Lloydminster Focus October 2011

LLOYDMINSTER

heat is on

OCTOBER 2011

The

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Producers push thermal recovery in heavy oil fields

Penny pinchers

Heavy oil success all about getting more for less

Opportunity central

Heavy oil play means different things to different companies A regional supplement to

Source Energy Tool Services is now

Logan Completion Systems

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Table of Contents

President & ceo Bill Whitelaw | bwhitelaw@junewarren-nickles.com INTERIM Publisher Chaz Osburn | cosburn@junewarren-nickles.com

7 The heat is on

EDITORIAL Editor

Darrell Stonehouse | dstonehouse@junewarren-nickles.com

Assistant editor

Joseph Caouette | jcaouette@junewarren-nickles.com EDITORIAL ASSISTANCE manager

Samantha Kapler | skapler@junewarren-nickles.com Editorial Assistance

Kate Austin, Brandi Haugen, Marisa Kurlovich proofing@junewarren-nickles.com

Producers push thermal

recovery in heavy oil fields

By Darrell Stonehouse

Creative Print, Prepress & Production Manager

Michael Gaffney | mgaffney@junewarren-nickles.com

13 Penny pinchers

Senior Publications Manager

Audrey Sprinkle | asprinkle@junewarren-nickles.com ART DIRECTOR

Ken Bessie | kbessie@junewarren-nickles.com creative services manager

Tamara Polloway-Webb | tpwebb@junewarren-nickles.com

Heavy oil success all about getting more for less

By Darrell Stonehouse

Graphic Designer

Lyuba Kirkova | lkirkova@junewarren-nickles.com Creative Services | production@junewarren-nickles.com

Janelle Johnson

CONTRIBUTING PHOTOGRAPHER

Joey Podlubny Sales

16 Opportunity central

DIRECTOR OF SALES

Rob Pentney | rpentney@junewarren-nickles.com SALES MANAGER—ADVERTISING

Maurya Sokolon | msokolon@junewarren-nickles.com

Heavy oil play means different things to different companies

SENIOR ACCOUNT EXECUTIVE

Diana Signorile SALES

Nick Drinkwater, Ellen Fraser, Michael Goodwin, Rhonda Helmeczi, Nicole Kiefuik, Jeff LeHoux, David Ng For advertising inquiries: adrequests@junewarren-nickles.com

By Darrell Stonehouse

On the cover

AD TRAFFIC COORDINATOR — MAGAZINES

Denise MacKay | atc@junewarren-nickles.com Marketing

LLOYDMINSTER

heat is on

OCTOBER 2011

Marketing / Trade Show Coordinator

The

Jeannine Dryden | jdryden@junewarren-nickles.com Marketing designer

Producers push thermal recovery as means to recover heavy oil

OFFICES Calgary

Penny pinchers

Heavy oil success all about getting more for less

Opportunity central

Heavy oil play means different things to different companies

BRITISH COLUMBIA

2nd Floor, 816-55 Avenue N.E. | Calgary, Alberta T2R 1N7 Tel: 403.209.3500 | Fax: 403.245.8666 NOVEMBER 2010

Toll-Free: 1.800.387.2446

Edmonton 6111 – 91 Street N.W. | Edmonton, Alberta T2E 6Y4 Tel: 780.944.9333 | Fax: 780.944.9500 Toll-Free: 1.800.563.2946 Oil & Gas Inquirer is owned by JuneWarren-Nickle’s Energy Group and is published monthly.

GST Registration Number 826256554RT. Printed in Canada by PrintWest. ISSN 1204-4741 | © 2011 1080554 Glacier Media Inc. All rights reserved. Reproduction in whole or in part is strictly prohibited.

Publications Mail Agreement Number 40069240. Postage Paid in Edmonton, Alberta, Canada. If undeliverable, return to: Circulation Department, 800 - 12 Concorde Place, Toronto, ON M3C 4J2 Made in Canada The opinions expressed by contributors to the Oil & Gas Inquirer may not represent the official views of the magazine. While every effort is made to ensure accuracy, the publisher does not assume any responsibility or liability for errors or omissions.

The cover photo shows inside a steam generator at a SAGD operation.

