Better Prospects. The public relations battle that bubbled up into an ongoing. for Alberta s Oilsands

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1 Better Prospects for Alberta s Oilsands Cover Better Prospects for Alberta s Oilsands In Situ Oil Sands Alliance forms to be the voice for what it calls the future of oilsands development in the province By Derek Sankey Cover photo by Ewan Nicholson Photography Inc. The public relations battle that bubbled up into an ongoing international debate about so-called dirty oil, Alberta s tarsands, foreign oil dependence, the safest sources of oil and other headline-friendly tag lines pushed forward by environmentalists and NGOs has reached a crescendo in recent weeks and months. The massive offshore oil spill in the Gulf of Mexico did little to ease oil concerns from its impact on the environment to how and where it is extracted. Glen Schmidt, chairman of IOSA and president and CEO of Laricina Energy Ltd. Photo by Ewan Nicholson Photography Inc. BUSINESS IN CALGARY JUNE

2 Better prospects for Alberta s oilsands Cover Connacher s Great Divide SAGD Project Petrobank s Whitesands THAI Project Pat Nelson on site at Connacher s Great Divide SAGD Project. Pat Nelson on site at Petrobank s Whitesands THAI Project with Petrobank Senior VP and COO, Heavy Oil Chris Bloomer Drilling Operations SAGD Steam Chamber Schematic All photos on this page courtesy of Laricina Energy Ltd. Pat Nelson with Petrobank Senior VP and COO, Heavy Oil Chris Bloomer Drilling horizontal wells at Laricina s Saleski Pilot site Back in Alberta, the Canadian Association of Petroleum Producers (CAPP) decided to fight back recently with a renewed effort to combat what it calls misinformation and sometimes just pure lies. But there is another organization that quietly formed in 2008 that is much more narrowly focused on what it sees as the future of oilsands development in northern Alberta. The In Situ Oil Sands Alliance (IOSA) was born by a group of energy companies who are at the forefront of a set of new in situ technologies (using heat in wells beneath the ground to recover oil) focused on drillable oilsands, according to Glen Schmidt, chairman of IOSA and president and CEO of Laricina Energy Ltd. This group of companies finds itself in a unique position in the industry because they straddle what is considered conventional and unconventional energy development. They drill wells to reach the roughly 80 per cent of Alberta s oilsands bitumen that isn t recoverable via mining techniques like the large operations in Fort McMurray. However, they employ a range of vertical and horizontal well techniques and related technologies some emerging and some firmly commercialized that are not typically associated with conventional oil drilling operations. For the same environmental impact as a conventional well, you re getting 10 times the energy, says Schmidt. Where we re going is drillable oilsands [and] a relatively benign, balanced environmental footprint, not materially larger than conventional [wells], but more oil in exchange that s the trade people are looking for. The range of technologies they are using there are more than 20 of these companies exploring several cutting-edge methods while larger oil companies have been using more established variations of the same technology for years include Cyclic Steam Stimulation (CSS), Steam Assisted Gravity Drainage (SAGD), Toe to Heel Air Injection (THAI) and other variations on all of these, along with more experimental methods still in development. Schmidt says IOSA is necessary because the future development of Alberta s oilsands depends on this evolving set of technologies. A voice is needed to speak up for this narrow 28 JUNE 2010 BUSINESS IN CALGARY

3 Glen Schmidt, chairman of IOSA and president and CEO of Laricina Energy Ltd. Photo by Ewan Nicholson Photography Inc. bandwidth of operators and their emerging methods. We have a good news story and we need to get it out, says Schmidt. Drillable oilsands is now top of barrel. We re able to reduce the cost of that energy and reduce the environmental footprint. At a time when offshore drilling as well as the reputation of Alberta s oilsands are squarely under the microscope albeit for different reasons IOSA believes that drillable oilsands is the future of energy development in northern Alberta. You can fly over a vast area and you can barely pick out the in situ [oilsands] operations, says Chris Bloomer, senior vice-president and COO of heavy oil for Petrobank Energy and Resources Ltd., a member of IOSA that is leading the development of THAI technology for drillable oilsands. We believe that THAI will overtake SAGD and it will be the technology of choice, but I think this area is ripe for the application of new technologies, says Bloomer. Getting IOSA s message out to the public and government regulators is an entirely different challenge at a time when it can be easy to get drowned out by well-funded environmentalist groups, NGOs and glossy magazine spreads that portray the oilsands as dirty oil. They can use a sound bite to get their message across, but we have to explain ours and it s not easy, says Bloomer. There s a lot of science involved in it. It s a challenge for us to take over the message and put the positive spin on it. We decided it s just going to take time and we have to keep at it. Schmidt believes once the technologies are proven some of them have already been proven and highly commercialized over the past 20 years that the message will eventually sink in. There s a difference between selling and communicating, says Schmidt. People will want to test to see if we re selling. Our role as a group is to provide that information so we can be tested. The energy sector has been politicized and part of that has been the result of the industry being silent over the years, and others using their own characterization of the industry to achieve goals. Those characterizations have not always been balanced or reasonable. Using this suite of existing and emerging drillable oilsands technologies, companies can recover the deep bitumen that isn t recoverable with more traditional mining operations on the surface and they recover much more oil than conventional oil wells, which typically only recover 10 to 20 per cent of the oil in a reservoir. Drillable oilsands techniques can recover anywhere from 25 to 80 per cent of the bitumen in a reservoir and do it in such a way that uses less water and other 30 JUNE 2010 BUSINESS IN CALGARY

