Oil Sands Truth: Shut Down the Tar Sands

Tar Sands slowly Expanding into northwest Saskatchewan

Oilpatch eyes neighbour
Bitumen find in Saskatchewan could spawn new industry
Claudia Cattaneo, Financial Post
Published: Tuesday, April 17, 2007

By oil sands measures, the core sample plucked from 200 metres below a spindly Jack-pine forest last month was a beauty. Saturated with bitumen, the brownish, one-metre cut, part of a 20-metre oil sands zone, smelled like fresh asphalt. The sand was as warm and homogenous as that of a Caribbean beach.

But it was not from Alberta. The core was unearthed in northwest Saskatchewan. In fact, it was one of 174 brought to light over the past two winters by drilling crews working for Oil sands Quest Inc., a junior oil sands company that is well on its way to demonstrating that a rich sliver of the Athabasca basin, centred in the Fort McMurray area of northeast Alberta, spills over into this neighbouring province.

If its aggressive exploration program shows there's enough of the stuff to support a commercial project, Saskatchewan could be producing oil from its first multi-billion-dollar in-situ oil sands project by the middle of the next decade.

"What we see in the reservoir is uncharacteristically good," Christopher Hopkins, CEO of the startup, said during a recent tour of his company's vast leases. "It's basically as good as it gets. "Saskatchewan has been fortunate enough to have a clear glimpse of the opportunity the energy industry offers [in Alberta]. We hope we can deliver an oil sands industry to them here."

If there is one to be had, a Saskatchewan oil sands industry would ramp up about half a century behind Alberta's. But it would also do it at faster speed, benefiting from Alberta's experience and a more receptive environment -- labour here is abundant, costs are lower, the fiscal terms more competitive.

A project would elevate Oil sands Quest to the big leagues. The company is among an aggressive, new generation of oil sands startups trying to beat the challenges faced by bigger companies -- such as high costs and labour shortages -- by using new technologies, looking in new areas, watching their pennies and even embracing higher environmental standards as a way to impress investors.

Mr. Hopkins and his team of oil sands explorers first became confident that the Athabasca deposits don't stop at the provincial boundary in early January, 2006, when their first well encountered oil bearing sands near Axe Lake, about 100 kilometres northeast of Fort McMurray on the Saskatchewan side of the border.

Oil sands Quest took on the prospect for two main reasons: It was away from the highly competitive environment on the Alberta side, and there had been evidence of rich bitumen deposits, some of which could be seen lining the banks of the nearby Clearwater River.

Still, skepticism was huge; to the point even the government of Premier Lorne Calvert didn't have rules in place to deal with such an industry.

"As recently as months ago, the Saskatchewan government was saying, 'Of course we know that there is oil sands here, but it will be too shallow and too deep to mine, too thin, too this and too that'," Mr. Hopkins said.

The oil community was similarly skeptical. At a recent fundraising dinner in Calgary with a big turnout from the oil patch, the leader of the Saskatchewan Party, Brad Wall, dramatically held up a scoop of one of Oil quest?s core samples to show the deposits indeed exist in his province. "There was always the question: 'Is it really there or not? Its 2007, and so how come nobody has looked in Saskatchewan? Why didn't any of the big companies come across here yet'," said Errin Kimball, vice-president exploration at Oil sands Quest.

Mr. Kimball's exploration team was convinced the main reason the Saskatchewan oil sands hadn't been discovered was that no one had seriously looked for them.

Industry was too busy developing the deposits on the Alberta side and ignoring left-wing Saskatchewan, until recently perceived as unfriendly to oil companies.

In fact, the province, Canada's second largest oil producer, has been revamping its oil and gas regime to promote investment and now has even more favourable terms than Alberta's. Mr. Hopkins said the province has been very supportive of his company's efforts.

The Axe Lake discovery well was drilled not far from where two oil majors, Shell Canada Ltd., a subsidiary of Royal Dutch Shell PLC, and Gulf Canada Ltd., now a part of ConocoPhillips, found bitumen in 1974 -- and then moved on. In those days, bitumen oil sands were hardly stuff to get excited about.