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Corinne McKetiak | cmcketiak@junewarren-nickles.com

A regional supplement to

Photo: Joey Podlubny

Advertisers’ Index ASTEC Safety Inc �������������������������������������������������������������������������������������������������������������������������������������������������������� 4 BDI Canada Inc �������������������������������������������������������������������������������������������������������������������������������������������������������������19 Bry-Tan Trucking Ltd �������������������������������������������������������������������������������������������������������������������������������������������������19 Dow Trucking Ltd ��������������������������������������������������������������������������������������������������������������������������������������������������������19 FDI Acoustics Inc �������������������������������������������������������������������������������������������������������������������������������������������������������� 15 Flexpipe Systems ��������������������������������������������������������������������������������������������������������������������������������������������������������11 Gibson Energy �������������������������������������������������������������������������������������������������������������������������������������������������������������12 Kenilworth Combustion Ltd ���������������������������������������������������������������������������������������������������������������������������������12 Logan Completion Systems �����������������������������������������������������������������������������������������������inside front cover Northern Blizzard Resources Inc ������������������������������������������������������������������������������������������������������������������������ 6 PWM Steel Services Ltd ����������������������������������������������������������������������������������������������������outside back cover LLOYDMINSTER FOCUS ■ 3B

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AsteC safety inc.

The ticket gets you on-site.

The training gets you home!

Safety has taken centre stage in recent years as both federal and provincial governments have implemented minimum standards for safety training, safety equipment and safe work practices, says Jo-Anne Johnston, Director of Training for ASTEC Safety Inc. “As an employer, you are expected to make sure your workers are trained in all the required disciplines and have been given the information they need to know and apply company safety policies,” Johnston explains.

“Likewise, the company representative that hires the contractor must make sure that they meet the required safety standards and so on up the line. The CEO in head office is no longer immune to prosecution for negligence.

“Who pays the cost for safety? We all do.

And who reaps the benefits? We all do,” she notes. You cannot put a price on someone’s life.

ASTEC Safety has been in business in Lloydminster since 1991. Larry and Jo-Anne Johnston purchased the company in 2003 and expanded the business to include locations in Bonnyville and Provost in 2005. With a strong client base in the oil, gas and construction industries, ASTEC has gone from training 8,000 students a year to over 18,000 students annually. This number continues to grow as its development team adds new training programs and updates course content. In addition to training in the classrooms at all locations, Client Specific Training is offered

on the customer’s site as well. Any course delivered “in house” can be delivered on location.

“We believe that there is no substitute for hands-on training with a qualified instructor who has years of field experience,” says Johnston. “We seek third-party accreditation for all of our courses, making sure that the customer gets the highest quality of training available. Having said that, there are instances where classroom training is just not possible.”

Realizing that there are applications for all types of learning, ASTEC has branched out into online training and has just completed their first online course called Basic Fire. Customer response to the online course has been very positive, with 18 different safety companies now offering the course online through their websites.

“While online training cannot take the place of conventional classroom training, it is an excellent tool to help teach the basics and is available in remote areas day or night.”

ASTEC provides a full range of safety training courses to prepare field hands to work safely in the field. The company also provides the latest in safety equipment to protect workers.

In 2007, ASTEC signed a distributorship with Sperian to offer their full line of Gas Detection, Breathing Apparatus, and Fall Protection products. Each of the three locations has a full service repair and diagnostic centre with certified technicians who service all the products they sell. In addition, all three locations sell and service fire extinguishers and offer mobile on-site repair service.

“We are branching into more of the specialized equipment because, as the patch gets busier and the extraction methods more

415753 ASTEC Safety Inc full page · fp

sophisticated, the risk for the employees rises,” says Johnston.

ASTEC’s rental division has added the newest technology for monitoring drilling sites, construction and maintenance with MeshGuard Gas Detection Systems. These units are designed to monitor large areas, reporting the results in real time to a central control and alarm centre. They do not take, however, the place of the personal gas monitors that each employee wears. They are designed to operate independently and monitor an entire site. ASTEC also has a special projects division headed up by Chris Johnston, vice-president of Technical Services.

