Canadians Join Forces to Develop Gooey Wyoming Oilfield

Using a novel thermal recovery technique for the first time in the U.S., companies hope to develop a heretofore stingy reservoir and sell the high-quality oil locally as feedstock for jet fuel used by a nearby USAF base.

Canadian company Derek Oil & Gas has found a chivalrous new participant in its nearly 10-year quest to turn the recovery of glutinous oil from a once "impossible" reservoir into a paying proposition.

The tiny, Vancouver, British Columbia independent (known as a "junior" company in Canada) last week said it had cut a deal with Ivanhoe Energy, also based in Vancouver, that if successful, could make the venerable LAK Ranch in the Powder River Basin near Newcastle, Wyoming, the scene of the first commercial-scale U.S. application of a thermal oil recovery technology that's been used with great success for years in Western Canada.

And a highly profitable one, at that.

The technology involved at LAK Ranch is Steam-Assisted Gravity Drainage (SAGD), a practice that involves drilling twin horizontal wellbore pairs--an injector and a producer--into a reservoir of heavy or viscous oil. The wellbore pairs are aligned precisely, the injector above the producer. In practice, steam is then directed into the injector, heating the formation around the wellbore and making the oil surrounding it less viscous. The oil then flows naturally into the producer below it, where it's collected and produced to the surface.

In Canada, particularly in Alberta, SAGD use has allowed companies to develop extra-heavy oil and deep tar sands bitumen from reservoirs previously considered uneconomic. Heretofore, the technology has not been applied commercially in the U.S., with experimental thermal recovery techniques confined mainly to very shallow heavy oilfields in California and, to some degree, low-temperature heavy oil reservoirs on Alaska's North Slope. However, reservoirs holding highly viscous crudes are numerous in this country, both onshore and offshore, and SAGD or its variants could prove effective in hiking production from such reservoirs, particularly since sustained higher oil prices should make the technique's added cost relatively soft.

But as with any "new" technology that has the potential to increase production in U.S. fields, there has to be at least one company willing to try it first. Derek did that. However, if Ivanhoe succeeds at expanding its use, techniques like SAGD could start receiving much closer review in U.S. producers' boardrooms.

Ivanhoe is an international energy development company engaged in conventional oil and gas production, enhanced oil recovery (EOR) and natural gas projects, and production of cleaner burning fuels from natural gas using proven gas-to-liquids (GTL) technology. Though a Canadian company, Ivanhoe's chairman, David Martin, is based in Bakersfield, California. Many of the company's operating managers were former employees of Occidental Petroleum Co. in its San Joaquin Basin heavy oil development program. Ivanhoe has producing properties in that area, most of it enhanced by conventional steam injection techniques using vertical injectors and producers.

Derek acquired its LAK Ranch leases in the late 1990s when the use of SAGD, developed by an Alberta provincial research organization, was just getting underway there. Barry C..J. Ehrl, a Derek founder and current chairman, had retained geologists with a request to identify existing U.S. fields--and not necessarily heavy oilfields--to which the SAGD process might be profitably applied. The geologists tagged the LAK Ranch property as a likely candidate for using SAGD in developing medium- to light-gravity, but highly viscous, crude.

The company acquired the rights to some 7,500 acres of private and federal leases that comprise the northeast extension of the LAK Ranch field, discovered back in the 1920s. The field's main oil source is the Newcastle formation, a shallow Cretaceous sandstone that's commercially productive, only 10 miles away. Beneath Derek's acreage, however, past attempts at producing oil were disappointing, due mainly to such geological anomalies as low reservoir temperature, a highly viscous crude, and the fact that the formation dips steeply. In fact, a number of major oil companies, including Texaco (now ChevronTexaco) and Conoco (now ConocoPhillips), tried to coax the gluey Newcastle crude from beneath the ranch, but all attempts, including modified huff n' puff steam injection and chemical/solvent recovery techniques, failed to make it worthwhile.

