Small company has big plans

There are only a small number of new projects being started in the Alberta oil sands this year, thanks to a precipitous decrease in both the price of oil and the availability of financing.

But these less-than-ideal business conditions have not stopped Calgarybased North Peace Energy Corp. from beginning work on a pilot project on Block B South of its Red Earth property in northern Alberta.

North Peace’s Red Earth project consists of a 100-percent interest in 86,400 acres of nearly contiguous oil sands leases in the Bluesky Deposition between the Peace River and Athabasca oil sands areas.

To recover the heavy oil at Red Earth, North Peace is using cyclic steam injection (CSS), a form of thermal stimulation that has been in use since the late 1950s. The company recently began steam injection on the L1 horizontal well.

President and CEO Louis Dufresne said this phase is expected to last six to eight weeks, after which the L1 well will be put on production for six to nine months.

Following the initial production period, steam injection will be repeated and followed by more production. After this cycle of activity at the L1 well, the L2 well will receive the same treatment. The two horizontal wells are expected to hit total peak production of up to 800 barrels per day in 2009.

Total pilot project costs are projected to be approximately $14.8 million.

Dufresne said the main objective of the pilot is to demonstrate the feasibility of producing economic quantities of bitumen from the company’s resource and to test economic and technical parameters before undertaking commercial exploitation.

If the pilot project is judged a success and Red Earth proceeds to full commercial production, it will become a 30,000 barrel-per-day facility over a 25-year project life.

The commercial project is slated to go ahead in three phases of 10,000 barrels a day each: Phase One start-up, beginning in 2012-2013, followed by Phases Two and Three in 2016 and 2019 respectively.

Steam injection, also known as the “huff and puff” method, is a well-known and commercially proven method to thermally stimulate oil reservoirs. The technology is widely used in the San Joaquin Valley in California and the Lake Maracaibo area of Venezuela, as well as the northern Alberta oil sands.

Commercial and pilot CSS projects under way in Alberta include Shell Canada Peace River; Baytex Peace River; Canadian Natural Resources Primrose and Wolf Lake; and Imperial Oil Cold Lake.

CSS is most commonly applied to oil reservoirs that are relatively shallow and that contain crude oils which are very viscous in their underground reservoirs.

CSS works by putting target wells through cycles of steam injection, soak and oil production.

Steam is injected into a well at a temperature of 300 to 325 degrees Celsius for a period of weeks to months. Following the injection, the well is allowed to sit long enough — from days to weeks — to allow the heat from the steam to soak into the formation. Finally, the hot oil is pumped out of the well. This production period can last from several weeks to several months.

To produce the steam at Red Earth, water from a nearby underground aquifer is first treated and then boiled in a natural gas-fired boiler. Natural gas is supplied from a pipeline adjacent to the edge of the Red Earth lease. Because steam injection is subject to diminishing marginal returns, wells are put through another injection-soak-production cycle when the initial production rate falls off.

The process is repeated until the cost of injecting steam exceeds the returns from producing oil.

In addition to CSS, there are two other methods of thermally assisted heavy oil production. In steam assisted gravity drainage (SAGD), two horizontal wells are drilled in the oil sands, one at the bottom of the formation and another about five metres above it.

In each pair of wells, steam is injected into the upper well, the heat melts the bitumen and it flows into the lower well from where it is pumped to the surface. Most major Canadian oil companies now have SAGD projects in production or under construction in the Alberta oil sands.

The vapour extraction process (VAPEX) is similar to SAGD except that hydrocarbon solvents, instead of steam, are injected into the upper well to dilute the bitumen and allow it to flow into the lower well.

The CSS, SAGD and VAPEX processes are not mutually exclusive and can be used in combination with each other.

Dufresne said that Red Earth lies outside the busy Fort McMurray corridor and, therefore, is a relatively quiet spot in the oil sands. It’s hardly a backwater, however.

“There has been lots of conventional oil and gas production in the area, and North Peace has access to their drilling logs. We knew the resource was there. It was no big secret.”

Because of the area’s history of production, it has all the infrastructure the project needs -paved roads and highways, electricity, Internet, natural gas, water and air service. Red Earth is 700 km from Calgary and 160 km from Slave Lake, the nearest centre.

“Getting in and out is easy,” says Dufresne.

Compared to many of the companies working in the oil sands, North Peace is a young sprout. When it was founded in December 2005, it immediately began acquiring leases in the Red Earth area. The company has stayed small and has a staff of 12. Dufresne, who hails from suburban Montreal, studied mechanical engineering at the University of Waterloo and has extensive experience in both the technical and business sides of the Canadian energy industry. He says the main challenges currently facing the Red Earth project are financial.

“Tough capital markets and depressed commodity prices are serious obstacles, even if the company has no debt,” says Dufresne. “Our break-even point for the pilot project is an oil price of $45 a barrel, which isn’t too bad when you consider we started the project when oil was $60 a barrel. And we’re optimistic that commodity prices are going to strengthen.”

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