“Because off-the-shelf products do not always meet the special needs of a customer, Chris works with our clients to engineer solutions to their particular equipment requirements,” says Johnston. “Special Projects has designed and built a number of products such as portable air systems for operator’s trucks and fluid haulers, stationary air systems for tank farms and plant sites, as well as specialized mobile breathing air trailers.”

ASTEC has recently expanded their management team with the addition of John Peterson as vice-president of Operations. John’s expertise will allow the company to grow and diversify to meet the needs of an everchanging industry.

“We are and will continue to be ‘Your Safety Training and Equipment Specialists’,” says Johnston.

Provost

LLoydminster

BonnyviLLe

780 753 2905

780 875 0331

780 812 3080

The Heart of Heavy Oil

The heart of heavy oil

By Darrell Stonehouse

The heavy oil fields around Lloydminster are the original resource play, with de­v elopers testing a variety of enhanced recovery methods to coax a massive but geographically dispersed resource to the surface.

What’s remarkable is that despite 70 years of continuous development, only six to eight per cent of the original 32 billion barrels of heavy oil in place straddling the Alberta/ Saskatchewan border have been produced.

There have been breakthroughs. Progressive cavity pumps were a game changer, allowing cold oil production with sand. Production shot up tenfold on some wells and recovery increased as more oil could be produced economically. Horizontal wells also added production and reserves.

But mostly, the story of Lloydminster has been one of grinding it out, working year in and year out and making small economic gains through technological tweaks.

Fortunately, those small gains add up over time. Today, depending on the heavy oil differential, the Lloydminster heavy oil play ranks in the top five most profitable plays in North America.

And the technological tinkering continues. Better geophysical information has enabled companies to identify areas with thicker pay zones where steam assisted gravity drainage (SAGD) can be used to greatly increase production and recovery. SAGD pairs at Baytex Energy Corp.’s operations at Kerrobert are producing over 1,000 barrels per day. Recovery rates are expected to reach up to 60 per cent. Also at Kerrobert, Petrobank Energy and Resources Ltd. is testing its toe to heel air injection (THAI) technology. It expects wells to average 600 barrels per day with similar recovery to SAGD wells. The difference is the THAI process works in thinner pay zones, opening up more resource to thermal development.

There are also less ambitious technological pushes using tools like radial drilling and foam stimulations. Radial drilling technology hydraulically jets a one-inch horizontal leg up to 100 metres from the wellbore in four or more directions, acting like a controlled wormhole. This compares with conventional perforations that only go around one metre into the formation. Preliminary results using the technology show an average increase of 15–20 barrels per day of production and may add as much as 15,000–20,000 barrels of reserves. The cost is between $100,000 and $130,000 per well.

The attraction of heavy oil development differs from company to company. Some, like Husky Energy Inc., view it as their foundation. Others view it as a means to diversify production and even out volatile oil prices. A relatively new attraction of Lloydminster is that, with many services in short supply due to demand for multistage fracking in shale gas and tight oil plays, heavy oil is one of the few areas companies can actually get things done in.

But the bottom line is that it takes a stubborn streak to stick it out in the Lloydminster heavy oil fields in the long run. Companies have come and companies have gone. But the 32 billion barrels remain. And that should continue to draw explorers and entrepreneurs to the heart of heavy oil long into the future.

LLOYDMINSTER FOCUS ■ 5B

“Proud to be Part of a Vital industry.”

836649 Northern Blizzard Resources Inc full page · fp

5301 – 62nd Street, Lloydminster, Alberta T9V 2E5 (780) 871-8700 P.O. Box 2190, Lloydminster, Sask. S9V 1R6 2100, 440 – 2 Avenue SW, Calgary, Alberta T2P 5E9 (403) 930-3000

www.northernblizzard.com

The Heart of Heavy Oil

heat is on The

Producers push thermal recovery in heavy oil fields

Photo: Joey Podlubny

By Darrell Stonehouse Using heat to recover bitumen resources is the lifeblood of the in situ oilsands industry. Increasingly, however, thermal recovery technologies are being employed in conventional heavy oil fields, and producers are looking to improve recovery rates from an in-place resource base upwards of 30 billion barrels in the Lloydminster area.

Husky Energy Inc. expects to double its thermal heavy oil production to about 40,000 barrels a day in roughly five years, it reported in July.