Now, finding it was a big deal for Oil sands Quest. Reaction in the company's offices in Calgary and its camps in the frigid Saskatchewan wilderness ranged from elation to pride that the discovery was made in the province, in a brand new area, and that the task ahead involved not only building a company, but an industry.

"Our first hole exceeded our expectations, and it was a clearly a discovery hole," Mr. Hopkins said. "Our thinking was validated. We just continued to drill and continued to demonstrate through the drill bit that the oil is here."

The Company?s stock, heavily traded on the American Stock Exchange, shot up above US$8 last year. It has since retreated to less than US$3.50 (it closed yesterday at US$3.28, down US14?) on uncertainty about new greenhouse gas regulations, lower oil prices and tax and royalty changes. Oil sands Quest plans to list on the Toronto Stock Exchange this year.

Last year, the company kicked off one of the largest oil sands drilling programs in Western Canada. Last month, eight drilling rigs were working its leases.

It was no routine undertaking. The Axe Lake project is located about 100 kilometres northeast of Fort McMurray --close enough to see the thick columns of smoke billowing from the major oil sands projects, but so isolated it's hard to reach by motor vehicle or airplane.

The Company flies people in and out on a bush plane that lands on a frozen lake as it waits for a permit to build a permanent airstrip.

Its leases are so vast they required building and maintaining 350-kilometres of ice roads and three camps. Employees -- there are 200 on site -- travel with cigarette lighters even if they don't smoke, just in case they get lost and need to start a fire. They're expected to check in and out as they move around the project. If they don't show up when expected, a search party is mobilized. Six ambulances are always on stand-by.

Mr. Hopkins estimates running the operation costs about $150,000 to $200,000 a day.

But the area's isolation is also its advantage. The natural barriers that keep people from coming in are also keeping them from going away to lucrative jobs in Fort McMurray, leaving more available for Oil sands Quest to hire from nearby Metis and First Nations communities like La Loche.

"We are not faced with nearly the competition that you see in McMurray," said site supervisor Morris Kimball. "We are finding qualified people."

The Company buys services, food and equipment in Saskatchewan to support the local economy, while at the same time benefiting from its lower costs.

So far, the drilling program has been encouraging. At the end of last year, the company reported it found 500 million barrels of resource after drilling 24 wells into 20-metres thick geological structure stretching about 60 square kilometres. Following a 150-well drilling program this winter, that estimate was boosted to 1.5-billion barrels.

Simon Raven, chief geologist of Oil sands Quest, said the sands found so far are of excellent quality.

"The saturation of this core is excellent," he said as he inspected a specimen, laid out in a core shack near a drilling rig noisily penetrating the ground. "I suggest that the saturation is about 14% by weight. Generally, in Alberta, they are running at about 12%.

"It's all sand, no clay or shale material

in here," he said. "The sand is all the same size. It's sorted into very consistent grain size, which gives you a lot of porosity and permeability. Generally, those are the attributes we seek."

More drilling is expected this summer and next winter as the company looks for the boundaries of the deposits.

Meanwhile, Oil sands Quest has been working with the Saskatchewan government to nail down fiscal terms.

A year ago, the province announced an oil sands royalty regime that involves a 1% royalty until the project has recovered its costs, and 20% after. That's more favourable than in Alberta, where the government collects 1% through payout, then 25% and is currently holding a review to determine whether royalties should be increased.

What's still missing in Saskatchewan is a regulatory framework. Those rules are expected to be finalized shortly.

"They won't simply Xerox the Alberta regulations. I don't blame them," Mr. Hopkins said. "But because they have to develop them, it takes time."

As the rules become clearer, other oil sands explorers are expected to move into Saskatchewan.

Eventually, Oil sands Quest wants to line up a partner to help out with building a project and share costs, expected to range between $5-billion and $10- billion.

It's also pondering upgrading options in Saskatchewan, where there are upgrades in Lloydminster and Regina.

"We are knocking down the barriers one at a time," Mr. Hopkins said. "The first one was: there is no oil. That one is done. Secondly, it's to demonstrate that there are sufficient barrels here. We hope to demonstrate that with this program. And then, commerciality."


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