Sleeping giant: Can Canada’s other mammoth bitumen deposit be commercialized?
Only a handful of risk-tolerant companies are taking on the bitumen carbonates in earnest
Trevor Newton picks up a small lump of bitumen from a section of core sample and begins massaging it between his thumb and forefinger, watching as it abrades into a coarse, black powder. “That literally crumbles in your hands,” he says, as much to himself as anyone else. “It’s not as solid as it looks, is it?”
The sample is unique from the thousands of other bitumen slabs stored at this Calgary core research center. Most were pulled up from the sands of the McMurray Formation. But this particular 36-meter-long tube of Earth was carved out farther west, in the lesser-known Debolt Carbonate formation, from 500 meters below the surface – deeper than the cretaceous oil sands deposit that sits atop it.
“You read it like a book,” Newton says, gesturing with his arm from the shallowest to the deepest portions of the sample. What begins as a thin layer of oil sands at the top quickly gives way to a few meters of greyish clay, which eventually fades into a hard, black limestone rock. The deeper portion of the sample is covered in penny-size blotches of bitumen that have seeped through occasional hairline fractures. The bitumen itself is thicker than molasses, thought to be more viscous than any other carbonate reservoir in the world. Pressing a thumb into it leaves an imprint, like fresh tar on a road.
Newton is the chief executive officer of Strata Oil & Gas, a micro-cap company holding 53,760 acres of land in the northwestern corner of what is broadly known as Alberta’s carbonate triangle, a series of rock formations endowed with an estimated 447 billion barrels of ultra-heavy bitumen in place. So vast is this deposit of carbonate bitumen in Alberta that some have compared it, in terms of size, to the oil sands – a deeper, harder, heavier version of the renowned Athabasca Formation.
If only one third of the carbonate resource were proven recoverable, Canada could become the top-ranking country in the world in terms of oil reserves, ahead of Saudi Arabia and Venezuela. But there’s a catch. To date, no company has managed to commercially produce oil from the formation despite various attempts dating back to the ’70s. Carbonate bitumen is not included in provincial reserve estimates.
A few companies are attempting to change that. Major producers like Shell Canada Ltd. and Husky Energy Inc., in an on-again off-again fashion, have been investing in the carbonates. Husky has plans to develop its Saleski project – a development it estimates could eventually produce as much as 10 billion barrels of oil. The company hasn’t yet specified a production timeline. Shell had plans to develop its Grosmont Venture leases, but in 2008 announced it would put the project on hold. Other companies, including Athabasca Oil Corp., Laricina Energy Inc. and Osum Oil Sands Corp. have collectively raised billions of dollars to put toward projects in the carbonates.
Laricina and Osum have joint-ventured on one such project, a 10,700 bpd demonstration that holds promise of being the first to scale up from pilot to commercial development. Large capital infusions from American and Asian institutional investors have made that expansion possible. Laricina has raised $1.3 billion to date, the majority from private equity, and is backed by New York-based investment houses like Lime Rock Partners and Kayne Anderson LP. Osum, for its part, is partly owned by Blackstone Capital Partners and Warburg Pincus LLC; the Korea Investment Corporation, an investment division of the South Korean government, bought a $100-million stake in the company in 2010. The Singaporean government’s investment division is also a shareholder.
Beneath the Sands
The bitumen carbonates, unlike the oil sands deposits that tend to sit atop them, are layered in a downward slant that leads from east to west.
Near the end of 2012, former Suncor Energy Ltd. CEO Rick George joined Osum as chairman, further bolstering the company’s credibility. George told Alberta Oil in a 2013 interview that his position at Osum came as a result of his belief in the potential of the carbonates. On July 31, 2014, the company closed a $350 million purchase of Orion, an in situ oil sands project, from Shell Canada. The acquisition was funded in part with net proceeds of a new US$210-million secured term loan for which Barclays Bank PLC and Goldman Sachs Lending Partners LLC acted as joint-lead arrangers and bookrunners.