“Our current thermal production is in the range of about 18,000–20,000 barrels per day today,” Rob Peabody, Husky’s chief operating officer, told analysts after the company released strong second­- quarter results. “With these pro­ jects coming on stream over the next five years, we’re looking to increase our thermal production into the range of about 40,000 barrels a day.”

Husky’s total heavy oil production is roughly 100,000 barrels a day, most of it from the Lloydminster area. >

LLOYDMINSTER FOCUS ■ 7B

The Heart of Heavy Oil

Husky expects its overall heavy oil output—thermal and cold combined—to grow at a compound annual rate of three to five per cent over the longer term.

Peabody said the increase in thermal heavy oil output will be offset somewhat by declines in cold heavy oil production: “As [we’re moving toward the edge of the reservoir with some of the cold heavy oil] wells, F&D [finding and development] costs are rising. And by bringing on these thermal projects, we actually help drive our F&D costs back down.”

Husky expects its overall heavy oil output—thermal and cold combined— to grow at a compound annual rate of three to five per cent over the longer term, but the rate may vary on a yearto-year basis as new thermal projects are developed, said Asim Ghosh, Husky’s chief executive officer.

Reviewing its thermal heavy oil construc tion progress, Husk y said its 8,000-barrel-per-day South Pikes Peak project is on target for first oil in mid-2012.

South Pikes Peak was 67 per cent completed on June 30.

Husky continued its 3,000-barrel-perday Paradise Hill development, which will use existing Bolney infrastructure. The project was 28 per cent complete on June 30 and is to be operational by the third quarter of 2012.

Construction of a single thermal pilot well pair at Rush Lake was completed in the second quarter with first production expected in the third quarter.

Husky said four more commercial thermal projects are in the early delineation and concept selection phase.

BlackPearl Resources Inc. is another conventional heavy oil producer looking at thermal technology to increase recovery. BlackPearl has an aggressive conventional drilling program underway 8B ■ SUPPLEMENT TO OIL & GAS INQUIRER | OCTOBER 2011

The Heart of Heavy Oil

Baytex’s initial steam assisted gravity drainage pair, producing since the third quarter last year, continues to exceed 1,000 barrels per day.

Baytex Energy is also moving forward with significant SAGD plans at its Kerrobert operations. Its initial SAGD well pair, which began production late in the third quarter of 2010, continues to exceed 1,000 barrels of oil per day at a cumulative steam to oil ratio of about 2.7.

Cumulative production from this well pair stands at 325,000 barrels after 10 months of production. Two additional SAGD well pairs were drilled during the second quarter. After June 30, one of the new well pairs was put on production at initial rates topping 1,000 barrels per day.

Start-up of the second new well pair is planned for later in the third quarter.

Baytex has identified at least nine further SAGD well pair locations at Kerrobert and plans to drill four additional stratigraphic test wells later this year to optimize the placement of these future well pairs. The company is also doing engineering and procurement work to increase the steam plant capacity in 2012.

Nea r by, Petro ba n k En erg y a n d Resources Ltd. continues moving forward with commercial development of its thermal development using its toe to heel air injection (THAI) methodology.

Petrobank has spent much of the last two years working through the challenges of proving the THAI technology in shallower pay zones of Saskatchewan’s heavy oil fields. But the two pilot wells are now on track, reaching peak combined production of 355 barrels per day early this year.

“The produced oil has been consistently upgraded in situ by four to seven degrees API [American Petroleum Institute], requiring less diluent to meet pipeline API quality,” said Chris Bloomer, Petrobank’s >

Photos: Joey Podlubny

at Onion Lake, drilling 63 wells in the second quarter and targeting 110 wells for the year. The company has 13 million barrels of established reserves in the play, with another 80 million barrels of contingent resource.

“In addition to conventional development, a portion of the Onion Lake lands are amenable to thermal development,” company president and chief executive officer John Festival said in releasing BlackPearl’s second-quarter results. “ In fact, the majority of the contingent resource estimates for Onion Lake are based on thermal de­velopment in the area.”

The areas BlackPearl is targeting for SAGD development have net pay zones in excess of 15 metres, making the technology workable. It expects to recover ­ 50–70 per cent of the resource in place, compared to around five to eight per cent through primary development. BlackPearl is predicting steam to oil ratios in the 2.5–3.5 range, putting it in line with the top quartile of SAGD bitumen projects.

