Financial Press: U.S. oilsands open for business


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TSX.V:ARK
06/20/2013 [ACCESSWIRE]

Archer Petroleum is bringing an innovative and economic oilsands extraction approach to the relatively uncharted waters of the U.S. oilsands

(Financial Press - June 20, 2013) - The art of extracting bitumen from sand is a tricky business that even some of the world’s largest oil companies have difficulty handling. Keep your operations in check and producing, and the rewards are plentiful, as production numbers dwarf conventional drilling methods. But if problems occur on your watch, the costs in capital and credibility can be enormous.

Alberta has benefited greatly from the resources generated from its oilsands, but the difficulties it has faced to get to this point have deterred other regions from developing their own oilsands operations to date. That may be about to change, as new developments south of the border are rising in order to develop the U.S. oilsands, and possibly change the bitumen landscape.

Pressure from environmental groups and media, armed with less-than-flattering overhead photos of tailings ponds, has stigmatized conventional oilsands mining. Large conventional oilsands companies, such as Royal Dutch Shell, Canadian Natural Resources Limited, and Suncor, must not only have talented technicians in place, but also be armed with a capable public relations team as well.

Typically the other method, known as SAGD (which stands for Steam Assisted Gravity Drainage) is looked at more favourably for its smaller environmental footprint. This is the method currently being used by companies such as Nexen, Imperial Oil, Cenovus and Devon Energy. However, it too comes with difficulties, especially when the necessary cap rock fails to contain the injected pressurized steam.

Two more recent examples of cap rock related disasters were French oil giant Total SA’s problems on its Joslyn SAGD operation in 2006, and Devon Energy’s previous issues at its Jackfish SAGD operation. Both scenarios involved high-pressure steam escaping to the surface, creating environmental headaches, and PR nightmares.

Total eventually had to shutdown Joslyn, while Devon managed to bring Jackfish back online after repairing its failed wellhead. For virtually all junior oil companies, it’s these types of issues that create a barrier to entry to the oilsands space. These types of problems seem to be manageable only by the major players.

Further, since most of Alberta’s prime oilsands acreage is already taken, land availability presents an additional barrier to new companies. If there is to be a breakthrough in oilsands extraction, Alberta doesn’t seem to be a likely area for it to occur.

A new alternative for bitumen extraction is about to kick off in an area not regularly associated with oilsands development. Archer Petroleum, which is working together with its technology partner, Arrakis Oil Recovery LLC, is bringing an innovative and economic oilsands extraction approach to the relatively uncharted waters of U.S. oilsands.

Without a need for tailings ponds, and on land that SAGD operations would prove ineffective, Archer is beginning its journey in the state of Kentucky. Thanks to favourable geological conditions, and acreage that can be acquired at a fraction of the cost of land in the better known Alberta oilpatch, the company is making a case for a game changer, as its key drivers start to line up.

“We expect to see up to 1,000 barrels a day of production out of our first 100-per-cent-owned facility which should be in production in the next six to 12 months for an approximate CAPEX (capital expenditure) of $3 million,” says Colin Bowkett, president of Archer Petroleum, which trades on the TSX-V under the symbol ARK. “Each additional extraction unit we put into a facility will only cost approximately $1.5 million, which can process up to another 1,000 barrels per day.”

Economics like this are hard to find. For example, 1,000 barrel-per-day wells drilled into North Dakota’s Bakken Shale can cost approximately $8 million-$10 million for an initial well. After spudding, the wells begin their sharp production decline, which requires post-exploratory work to keep production levels economic.

Bowkett’s team believes it found something quite different, with a chemical compound used to efficiently separate hydrocarbons from oilsands. According to their estimations, Archer’s production life per operation will look a lot more predictable, not unlike a mining play. “The field units, once installed, are going to effectively have zero decline rate for the life of the resource,” says Bowkett. “There may be fluctuations as you encounter different densities of ore or varying oil saturation levels, but over the long term we expect to see a flat production rate of approximately 1,000 barrels a day, per machine, for a life of production that can last up to 20 years per site.”

THE KENTUCKY ADVANTAGE

The initial installations of the first field units using the chemical surfactant will be located in Logan County, Ky. Archer will be targeting between 20-50 feet of pay zone, in areas that have up to a 2:1 overburden to pay ratio.

“We just drilled an 85-foot hole on our Davenport project which returned 48 feet of pay zone in one drill hole,” says Bowkett. “We still need to drill the whole property before we know if it’s a continuous target or not, but we believe it’s a fairly good indicator so far of what we’re looking at.”

Archer doesn’t intend to target anything below 80-100 feet on its property, in an effort to avoid any critical strip ratios. However, from what they’ve seen to date, much of the targeted oil-bearing sands are sitting closer to the surface.

