This Oil Sands Play Is More Accessible Than Ever

A few producers are betting on a play that could boost its production level significantly over the next few years. As a matter of fact, Pelican Lake, located in the northeast region of the Canadian oil sands, involves the Wabiskaw-McMurray formation, a deposit estimated to hold over 977 Bcf (billion cubic feet) in established reserves. Furthermore, it also involves a large part of the Grand Rapids formation, a heavy oil deposit estimated to hold over 307 Bcf of established reserves.

Pelican Lake: A world-class play
With the application of relatively new techniques, hydraulic fracturing and horizontal drilling, producers in the oil sands are able to recover bitumen more efficiently, thus reducing the operating costs and making it a more viable venture economically. However, this play, located in northeast Alberta, appears to offer a unique opportunity to boost the production of the producers involved, at a low cost level.

Pelican Lake is located at approximately 186 miles north of Edmonton, Alberta's capital. Back in 1997, Cenovus Energy initially began producing heavy oil at Pelican Lake with horizontal wells from the Wabiskaw formation. The company applied several innovative technologies over the years to upgrade the recovery efficiency. At the time, Cenovus managed to produce about 23,000 Bbls/d.

Notably, the company applied waterflooding and polymer injection techniques. Cenovus also developed a hot water injection pilot to assess improvements of recovery rates where higher viscosity oil can be recovered. Furthermore, the company currently uses surfactants at Pelican Lake to supplement the polymer technology in an attempt to improve upcoming results.

Therefore, Cenovus is currently developing its Grand Rapids project in Pelican Lake, in which it has operated a 600 Bbl/d pilot since 2011. Constructed in three phases of 60,000 Bbls/d, the project will have a total capacity of 180,000 Bbls/d over a 40-year lifespan.

Combined oil sands production averaged nearly 102,000 Bbls/d for Cenovus in Q3 of 2013, over almost 177,000 Bbls/d in total production. The company is currently seeking regulatory approval for its project for the end of 2013, and after the completion of the three phases Cenovus' production would at least double, its Grand Rapids project representing a tremendous growth catalyst.

Its direct competitor is one of the largest independent crude oil and natural gas producers in the world. Canadian Natural Resource owns assets in North America, the North Sea as well as Africa's offshore. This producer is also the second largest independent natural gas producer in Canada, with several assets in Alberta, Saskatchewan and British Columbia.

Its presence in Pelican Lake represents a terrific opportunity for the company. Its assets in the region has been estimated to hold over 4.1 billion barrels of oil originally in-place. Canadian Natural started converting some areas to waterflood in 2004 and testing polymer flooding on other areas in 2005.

In 2012, Pelican Lake produced about 38 Mbbls/d of oil and the producer is expecting approximately 48 Mbbls/d for this year's production. The producer is expecting to see its production peak at approximately 80,000 Bbls/d in 2015. Additionally, as of June 2013, Canadian Natural produced 241,402 Bbls/d of crude oil and NGLs from its Canadian assets in Alberta and Saskatchewan, out of its total production of 623,315 Boe/d. Therefore, once Pelican Lake achieves optimal production, it will represent more than 33% of its total Canadian production.

Finally, a small-cap producer that owns over 526,000 acres of undeveloped land including a large part in the Wabiskaw-McMurray and Grand Rapids formations, is also well-positioned in the oil sands. As a matter of fact, MEG Energy is producing crude oil from its Christina Lake and Surmont assets, two quality properties combining for 71,680 acres of land and best-estimate contingent resources of more than 1.3 billion barrels.

Notably, MEG reported, for its Q3 of 2013, record quarterly production of 34,246 Bbls/d and record year-to-date production of 32,980 Bbls/d for its two producing properties. Furthermore, Christina Lake is expected to produce approximately 210,000 Bbls/d and Surmont, 260,000 Bbls/d by 2020, when all phases will be commissioned and producing at full capacity.

With several thousands of acres of well-positioned undeveloped land, MEG has tremendous upside for organic growth, assessing the best-estimate contingent resources at over 2.1 billion barrels and a 10% present value resource of $5.67 billion.

Foolish conclusion
Pelican Lake is receiving a lot more attention in recent years, since proven technologies contributed to reduce the operating costs associated with the crude recovery from the oil sands. Thus, some producers got involved by acquiring significant acreage in order to develop the buried resource at more affordable costs. Pelican Lake offers a terrific catalyst for these producers because the recovery of heavy oil with innovative methods such as waterflooding and polymer flooding has shown higher recovery rates and lower operating costs.

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