But proving up the viability of the carbonates is far from assured. Foreign investment in the Canadian oil sands totaled $50 billion between 2007 and 2013, 60 per cent of which came from Chinese and U.S. investors, according to the Canadian Energy Research Institute. But a perfect storm, including pipeline bottlenecks, rising operating costs and new Investment Canada Act restrictions on state-owned enterprise investment in “strategic assets,” may inhibit capital inflows from abroad, especially impacting higher risk plays like the carbonates.
In March of 2011, Laricina reached first production at its 1,800-barrel per day pilot project, which shares the name “Saleski” with a nearby Husky development. Cumulative production has since reached roughly 436,000 barrels. For the past few years the company, together with joint-venture partner Osum, has been working toward ramping up Saleski to a 12,500-barrel-per-day operation (including pilot production). The company currently has five wells producing a yearly average of 600 barrels per day, or 80 per cent of capacity. “When people ask us ‘is the Grosmont commercial?’ we say ‘yes,’” says Glen Schmidt, the CEO of Laricina.
Laricina is developing two projects in the central region of the Grosmont, a wide sheet of carbonate rock that reaches from the top of the Athabasca Formation down to the bottom of the Cold Lake Formation with a paywall thickness, in some areas, of over 100 meters. It is Alberta’s largest single carbonate trend. Long ago the Grosmont was a limestone formation, but geological processes slowly converted it to dolomite over time – a process that has left fractures and small holes, or “vugs,” in the rock.
Schmidt, like others, believes developing Saleski would demonstrate a wider potential for the carbonates. But the reservoir appears to be resisting efforts. “The first challenge was how to drill it. We found it was more like drilling in the foothills,” he says. There are upsides to the craterous characteristics of the Grosmont, however. Wells don’t need to be stimulated, as in shale formations, or produced with dual wells, as in situ oil sands operations, because the rock is naturally fractured. “We’ve learned that a perceived challenge is in fact a positive characteristic.”
The real challenge is viscosity. Bitumen that measures around 80,000 centipoise (CP), which is a measure for viscosity, can typically be cold-produced. Carbonates bitumen is often around 2 to 3 million CP, and can go as high as 8 million CP. “It’s more viscous than peanut butter,” says Mike Ranger, a geologist with Strata.
Based on past results, Schmidt is confident that by using a single-well cyclical steam-assisted gravity drainage (C-SAGD) method the company can begin to approach its production goal. Schmidt aims to eventually move toward a cyclical-to-continuous SAGD (C2C-SAGD) method to ramp up production. Wells could possibly be extended from 800 to 1,200 meters. Finally, the hypothetical plan goes, a solvent may be added to increase production rates. “In the Grosmont, the oil will move,” he says. “The technology really goes back to basics of drilling and completion.”
The construction of steam generators has already begun, but as part of the plan to reach first steam at the new facility, the JV partners must raise $550 million. Osum has already raised its $200- million share. The completion on March 20 of a $150-million debt issuance to the Canadian Pension Plan Investment Board will give Laricina further cushion to meet ongoing operating expenses.
Newton points to big blue blotch on a paper map, representing a series of contiguous land holdings that add up to roughly 360,000 acres of undeveloped territory in northern Alberta. “This is Koch,” he says. Koch Industries began buying up the land just northeast of Strata’s Cadotte West plot sometime around 2007. That land grab now represents about one third of its total Alberta land holdings, a larger area than either Husky or Shell oil sands leases. The company has been characteristically silent about its intentions in the region, though geologists say a large portion of the reservoir beneath is carbonates. “Koch isn’t really saying what they’re up to,” Newton says.
He sees the investment from the U.S. juggernaut as a sign that confidence in the viability of the carbonates is growing. For now he is looking on as larger companies with deeper pockets sell the carbonates story. He’s waiting for companies like Laricina and Osum, and the majors like Shell and Husky, to prove up the formation’s commercial viability. It’s been slow going. “We’re just kind of waiting for the industry to wake up to the reality of the carbonates’ potential,” he says. “When we first made our discovery, like a lot of people, we thought that carbonate development would go a lot faster than it has.”