exchange. “You’ve kind of got to go where the money is, right?”
Which raises the question: Would Osum opt for a public listing in Hong Kong? “We’d never say never,” Spence says. The company has no plans for a public share sale, however. Nor is it relying on a deep-pocketed national oil company to prop up its balance sheet. Says Spence, “We’re designing our business to be self-contained, and not rely on a large partnership with a supermajor as part of our business model.”
That means using cash flow generated by Taiga to develop the firm’s carbonate leases, where plans call for use of a combination of steam and solvents to thin the ultra-viscous oil. “As long as you get high enough recoveries of the light hydrocarbon you’re putting in, it can be a very economic process,” Spence notes, declining to discuss specifi c projections. (Joint-venture partner Laricina anticipates a break-even price at its neighboring carbonate holdings below US$55 West Texas intermediate using solvent-cyclic SAGD techniques).
“Early projects will have some additional, logistical challenges,” the Osum executive allows, “but over time we see no reason why” costs should be different than a conventional SAGD project in the southern Athabasca region.
The giant oil field is prone to surprises, however. One morning in February, at the center of a football field-sized clearing in the woods, Russel-Houston, Osum’s geosciences manager and a veteran of pre-development work at Shell’s Carmon Creek project, is watching intently as a thin wire pulls taut. A 1970s-era rig called Trinidad 64 has corkscrewed down more than 400 meters to retrieve a core sample for analysis. The geologist’s eyes are fixed on a silver tube as it emerges from the hole. There is a moment of uncertainty before she shoots drilling supervisor Ron Barron a sideways glance.
“Is there nothing in there?”
“It’s not catching,” Barron says, above the whine of diesel engines.
The tube has come up empty. “Could be the bit we’re drilling with,” he says, bemused. He smiles. “Usually you get something.”
More posts by Jeff Lewis
- Director shines spotlight on 'fracking'
- Oil addiction 101, care of The Economist
- Cap-and-trade takes shape, sort of
- Russia quietly enters Alberta's cardium oil play
- Global LNG players jockey for space on a crowded field