To assist in the transition from conventional to SAGD development, BlackPearl plans on “pre-spending” some capital by drilling the horizontal wells that will be used in the SAGD operations. This will ensure it is not drilling in areas that have been partially depleted or disturbed by conventional drilling. The company expects to drill up to 20 horizontal wells by the end of 2012.

“These wells will not be put on production until we begin SAGD development.

We have recently filed an application with regulatory authorities for a 10,000-barrelper-day commercial SAGD project in the area,” said Festival.

LLOYDMINSTER FOCUS ■ 9B

The Heart of Heavy Oil

Petrobank is focused on getting production at

Photo: Joey Podlubny

Kerrobert up to 600 barrels per day per well.

senior vice-­president and chief operating officer, heavy oil, said in March. “We will focus on increasing production towards design capacity of 600 barrels per day per well. Under normal operations, design capacity is expected to be achieved approximately one year after air injection has commenced.”

A 10-well commercial expansion at Kerrobert is well underway. In August, Bloomer said that eight of the 10 new well pairs are on air injection and in the initial production phase.

“The first expansion well pair was placed on air injection and production in the middle of May, with an additional four well pairs placed on air injection by the end of the second quarter,” he said.

The pre-ignition heating cycle (PIHC) for the remaining five well pairs began at the end of the second quarter and currently three of these well pairs are on air injection, with the remainder expected to be on air injection by September. The company said its operating procedures continue to evolve.

“We have been able to reduce the duration of the PIHC from a planned eight weeks to approximately four weeks.

Following the PIHC, the vertical wells commence air injection at low rates and the horizontal production wells are brought on production with a progressive cavity pump,” Bloomer said.

The initial cleanup fluids consist of water, including condensed water from the PIHC steam injection, and some native oil. As these fluids are produced, the combustion gas volume increases, the temperature in the horizontal well begins to rise and the well begins to produce an oil and 10B ■ SUPPLEMENT TO OIL & GAS INQUIRER | OCTOBER 2011

water emulsion at low rates. Wellbore temperatures will increase and combustion gas, along with some native oil and occasional upgraded THAI oil, will be produced.

“As we measure the combustion gas communication and rising wellbore temperatures, we will increase the air injection in stages to facilitate the combustion zone development,” Bloomer said Bloomer noted that the second quarter was a “period of transition” for the Kerrobert project.

“We completed the drilling of the expansion wells, began operations on the new wells and started dismantling the temporary facilities in anticipation of the new wells being tied into the new central processing facility [CPF],” he said.

Bloomer added that very wet weather delayed the company’s access to the CPF and wellsite until mid-July. Petrobank experienced “significant downtime” on the original Kerrobert wells due to pump changes, decommissioning of the original Kerrobert facilities and delayed tie-in to the new CPF. These activities resulted in second-quarter Kerrobert production of approximately 40 barrels per day.

Petrobank continues expanding its land base at Kerrobert. In May it acquired 566 acres of petroleum rights on the Kerrobert trend adjacent to the 4,092 acres of land that it purchased in March. This is the third acquisition of land that it has made in six months on the same trend as Kerrobert, and it currently controls 11,517 net acres of land on the trend. To define the resource potential of its new lands, the company purchased three third-party 3-D seismic surveys and plans to drill two stratigraphic delineation wells.

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The Heart of Heavy Oil

Penny Photo: ©iStockPHOTO.com/ bluestocking

pinchers Heavy oil success all about getting more for less

By Darrell Stonehouse

The Lloydminster heavy oil play is currently one of the most profitable plays in western Canada, delivering better returns than hot spots like the Cardium in central Alberta and the Bakken in southeastern Saskatchewan.

But that doesn’t mean heavy oil producers are resting on their laurels. In fact, there are ongoing efforts to fine-tune drilling and production technologies to add to the bottom line. And as heavy oil developers work through the challenges of instituting new technologies, the payoff from heavy oil production will only increase.

Allen Bey, chief executive officer for Rock Energy Inc., told delegates at the Canadian Association of Petroleum Producers June symposium that the keys to success in heavy oil are managing operating costs and using technologies to improve recovery factors.