4 Better prospects Cover resources, leaving a smaller environmental footprint. And they can do it in a cost-effective manner, argues Schmidt. At this point, it s impossible to say which of the techniques or a combination of several of them will emerge as the leader. There will never be one way, he says. Around the house, there s not one computer or one cellphone or one auto company. They do similar things and quite frankly that s the effectiveness in that you have multiple ideas. Companies will adapt the most effective and economically viable methods into their own projects as they see fit, drawing on the expertise already gained from previous projects. What is so vital to the future of Alberta s oilsands development is as much about public perception as it is about finding and developing the technologies to exploit the resource. Public confidence comes from a solid regulatory structure, which will necessarily start in a more restrictive way very high standards, says Schmidt. As success demonstrates that the industry is meeting its obligations and the technology is proven out, then the regulatory structure becomes more flexible because now it s proven. Still, it can be a frustrating, uphill battle for any emerging industry. One of the issues we have with the regulatory system is that it treats a small pilot [project] like a big mining process, says Bloomer. The key thing is that we want to influence policy on the regulatory and fiscal side to have those policies consistent with the nature of the business. The cause has attracted some highprofile talent with the addition of Pat Nelson, Ralph Klein s former energy minister (then known as Pat Black), as vice-chair of IOSA. She was first introduced to SAGD technology the oldest and most established of the broad range of technologies employed by IOSA members and others in the BUSINESS IN CALGARY JUNE

5 Better Prospects for Alberta s Oilsands Cover In Situ Oil Sands Alliance (IOSA) Background: Formed in 2008, the In Situ Oil Sands Alliance (IOSA) is comprised of smaller, emerging energy companies focused narrowly on drillable oilsands. About 80 per cent of the bitumen in northern Alberta can only be exploited using new horizontal drilling technologies, versus the 20 per cent accessible through mining. IOSA has a mandate to influence regulatory and fiscal policy, but also to act as a communications body for this unique subset of the energy industry. Current Members: Laricina Energy; Petrobank Energy and Resources Ltd.; Osum Oil Sands Corp.; MEGG Energy Group; Athabasca Oil Sands Corp.; and, Connacher Oil and Gas Ltd. In Situ Technology: In situ refers to recovery techniques that apply heat or solvents to heavy oil or bitumen reservoirs beneath the ground. There are several types of in situ technologies and techniques. Cyclic Steam Stimulation (CSS): Imperial Oil pioneered the CSS, or huff-and-puff, technique in the mid-1980s in Cold Lake, but other companies also now use it. Steam is injected into a well for a period of time, stopped, before the hot oil is pumped out due to the pressure created by the heat as the bitumen warms up. Recovery rates are around per cent of the reservoir. Steam Assisted Gravity Drainage (SAGD): The Alberta Oil Sands Technology and Research Authority conducted Steam Assisted Gravity Drainage (SAGD) tests in the 1980s which coincided with advances in drilling from vertical wells to horizontal wells. In SAGD, two horizontal wells are drilled a few metres apart with steam injected into the upper well. Heat warms the bitumen and it flows into the second well, where it is pumped to the surface. Most energy companies operating in the Fort McMurray area have SAGD projects in operation or underway. It is considered a major breakthrough in drillable oilsands because it recovers per cent of the oil in a reservoir. Toe to Heel Air Injection (THAI): Petrobank Energy and Resources Ltd. is a pioneer in the THAI method with several projects underway in the Fort McMurray and Lac La Biche regions of northern Alberta. THAI injects air into a vertical well at the toe of one horizontal well and combusts to create a sweeping smouldering fire that moves into the heel of the horizontal well, recovering per cent of the oil out of the reservoir. It is a new technology, but does not use the same large amounts of water as some other methods. Combustion Overhead Gravity Drainage (COGD): This experimental method injects air into several vertical wells above one horizontal well. Similar to CSS, steam is used to heat the bitumen, followed by the air injection to ignite the upper bitumen and recover the lighter remaining bitumen, also using less water than SAGD. Vapour Extraction Process (VAPEX): Also similar to SAGD, VAPEX uses hydrocarbon solvents injected into the upper well instead of steam. Most companies are combining and experimenting with all of these technologies in an effort to find the most economic, effective, efficient and environmentally-friendly options. industry in 1993 during the pilot test of SAGD with Alberta Oil Sands Technology and Research Authority s Underground Test Facility (first launched in 1984). As SAGD evolved into the 90s, it became more commercially viable and oil companies began to launch the first commercial projects. In the last decade, SAGD and similar techniques began spreading like wildfire across the province at the same time that horizontal drilling techniques were developed. Horizontal drilling has led to great strides in areas such as shale natural gas plays, using multiple fractures in plays that had previously been considered unrecoverable using older methods. Drillable oilsands projects are still a relatively small portion of oilsands development compare it to the tens of billions of dollars worth of mining projects underway or planned but Schmidt expects the future to lie in IOSA members techniques. A smaller physical and environmental footprint than mining, less and less water usage, the ability to reach 80 per cent of the oilsands bitumen unrecoverable through mining operations, and a range of techniques that continue to evolve rapidly all add up to a bright future for drillable oilsands companies, says Schmidt. There are still large regulatory and technical challenges ahead, but perhaps the greatest one is that of public perception. With all eyes on the Gulf Coast and its implications for the North American energy industry moving forward, perhaps there s a window of opportunity to push their message out to the public. It is, after all, the people of Alberta and Canada that own these resources. It comes back to confidence in the energy sector that it is doing its job not only economically, but environmentally which will answer the question that the public should ask: Are we doing the right things? I think the answer is yes and we ll continue to make it better. BiC 32 JUNE 2010 BUSINESS IN CALGARY