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.

Students Against Geriatric Driving?
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 (NYSE:OXY) stormed into the oil sands, in situ production is thus much closer to conventional oil recovery. The tar-like bitumen just needs a little extra heat to get it flowing to the surface.

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 (NYSE:BP) Sunrise project and ConocoPhillips' (NYSE:COP) next phase at Surmont representing two of the most recently greenlit projects.

I've been writing about in situ operations like Devon Energy's (NYSE:DVN) Jackfish project and Suncor Energy's (NYSE:SU) Firebag project since 2007, but it really wasn't until the fall of 2009 that I realized how attractive these projects are relative to conventional open-pit mining.

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 (NYSE:CVE) is one of the champions in this category, with Foster Creek and Christina Lake boasting some of the lowest SORs in the sector. Suncor's MacKay River project is another low-steam leader.

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 (NYSE:ECA), really looks like the best of the bunch. As we saw before, Foster Creek and Christina Lake are both big winners. I'm very interested to see how the firm's solvent-aided process affects performance at Narrows Lake, the firm's next major SAGD project. The co-injection of butane along with steam promises to both drop the steam-oil ratio far below peer levels and improve the project's bitumen recovery factor. Cenovus' combination of proven experience and technological leadership in the sector is a very appealing one.