Bey said the company is focused on a number of things to ensure its heavy oil play meets expectations. It is zeroed in on maintaining a strong drilling inventory, keeping finding costs low, maintaining low operating costs, using new technologies to improve recovery rates and finding the best markets possible for production.

“Heavy oil is about looking at the details and making sure you don’t get too far off track,” Bey said.

To keep finding costs down, Rock stacks the different productive zones in wells. To keep operating costs down, the company has a number of efforts underway, including operating central production facilities, using casing head gas as fuel for operations and using supervisory control and data acquisition (SCADA) to improve well management.

“Another thing heavy oil operators want to do is improve our recovery factor,” said Bey. “We do that with different completion technologies, things like radial drilling pro­ jects, foam stimulation and making sure the wells are cemented properly so we don’t have natural breakdown. We’re also down spacing at appropriate times to improve our recovery factors on a pool basis.”

Radial drilling technology hydraulically jets a one-inch horizontal leg up to 100 metres from the wellbore in four or more directions, acting like a controlled wormhole. This compares with conventional perforations that only go around one metre into the formation. Preliminary results using the technology show an average

increase of 15–20 barrels per day of production, and may add as much as 15,000– 20,000 barrels of reserves. The cost is between $100,000 and $130,000 per well.

Foam stimulation is used to restore or improve production levels in wells.

A surfactant foam is injected through wormholes into the reservoir, and the surfactant reduces the viscosity of the heavy oil near the wellbore and helps in recovering and lifting sand and other debris from the wellbore.

“The key point of all of this is that Rock has 200 million barrels of oil in our heavy oil region, and we are only looking at re­covering about six per cent of it,” said Bey. Also significant is the price received for heavy production. Rock has taken the innovative step of leasing 300 railcars to export its production to higher value markets on the Gulf Coast.

“We are selling over 500 barrels per day into the Gulf Coast market,” said Bey. “We’re getting over a $6–$7 per barrel premium on our netback over selling it locally.”

Twoco Petroleums Ltd. is focused on using cutting-edge horizontal drilling technologies to drive profitability on its Sparky heavy oil play in the Warspite area of Alberta. The company is using tri-leg horizontal wells to increase exposure to the reservoir while cutting horizontal drilling costs. > LLOYDMINSTER FOCUS ■ 13B

Photo: Joey Podlubny

The Heart of Heavy Oil

In the second quarter, Twoco announced it that placed on production its previously announced two tri-leg horizontal oil wells drilled on the play. Based on the initial 10 days of production, the Twoco HZ Bellis 15-34-58-17W4 well flowed at an average rate of 193 barrels of oil equivalent per day (includes 110 barrels per day of oil and 83 barrels of oil equivalent a day of natural gas). Based on the initial 11 days of production, the Twoco HZ Bellis 14-35-58-17W4 well was pumping at an average rate of 146 barrels of oil equivalent a day (includes 129 barrels of oil per day and 17 barrels of oil equivalent per day of natural gas).

The two new oil wells are the third and fourth horizontal oil wells drilled on the company’s Sparky heavy oil property. The first two wells on the Sparky heavy oil play were single-leg horizontal wells that were placed on production in December 2010.

The company said in its second-quarter report it will continue to monitor production from its existing wells on the Sparky heavy oil play and also from wells in an­alogous pools with a view to optimizing production and reserves recovery by using different drilling techniques, wellbore configurations, completion practices, equipping systems and utilization of secondary and tertiary recovery potential. Twoco has

started field operations for the drilling of four additional multilateral horizontal oil wells on the Sparky heavy oil play in the fourth quarter.

The average cost per well of drilling, completing and equipping the two tri-leg horizontal oil wells was approximately $1.35 million.

These costs were higher than ori­ginally estimated due to the extremely wet surface conditions encountered during drilling and completion operations. Twoco believes that future drilling costs on its Sparky heavy oil lands could be significantly reduced in a multi-well drilling program.

Twoco currently controls 2,727 net prospective acres on its Sparky heavy oil play, which represents approximately 68 per cent of the total estimated pool area.

Twoco received approval from the Energy Resources Conservation Board (ERCB) to amend the drilling spacing on the company’s Sparky heavy oil property, to allow for the drilling of up to eight horizontal lateral legs per pool, per quarter section.

