Crude Oil in Saskatchewan

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1 Crude Oil in Saskatchewan Description of Crude Oil Crude oil is a mixture of many substances, mainly compounds of carbon and hydrogen, together with varying proportions of sulphur. Crude oil also is referred to as petroleum from the Greek word petra meaning rock, and the Latin word oleum meaning oil. Saskatchewan produced crude oil has a wide range of quality, varying from light sweet crude to heavy sour crude. For statistical purposes, Saskatchewan categorizes the oil into heavy, medium and light categories. Heavy crude is dark, thick, sticky and viscous, somewhat like blackstrap molasses and has a high content of asphalt and sulphur. Light crude is colored light golden brown, flows quite easily and generally has a low sulphur content. Medium crude falls between heavy and light crude in characteristics. Uses for Crude Oil Crude oil is refined into various proportions of gasoline, aviation fuels, diesel fuel, heating oil, residual fuel oil, asphalt and lubricants. Crude Oil Producing Areas Heavy crude oil is produced from wells drilled in the Lloydminster and Kindersley areas. Light crude oil is located mainly in the southeast part of the province around Weyburn and Estevan, although a small amount is produced in the Kindersley area as well. Medium crude oil is found in both southeast and southwest Saskatchewan. Crude oil is produced from underground reservoirs ranging in depth from 360 to 2,900 metres (1,181 to 9,514 feet). Ownership of Saskatchewan s Crude Oil Any company can produce oil in Saskatchewan as long as it obeys the provincial laws and regulations governing this activity. Before drilling an oil well, the company must acquire the petroleum rights to the property. The province of Saskatchewan owns 24.3 million hectares of petroleum and natural gas rights in the surveyed area of the province. This represents about 75 percent of the total petroleum and natural gas rights in the province. The remaining 25 percent of the rights are owned by individuals, companies, Indian bands and the federal government. Approximately 7 million hectares (about 29 percent) of the total provincial petroleum or natural gas rights are currently leased to oil and gas companies.

2 Oil Well Drilling Methods Two basic types of drilling methods are utilized in Saskatchewan. The most common method is vertical drilling, whereby the drilling rig drills down more or less vertically until it penetrates the targeted oil reservoir. In the 1980 s, a new drilling technology known as horizontal drilling was developed. Horizontal wells are drilled by first drilling down more or less vertically until the drill bit approaches the target oil reservoir and then the drill bit is steered in a curved path until it enters the target reservoir. Once it enters the reservoir, the drill bit is steered horizontally through the oil reservoir, sometimes for distances more than 1,500 metres. Horizontal wells are much more expensive to drill but are also usually more productive. The first horizontal well in Saskatchewan was drilled in 1987, with a total of almost 7,130 wells drilled by the end of Approximately 39% of Saskatchewan oil production is currently produced from horizontal wells. Crude Oil Recovery Methods Oil is recovered from underground reservoirs in Saskatchewan using three different recovery methods commonly referred to as primary, secondary and tertiary. In the primary method of production, oil is simply pumped from the underground reservoir to the surface through a wellbore drilled into the reservoir. Secondary recovery, or waterflooding as it is commonly known, involves the injection of water into a neighbouring well to force out more oil than can be extracted by straight primary pumping. Tertiary recovery methods are usually referred to as Enhanced Oil Recovery (EOR) methods. EOR methods involve the injection of substances such as steam, gases or chemicals into reservoirs to flush out oil that cannot be produced by either primary or secondary techniques. Production & Reserves Saskatchewan's first commercial crude oil discovery was made in Many of the major pools in the province were discovered as a result of an intensive exploration effort in the mid-1950s and early 1960s. Saskatchewan is now the second largest oil producer in Canada after Alberta. The province produces approximately 17 percent of total Canadian oil production. Crude oil production in 2006 was a record million cubic metres (156.3 million barrels), a slight increase from the previous record production level of million cubic metres (155.7 million barrels) reached in The high production levels over the past several years can be attributed to the many advances in technology that have taken place in the oil industry as well as to continuing strong development and exploration activity. Cumulative oil production from Saskatchewan to December 31, 2006 was million cubic metres (4.5 billion barrels). Remaining recoverable reserves at December 31, 2005 were estimated to be approximately 187 million cubic metres (1.18 billion barrels). Saskatchewan has an estimated 25 billion barrels of heavy oil-in-place in the west-central region of the province, which represents the greatest potential for future production.