Beneath Derek leases, the Newcastle consists of two oil-saturated sand layers separated by a thin shale section. Due to the extreme dipping, the formation reaches a depth of 2,500 feet at the southwestern edge of the property but actually outcrops on the surface only a short distance to the northeast. But, say Derek officials, the oil between those extremes is highly naphthenic, paraffin-free and alkaline-sensitive. Average weight of the oil is 20 degrees API, and although highly viscous, it flows readily when heated to 70 degrees F.

Estimated reserves total more than 100 million barrels of that oil, which has all the characteristics needed for blending jet engine fuel. And the kicker is that very early in the game, Derek received a signed contract from Texaco (which still stands) to deliver LAK Ranch crude by tank truck or pipeline to its Newcastle refinery a scant three miles away, and at the WTI posted price less only transport costs and gravity deduction. A major customer of the refinery is a nearby U.S. Air Force base. From Derek's point of view, the project was a go.

Working on a shoestring budget, the company made plans to drill at least one SAGD well pair as a pilot project for what it began calling the LAK Ranch Project. Working with Derek was Paul Trost, Ph.D., a Denver-based geologist who later was named manager of the project itself. The company drilled several core holes which reinforced reserve estimates made earlier by two independent engineering firms. Meanwhile, Ehrl investigated numerous off-balance-sheet financing arrangements.

Finally, after several fits and starts, Derek drilled and completed its first SAGD well pair in June 2000, with the injector going horizontal at 1,000 feet and the producer beneath it at 1,800 feet. Meanwhile, the company built a pilot steam generation and oil production plant. The pilot was then operated from March through June 2001, and again from October 2001 to January 2002, producing a total of 5,363 barrels of oil.

Until last week's announcement of the Ivanhoe deal, Derek was fine-tuning the pilot and searching for additional financing with which it planned to expand operations.

From Ivanhoe's perspective, the LAK Ranch Project arrangement is a relatively low-cost opportunity to develop a 100-million-barrel field of high quality crude, with thermal recovery, estimated at from 30 percent to 70 percent of oil in place.

Under the agreement, Ivanhoe will become LAK Ranch Project operator and earn a 30 percent working interest by investing $1.1 million for expanding the pilot phase, after which it can opt to provide an additional $3.9 million for initial development and increase its working interest to 60 percent. The expanded pilot phase, scheduled to begin in February 2004, will involve injecting steam into six vertical wells drilled around the edge of the field and monitoring production to horizontal SAGD wells. Also, a three-dimensional seismic survey will be made to further identify field limits.

John MacDonald, Ivanhoe vice president, said that if the pilot phase is successful after about 18 months, a total project expansion could begin, with as many as 20 producing wells drilled and oil production volumes raised to more than 4,500 barrels per day. As more productive acreage is identified through further development, he said, production could be raised to more than 10,000 barrels per day. After costs reach the $5 million threshold, both companies will share spending on a working-interest basis. Also, Ivanhoe has a post-pilot escape clause allowing it to back out of the project with an earned 15 percent working interest, returning the operatorship to Derek.

MacDonald said Ivanhoe is "not necessarily" intent upon looking for similar fields in which to institute SAGD and other thermal recovery techniques. The potential for recovery of up to 70 percent of the high-quality LAK Ranch crude, having a market standing by who's willing to pay the WTI price, and facing up-front exposure of only $5 million or so are all attractors to a company with respectable cash reserves, he said.

Meanwhile, Derek has plans to develop the upper Newcastle sand beneath the project with gas-assisted gravity drainage (GAGD), a variation on the SAGD technology using miscible gas as the injection medium. It also holds other Powder River Basin leases on which it could apply a third EOR technique called Low-Temperature Oxidation (LTO) to known oil reserves. Among other things, the LTO technique is used to repressurize the reservoir and aid oil miscibility and enhance oil production.