It turns out I'm not the only one to have called "game on" in the oil sands. Macquarie is out with the first volume of its new "In Situ"-ation Report, which focuses on emerging themes in the oil sands sector. As the title of the report implies, front and center is the rise of SAGD production.
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Actually, SAGD stands for steam-assisted gravity drainage. This is the most common form of in situ (Latin for "in place") production, in which bitumen flows through a wellbore, rather than being mined. As I wrote when Occidental Petroleum
Macquarie estimates that SAGD production in Western Canada has doubled in the past two years, to 220,000 barrels per day. Hundreds of thousands of additional daily barrels are under construction, with BP's
I've been writing about in situ operations like Devon Energy's
While they have their own emissions issues to deal with, SAGD operations can potentially have a considerably lower environmental impact. Project developers can ramp up operations in stages, stretching out an otherwise very front-loaded capital cost. Per-barrel costs are significantly lower than those at oil sands mines, putting SAGD breakeven economics at a 14% discount to mines with integrated upgrading capacity and a 28% discount to non-integrated mines. Finally, a great majority of Canada's oil sands are amenable to the technique. The report says that 80% of the region's oil requires some form of in situ recovery.
Lower costs and a bigger exploitable resource? Sign me up!
Not all SAGD is a slam dunk
So how do we judge the performance of the many SAGD players? Macquarie suggests focusing on the following factors: the cumulative steam-oil ratio, the average bitumen rate per well, and time taken to reach steady-state production.
The steam-oil ratio (SOR) is important for many reasons. A lower SOR implies lower capital and operating costs, lower energy usage, and lower emissions. Cenovus Energy
In terms of average production per well, Suncor's Firebag is way out in front, with Devon's Jackfish and Cenovus' Christina Lake making strong showings.
The time it takes a project to reach steady-state design capacity has a big impact on net present value, and flat-out failure to meet design capacity can really tank returns. A SAGD project reaching only 80% of design capacity would probably not break even at today's oil prices.
Who are the standouts?
Devon's Jackfish project comes out near the head of the pack. The company has retained Jackfish while putting billions of dollars worth of other assets on the sale block in order to focus on shale and other onshore resource plays. Devon clearly recognizes that it has a very special asset on its hands. At the end of the day, though, Jackfish only represents about 6% of Devon's total estimated onshore resource potential.
Cenovus Energy, the integrated oil spinoff of EnCana