As a result of the ERCB’s approval, Twoco has identified drilling locations for up to an additional 120 horizontal laterals on its Sparky heavy oil lands.

Palliser Oil & Gas Corporation is looking at improved fluid handling to cut production costs at its Lloydminster operations.

14B ■ SUPPLEMENT TO OIL & GAS INQUIRER | OCTOBER 2011

In the second quarter, Palliser was focused on the implementation of saltwater disposal (SWD) infrastructure in the Lloydminster and Manitou areas within the greater Lloydminster core area. The Lloydminster saltwater disposal facility was operational at the end of the second quarter.

At Manitou, much of the quarter was spent restarting and reworking existing wellbores as well as resolving issues on the process side of the battery, which resulted in lower production in the second quarter on this property as production through the facility was curtailed while the work was done.

An additional SWD well was brought into service at Manitou and became operational through the utilization of an existing flow line that was converted to injection. At the end of the second quarter, the company was in the final preparation stages for the implementation of its SWD infrastructure in the Edam area.

As budgeted, six wells were reactivated in the second quarter. The 2011 cap­i tal budget is weighted heavily towards the second half of the year, coinciding with the timing of the SWD facility implementation.

At Lloydminster, completion of the SWD facilities allowed the company to optimize its wells and reactivate one wellbore, which

The Heart of Heavy Oil

Palliser expects that operating costs, which averaged $31.15 per barrel in the first half of 2011, will be reduced to approximately $24 per barrel in the second half of the year, due to the elimination of saltwater disposal trucking and disposal costs and propane costs on a number of producing wells in the company’s main core areas.

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At Manitou, additional pipeline and pump installations are in the approval process, which significantly increase total disposal capacity in this area and will allow the company to continue to optimize production and restart wells at Manitou.

Production at Manitou has increased from 231 barrels per day in the second quarter, to 393 barrels per day in July through optimization activities, implementation of a second SWD well and additional production from a new well.

The production increases at Lloydminster and Manitou have confirmed expectations that increased SWD cap­acity would allow Palliser to pump the wells at higher rates, resulting in increased oil production. Management expects that operating costs, which averaged $31.15 per barrel in the first half of 2011, will be reduced to approximately $24 per barrel in the second half of the year, due to the elimination of SWD trucking and disposal costs and propane costs on a number of producing wells in the company’s main core areas.

At Edam, production has been steady through the first half of the year, with the

second quarter averaging 798 barrels per day from this core area. In July, overall production from the area decreased by 195 barrels per day to an average of 603 barrels per day, due to increased water cuts in three of the company’s producing wells.

SWD facilities at Edam were expected to be operational in September. As the new facilities at Edam become operational, the company expects that most or all of the lost production will be restored from these high rate wells, similar to the increases seen at Manitou and Lloydminster, with the production expected to be largely restored through August and September.

The new disposal facilities in all of these areas, in conjunction with flow lines, will result in significant operating-cost savings and enable the company to optimize all existing wells and re­activate all of the currently shut-in wells, with additional capacity to service the remainder of the 2011 drilling and reactivation program and beyond. It is anticipated that these salt water disposal facilities and associated flow lines will result in an estimated operating cost savings of $3,500,000 in 2011, with the facilities paying out in seven to eight months.

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LLOYDMINSTER FOCUS ■ 15B

The Heart of Heavy Oil

Opportunity central Heavy oil play means different things to different companies

Photo: Joey Podlubny

By Darrell Stonehouse

16B â– SUPPLEMENT TO OIL & GAS INQUIRER | OCTOBER 2011

The Heart of Heavy Oil

With around 32 billion barrels of original oil in place and only 6.5 per cent recovered, the heavy oil fields surrounding Lloydminster represent a big opportunity.

Oil and gas companies have a number of different strategies for capturing that opportunity. Some use heavy oil production as a foundation, providing the cash flow to grow into other plays.

Others are targeting heavy oil to diversify away from natural gas production, where low prices have rendered all but the most prolific plays uneconomic.

There are also companies targeting heavy oil for reasons as simple as it is the only play with adequate services available to grow production.

