"We made considerable progress this past year in laying the foundation for the future growth of our company," said Leon Daniel, Ivanhoe Energy's President and CEO. "Our most significant activities were related to our agreement to acquire Ensyn Group Inc. (Ensyn Group) and its proprietary Rapid Thermal Processing (RTP(TM)) heavy oil upgrading technology. We also advanced our work related to the application of this technology."
"We increased production to approximately 2,200 barrels of oil equivalent per day (Boe/d) at the end of 2004, an increase of 150% over the production level at the end of 2003. We also continued to advance discussions for the implementation of gas-to-liquids technology and started work on technologies to convert coal into transportation fuels," continued Mr. Daniel.
Heavy-to-Light Oil Activities
In December, we entered into an agreement to acquire Ensyn Group and its advanced upgrading technology for the development of heavy oil around the world. We also announced the start-up of Ensyn's 1,000-barrel-per-day heavy-to-light oil commercial demonstration facility in California.
Commercial demonstration facility operations - The commercial demonstration facility, located near Bakersfield, California, is processing crude oil from Aera Energy LLC's (Aera) Belridge heavy oil field. The facility also plans to process crudes, on a test basis, from other operators in California and throughout the world. As part of our acquisition of Ensyn Group, the commercial demonstration facility must satisfy performance criteria set out in the acquisition agreement. An independent third party will oversee test runs and conduct the analysis related to these criteria. The testing is expected to take place in the next 60 days.
Technology implementation - In 2004, we announced two memorandums of understanding (MOUs) to study the potential application of Ensyn's technology to heavy-oil fields in Iraq and Colombia. These studies are ongoing.
In addition, we will pursue initiatives that Ensyn has developed, including a non-binding MOU with Aera to advance negotiations for a 10,000- barrel-per-day RTP(TM) plant in California. Aera is a California limited liability company owned by affiliates of Shell and ExxonMobil.
Gas-to-Liquids and Coal-to-Liquids Activities
In 2004, we continued to advance discussions for the implementation of gas-to-liquids projects and are in preliminary discussions with several countries. We also are evaluating the potential to use new technologies to convert coal into a gas that the Syntroleum gas-to-liquids (GTL) process in turn can convert into clean-burning transportation fuels. Countries such as China and Mongolia are particularly suited to coal-to-liquids (CTL) processing because of their large supplies of coal.
Exploration and Production
We drilled 48 wells in 2004, increasing production to approximately 2,200 net Boe/d by year end, an increase of approximately 150% over 2003 year-end levels. After a technical review of our California properties, we scaled back our planned 2004 drilling program, deferring some of this drilling to 2005. In addition, our production in China was lower than anticipated. As a result, our year-end production was approximately 10% lower than targeted.
Dagang - In early 2004, we commenced oil production from the development phase of our Dagang oil field southeast of Beijing. In June, Richfirst Holdings Limited, a subsidiary of China International Trust & Investment Corporation (CITIC), became a 40% joint venture partner in this project. Our comparable production figures and targets have been restated to reflect the farm-out. The project currently has 22 producing oil wells and total gross production of 1,655 Boe/d. The 2004 year-end production rate is behind our original projection for the year. Excessive wet weather conditions in the fall delayed drilling and completion activities and production was lower than targeted. We continue to have three drilling rigs in operation at the Dagang project.
Zitong - In the Zitong block, in the Sichuan Basin, we completed the majority of our 1,100-kilometre seismic acquisition program. After analysis of the data, an initial drill site was chosen and drilling of the first exploration well is expected to commence in first quarter of 2005. Seismic work is continuing and a second well is planned for later in the year.
California and Texas - We improved the potential of our California properties by increasing our 50% interest in the Knights Landing natural gas project in the Sacramento Basin to between 80% and 100%, and selling our interest in the Sledge Hamar prospect. The realignment of our California assets fits with our short-term goal of focusing on exploration and development projects that can achieve early production and cash flow.
By year-end 2004, we had established approximately 1,100 Boe/d of production from the South Midway, Citrus (Lost Hills) and Knights Landing fields in California and the Spraberry field in Texas. Our interests range from 80% to 100% in the California oil and gas properties and from 30% to 40% in Texas.
Wyoming - Ivanhoe Energy is the operator of a thermal recovery/horizontal well oil project at LAK Ranch in Weston County, Wyoming. We are conducting pilot tests to determine the potential of this project. Two cyclic steam stimulation treatments were performed during 2004. The well is currently producing small amounts of oil and may be stimulated with an additional steam cycle the first quarter of 2005, pending results of seismic interpretation and recent drilling data. A 3D seismic survey was completed in December 2004 that will be used to define the development plan. Evaluation results are expected during the second quarter of 2005.
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