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Petroleum News: Shell pushes oil sands horizons

'Big gamble' purchase of untapped resource could open way to 38 billion barrels; others venture into Peace River, Saskatchewan
Gary Park
For Petroleum News
Royal Dutch Shell is aligning itself with the finest traditions of the oil sands — blazing a new trail in an effort to unlock hundreds of millions of barrels that have so far defied technology.
In forking over C$465 million for more than 230 square miles it has entered a region which other E&P companies have avoided until now.
Through Shell Exploration & Production in the Americas, the multi-national is tackling the late Devonian Grosmont carbonates — a massive potential heavy oil resource that poses a challenge for anyone hoping to separate the bitumen from its host limestone.
The National Energy Board estimates that of the 315 billion barrels of ultimate potential in the oil sands region, 38 billion barrels are trapped in carbonate deposits, instead of the standard sandstone or dirt, which are being widely exploited through conventional mining or steam-assisted extraction methods.
So far Shell has said only that it is hopeful it can apply either enhanced or new emerging heavy oil technologies such as thermal recovery to provide the basis for a commercial operation.
Mahogony project may provide solution
Murray Gray, a professor of chemical engineering at the University of Alberta, has told reporters that Shell may already be moving towards a solution through the work it is undertaking at the Mahogony oil shale project in Colorado.
He said the company has written several patents covering the extraction of hydrocarbons from some “very tough places” such as shales.
The Mahogony project involves lowering electric heaters into 1,000-foot vertical wells to increase formation temperatures to 657-700 degrees Fahrenheit, separating the hydrocarbons from rock and further reducing the oil to heavier and lighter fractions.
Gray suggested the carbonate could be easier to develop than oil shale because it would require 80 percent less heat.
Shell has said only that it expects to drill some appraisal wells later this year to “further understand the resource, the geology and the potential for development.”
However, the company showed a glimmer of confidence, noting that it has a suite of both enhanced and emerging heavy oil technologies and, although not all are proven, the volume of the resource in place along with market conditions give it the impetus to pursue a project.
Capital spending commitments not disclosed
Otherwise, the company won’t disclose its capital spending commitments or what timelines it has set for possible commercial development beyond conceding that oil prices in the range of US$60 per barrel persuaded it to invest almost half a billion dollars.
But analysts such as Tom Ebbern of Tristone Capital are mystified that Shell would pay so much to secure rights to a prospect that has failed to even establish its worth through drilling or pilot projects.
Robert Bedin, senior analyst at Ross Smith Energy Group, offered a succinct assessment of Shell’s decision: “It’s a gamble.”
But that has been the history of the oil sands, which, until this century, were mostly scorned as nothing more than a fringe mining venture.
The change of attitude was reflected in a Wall Street Journal article on March 27 which said that “thanks to rising global oil prices and improved technology, most oil-industry experts count oil sands as recoverable reserves” vaulting Venezuela and Canada to first and third in global reserves rankings.
But the article also delved into the economic and environmental challenges of exploiting heavy oil, including the remaking of the landscape in northern Alberta and the release of greenhouse gases from the extraction and processing of bitumen.
Other pioneering ventures under way
What Shell is tackling mirrors several pioneering ventures to open up new heavy oil territories in Western Canada.
Coming into focus is the Peace River play in northwestern Alberta, the least-tapped deposit in the province.
That could be quietly heading for change, with several projects under way, including plans to start work this summer on a C$800 million first-stage bitumen processing plant to handle 25,000 barrels per day.
Privately-held PRO Upgrading hopes to complete the Bluesky Upgrader by 2010, buoyed by the fact that it raised 60 percent of the construction costs in just 30 days without going outside Alberta.
It hopes to cover the balance within six months, PRO business development manager Don Allan told Petroleum News.
PRO (short for Peace River Oil) has set an eventual goal of expanding in four stages to 100,000 bpd by 2020 to serve a fast emerging array of projects, led by companies such as BlackRock Ventures and Penn West Energy Trust.
Allan said PRO aims to have feedstock commitments in place in the next 30 days.
Penn West, in the early stages of a project, hopes to achieve 5,000 bpd by the end of 2006, more than five times current levels as it develops 1.2 million acres of leases in the Seal region.
“We believe this area has the potential to add multiple millions of barrels of reserves and very strong production additions,” said Penn West Chief Executive Officer Bill Andrew.
“Our Peace River project has the potential to redefine our business,” he said.
BlackRock, which is targeting overall production of 40,000 bpd within four years, has budgeted C$95 million for its Seal program this year, where an independent evaluation has assigned 28.8 million barrels of proved plus probable reserves, up 40 percent from 2004, as the company steps up its development efforts.
The Seal prospect offers a bitumen deposit that is 50 to 80 feet thick and offers 10 degree API heavy oil that can initially be extracted using conventional artificial lift technology, reducing operating and capital costs, although operators are turning to steam-assisted gravity drainage methods to exploit deeper deposits.
Allan described the bitumen as “heavy and ugly,” with a high sulfur content, but is confident the technology being designed for Bluesky can improve the value of the crude, reduce the density of the oil and reduce the viscosity so the oil can be moved by pipeline.
Until now, the major Peace River spotlight has been on Shell Canada, which has been active in the region for 27 years, where it plans to spend C$115 million on new wells to achieve 35,000 bpd and may eventually aim for 100,000 bpd.
The Alberta Energy and Utilities Board estimates Peace River has 130 billion barrels of bitumen in place, of which 14 billion barrels are recoverable using current technology.
Oilsands Quest working in Saskatchewan
Other operators are pinning their hopes on an eastward expansion into Saskatchewan, where privately held Oilsands Quest, owned 70 percent by CanWest Petroleum, is touting a discovery it says could open the way to a major new play.
It has almost completed 25 core wells with what it describes as very encouraging results pointing to bitumen-bearing deposits from 16 to 88 feet thick and is poised to start a second phase of 125 wells costing C$15 million.
Oilsands President Chris Hopkins rates his company as a pioneer “in a whole new industry” in Saskatchewan.
If Oilsands’ geological model proves out, he said it is possible northwestern Saskatchewan could add up to 60 billion barrels of bitumen in place, putting the province in the big leagues.

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