3 Exploration & Development Activity Their were 2,339 oil wells drilled in Saskatchewan in 2006, well above the average drilling levels witnessed from 1998 through Wells Drilled 1,064 1,391 2,396 1,924 1,643 1,877 1,743 2,011 2,339 There are approximately 270 waterflood projects, six steam injection projects, two solvent injection (VAPEX) projects and two carbon dioxide injection projects operating in the province. Approximately $2.4 billion was invested by the oil industry in Saskatchewan during Provincial Fiscal Regime Conventional oil production is subject to a royalty/tax structure (royalty on Crown production and tax on freehold production) that is sensitive to both price and oil production rate. Drilling incentives are available for wells that meet the criteria for horizontal, exploratory or deep oil wells. Maximum royalty rates of 2.5 percent and a tax rate of zero percent of gross revenue are applicable to specified initial volumes of oil produced from the new wells. Incremental production from an enhanced oil recovery (EOR) project (not including waterfloods) is subject to a separate cost sensitive royalty/tax structure that incorporates lower royalty and tax rates prior to the project reaching payout of investment and operating expenditures. Prior to payout, EOR projects that commenced prior to April 1, 2005 are subject to a Crown royalty rate that varies from 0 to 4 percent of gross revenue and a freehold production tax rate of zero. After payout, the Crown royalty rate is 30 percent of operating revenue minus 0 to 2.5 percent of gross revenue while the freehold production tax rate is 23 percent of operating revenues minus 0 to 2.5 percent of gross revenue. For EOR projects that commenced operation on or after April 1, 2005, the pre-payout Crown royalty rate is 1 percent of gross revenue and the pre-payout freehold production tax rate is zero. After payout, the Crown royalty rate is 20 percent of operating revenue and the freehold production tax rate is 8 percent of operating revenues. Prices Canadian crude oil prices have been decontrolled since June 1, Crude oil prices are negotiated between the producer and the purchaser based on market conditions. Negotiations are influenced by competition with U.S. domestic crude oil, international crude oil and other Canadian crude oil sold in the same market place. The price of West Texas Intermediate (WTI), a U.S. light crude oil, is used as a marker for setting light oil prices. Heavy and medium oil prices are set to compete with Mexican Maya, Alaska North Slope, Venezuela heavy and Wyoming Sour crude oil. As a result, the lighter the crude oil and the lower the sulphur content, the higher the price will be.

4 Markets About 18 percent of Saskatchewan's production is currently used within the province. This is comprised mainly of heavy and medium crude oil feedstock required by the NewGrade Upgrader in Regina, Lloydminster Upgrader and the asphalt plant in Moose Jaw. Approximately 66 percent of Saskatchewan's production is currently exported to the United States. The remainder of Saskatchewan's production is sold in Eastern Canada with a minor amount of oil sold in Alberta. Transportation Numerous pipeline systems for oil and natural gas originate in and cross over Saskatchewan. These pipelines deliver crude oil, natural gas, natural gas liquids and refined petroleum products throughout the province. The major pipeline distribution system is the Enbridge Pipeline which originates in Edmonton and passes through Saskatchewan on route to eastern Canada and the United States. Refining & Upgrading The majority of the province's refining capacity is in Regina where Consumers' Co-operative Refineries Ltd. operates a 15,900 cubic metres (100,000 barrels) per operating day conventional refinery. The remaining capacity is in Moose Jaw where Moose Jaw Refinery operates a 2,380 cubic metres (15,000 barrels) per operating day asphalt plant. NewGrade Energy Inc., a joint venture by Consumers' Co-op and the Government of Saskatchewan, completed construction of Canada s first heavy oil upgrader in The upgrader converts heavy crude oil into lighter, higher quality oil. The NewGrade upgrader has a capacity of approximately 9,530 cubic metres (60,000 barrels) per operating day. The NewGrade upgrader converts heavy and medium oil into light synthetic oil, some of which is used as a feedstock for the Co-op Refinery. The NewGrade Upgrader employs about 170 people. A second heavy oil upgrader was built at Lloydminster, Saskatchewan in It is operated by Husky Oil and sources heavy oil from Alberta and Saskatchewan. The Lloydminster upgrader has a capacity of approximately 12,240 cubic metres (77,000 barrels) per operating day. The Lloydminster upgrader converts heavy oil into light synthetic oil and currently employs about 300 people.

5 Size and Economic Impact of the Oil Industry At the end of 2006, Saskatchewan had approximately 39,600 wells capable of oil production of which approximately 24,000 were actively producing. Approximately 300 oil and gas companies operate in Saskatchewan on behalf of more than 1,400 working interest owners. The oil industry represents a major economic force in this province as evidenced by the following statistics: revenues from crude oil royalties and taxes and sales of petroleum leases totaled $1.2 billion for the 2006/2007 fiscal year which represented approximately 15 percent of government revenues; oilfield investment for 2006 was approximately $2.4 billion; direct and indirect employment associated with Saskatchewan's oil industry (excluding refining, upgrading, and natural gas activity) in 2006 accounted for approximately 23,700 person years. Technology The Petroleum Technology Research Center (a joint venture between Natural Resources Canada, Saskatchewan Industry and Resources, the University of Regina and the Saskatchewan Research Council) initiates and supports research and development projects aimed at enhancing the production and recovery of Canadian petroleum resources. Saskatchewan has established the Saskatchewan Petroleum Research Incentive (SPRI) that currently provides a royalty credit equal to 50 percent of eligible expenditures involving the PTRC in Regina (to a maximum of $1 million in credits) plus 30 percent of any additional PTRC expenditures and all other eligible expenditures (up to a maximum of $3 million in additional credits) resulting in a total potential SPRI royalty/tax credit of $4 million. Eligible expenditures include expenditures related to enhanced oil recovery pilot projects or research, development and demonstration projects involving new technologies related to oil and natural gas. Innovative new technologies used to discover new oil reserves and improve recovery rates include three dimensional seismic, horizontal drilling, screw pumps (progressive cavity pumps) and enhanced oil recovery techniques using steam, CO 2 and various forms of gas injection.