“Most of what we’re looking is up to 2:1, which is positive when looking at the payout that’s possible on this type of resource,” says Bowkett.

While Kentucky may not come to mind when thinking of petroleum plays, there is a very large potential at stake. Estimates within the state have pegged Kentucky’s oilsands deposits to contain 3.4 billion barrels of oil.

Archer’s current 12-month goal is to have 10,000 acres under lease. The team believes that this could give it 200-300 million barrels of potential exposure. The 24-month goal is to double that amount.

Not to be overlooked is the proximity of Kentucky to major refineries. Archer sees potential for important savings on transportation costs, bypassing the WTI discounts other North American companies are currently being faced with. The Kentucky advantage on Archer’s Logan County operation is helped through a close proximity to rail, which can be utilized to get production cheaply to market.

DIFFERENT THAN A TECHNOLOGY PLAY

While the surfactant technology is relatively new and still in the proof-of-concept stage, Archer Petroleum is acting more like an explorer than a technology play.

“I think a very good parallel to this is the earlier days in the Bakken Shale,” says Bowkett. “There was a time when the land within the Bakken cost very little, despite knowledge that the area was oil bearing. Nobody at that time had the ability to produce oil out of it.

“It wasn’t until multi-stage fracking hit the scene that acreage values jumped in the Bakken. It was the early players in the area that had access to horizontal fracking technology who profited the most before the space became more crowded and costs sharply rose. Archer intends on having first mover advantage in what we believe will become a significant new play in the U.S.”

Archer is looking to be the U.S. oilsands’ version of the early players in the Bakken, and has many targeted areas in its sights to build acreage before the prices per acre rise. But unlike in the Bakken, Archer sees U.S. oilsands leases being capable of many years of production ahead, instead of Bakken-like quick payoffs, followed by rapid declines.

While the state of Kentucky as a whole has potential for 3.4 billion barrels, it is not the only state on Archer’s map. On deck are also operations within Alabama, where it is estimated to contain 6.4 billion barrels.

But the big fish that Archer is looking to land is in Utah, where the company already has a toe-hold with 919 acres. Utah has had estimations nearing 32.3 billion barrels of oil in its hydrocarbon-rich sands, and so far no company has so much as scratched the surface.

For now, the focus is on Kentucky, as commercial production is said to be within the next six to 12 months.

“There’s so much opportunity in Kentucky right now,” says Bowkett. “We expect to have multiple facilities up and running in the next 12 to 24 months that can potentially produce 2-3,000 barrels per day each. That’s a phenomenal growth curve for a small company.”

SURFACTANT, NOT SOLVENT

Archer’s process is hinged on a patented chemical surfactant instead of a solvent, which requires no heat distillation to separate out oil. Sand that is recovered after the operation is free of hydrocarbon residue, and there’s no requirement for tailings ponds.

The surfactant itself is NCP listed with the U.S. Environmental Protection Agency, and comes with an environmental upside of being biodegradable and non-toxic. The chemical is reusable, save for residual moisture in the sand, however Archer expects to retain 85 to 90 per cent with each process.

Oilsands are mined within the first 100 feet of surface, and brought to a facility that processes 100 tons of ore per hour. There is nothing out of the ordinary about the mining, as the process is conventional. Surface coal mining equipment is sufficient for this type of operation.

Bitumen is retrieved chemically and mechanically via a non-thermal process with the surfactant. Unlike hand cleaners and soaps that also remove oils from surfaces, this process doesn’t utilize a solvent.

Solvents have proven to be problematic with oil extraction, as they tend to mix with the oil. Without separating the solvent out, the mixed oil is virtually unsellable.

There are other companies in the field that are using solvent-based solutions, but they require costly and energy intensive heating processes to separate their solvent from the bitumen product before sending it to market. Because these operations require major actions and space to initiate an evaporation process, just one facility can look a lot like a mini refinery, and cost upwards of 10 to 20 times the start-up capital required for one of Archer’s facilities. As well, Archer’s operations require far less energy without the requirement for additional heat.

Archer’s current formula is derived from a similar surfactant that was used in the past for oil spills.

“Originally this technology was designed for beach cleanup after oil spills,” says Bowkett. “It wasn’t until later that innovators of the chemical compound realized there were more profitable applications than mitigating the damage from manmade disasters. They were able to adjust the process to work on the U.S. oilsands.”

Archer is currently the only Canadian publicly-traded company looking to use this process as its flagship. As they move forward through their proof-of-concept phase in Logan County, there will be a lot of eyes on their results. Should the process meet Archer’s expectations, a new renaissance in the oilpatch could be on the way, and a new oilsands region will be introduced to the rest of the world.

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