Husky Energy Inc. falls into the first camp, with its 1.2 million acres of land and nearly 100,000 barrels per day of heavy oil production providing the cash flow to grow both across Canada and internationally.

“We consider the base foundation of this company to be western Canada and heavy oil,” Husky president and chief executive officer Asim Ghosh told investors at the company’s annual meeting.

Husky has around 10 billion barrels of heavy oil in place on its Lloydminster lands, and has recovered around 800 million barrels since it began exploiting the play 70 years ago. Ghosh said using current technologies, the company could produce another 800 million barrels. The goal of the company is to maintain heavy oil production, while growing into new resource plays in western Canada.

Rock Energy Inc. followed a similar path. After building a production base in Lloydminster, the company expanded into the Montney tight gas play at Elmworth in the Deep Basin.

“The heavy oil play provided the financial base for our gas play at Elmworth,”

said Rock chief executive officer Allen Bey at a recent industry conference.

Rock is now considering strategic alternatives to develop the Elmworth play, after doing the preliminary work to prove its potential.

Unconventional oil and gas specialist Crew Energy Inc. recently entered the Lloydminster heavy oil play after spending $622 million to buy Caltex Energy Inc. in May of this year.

In giving its rationale for the purchase, Crew president and chief executive officer Dale Shwed said the Caltex properties, which include both heavy oil and tight gas production, would pair up nicely with the companies other major oil development in the emerging Pekisko tight oil play at Princess.

“This places Crew with significant production and growth potential in two of the highest rates of return oil plays in North America,” he said.

Another reason cited by Crew for the takeover of Caltex was that the heavy oil resource would provide substantial stable free cash flow for re-investment purposes in the Pekisko oil play while adding to the company’s oil resource.

The company added that low recovery to-date at Lloydminster, estimated at four per cent of original oil in place, offers significant upside potential through infill drilling. In its Lloydminster multi-zone cold heavy oil plays, Caltex had more than 900 million barrels of original oil in place. Shwed said just as important as the resource is the expertise to exploit the heavy oil.

“Heavy oil production is more of an art than a science. That’s why the people in the >

LLOYDMINSTER FOCUS ■ 17B

The Heart of Heavy Oil

Photo: Joey Podlubny

“ With our heavy oil strategy, Crew is able to avoid some of the inflationary pressures currently being experienced in tight oil plays where fracturing services are in high demand.”

— Dale Shwed, President and Chief Executive Officer, Crew Energy Inc.

Many companies are recompleting or doing workovers on existing heavy oil wells as high prices make them economic.

Lloydminster area are critical in the operation,” he said, adding that 12 former Caltex employees in the area will be joining Crew.

In the first quarter of this year, Lloydminster production averaged just under 6,000 barrels per day, double what it was when Caltex acquired it. Completions in additional zones can significantly improve the economics of the heavy oil play, said Shwed.

Another reason for the Caltex acquisition is it gives Crew an outlet for growth outside the tight oil and gas market where services are in high demand.

“With our heavy oil strategy, Crew is able to avoid some of the inflationary pressures currently being experienced in tight oil plays where fracturing services are in high demand,” he said.

Cardium tight oil producer Tamarack Valley Energy Inc. is a new entrant into the Lloydminster heavy oil play. In the second quarter, Tamarack reported it has identified and added a core resource play in Saskatchewan heavy oil through a combination of Crown land sales, freehold

18B ■ SUPPLEMENT TO OIL & GAS INQUIRER | OCTOBER 2011

land acquisitions and a farm-in with a First Nation. Tamarack has secured 37.3 net sections of land with a two well drilling commitment over the first two years of a four- year lease. The company also acquired 109 kilometres of 2-D seismic data and is planning to shoot a three-square-mile 3-D seismic program in the fall of 2011. An initial review of the area has identified seven different prospects with up to 33 potential un-risked drilling locations.

Tamarack said the heavy oil play melds with its strategy of assembling oil plays that possess potential drilling repeatability and has the potential to generate superior rates of return. As with Crew Energy, the company added that heavy oil play gives the company options to drill when services are in tight supply in light oil plays.

“These heavy oil prospects also allow assembly of multi-well drilling programs that require different services than the Cardium plays, creating flexibility to add production,” the company added.

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