The Long Lake oil sands project was promoted as a technological breakthrough by its owners and derided by critics as a too-ambitious science experiment.
It appears the detractors were right, at least for now. OPTI Canada Inc., the Israeli-backed oil sands startup, has filed for court protection from creditors, wiping out equity once worth as much as $5-billion.
On Wednesday, OPTI unveiled a plan reached with its main bondholders that will convert $1.75-billion (U.S.) of debt into $375-million (Canadian) of fresh equity. It is a crucial recapitalization of the company's balance sheet that will slash debt and increase cash.
The deal - to be sanctioned in September and closed by December - is a declaration that the company's debt holders "recognize the long-term value" in the company, chief executive officer Chris Slubicki said.
If the plan works, OPTI - which owns 35 per cent of the struggling Long Lake operation - will be able to continue working with Nexen Inc., operator and owner of the rest, to push the project ahead. Expansion is also in the plans.
OPTI's saga illustrates the engineering challenge inherent in oil sands production. While it might appear to outside observers that bitumen is easy to get out of the ground, it can be very difficult, especially using the tricky new technology known as SAGD - steam-assisted gravity drainage. Instead of mining, steam is injected down drilled wells to loosen the bitumen and coax it to the surface.
Cenovus Energy Inc. and Suncor Energy Inc. have built successful projects using SAGD, but OPTI stumbled on the technology, among other factors. Industry has staked much of future development of the oil sands on SAGD - rather than mining - in part because the majority of the bitumen in the region is too deep to mine but also because SAGD is billed as posing fewer environmental challenges. A potential revival at Long Lake will be closely watched to understand more about the technology and bitumen reservoirs, which will ultimately illuminate how much oil can be wrested from the earth.
OPTI's story is among the oil sands' most unusual. It began in Israel in the 1950s when engineer Lucien Bronicki came up with ideas to conjure electricity out of solar-heated water. In the 1990s, his firm, Ormat Industries Ltd., began to tinker with low-grade oil.
That led to an idea for an oil sands upgrader - the facility that converts tarry bitumen into valuable synthetic oil - that would largely be fuelled by bitumen. The plan would sharply reduce the need to buy natural gas to generate power, slashing operating costs.
A deal with Suncor Energy for a test project secured OPTI (which had been created by Ormat) some land south of Fort McMurray, far from the surface mines that lie to the north of the city. Then Suncor bailed and Nexen Inc. jumped in. A project was sanctioned, using OPTI's upgrader idea and SAGD to provide bitumen.
But problems plagued Long Lake. During the oil sands building boom of the mid-2000s, there were numerous delays. Costs ballooned to more than $6-billion from $3.4-billion. The global financial crisis hit, and the price of oil crashed. By the time markets had recovered, Long Lake was open but functioning badly.
The ambitious upgrader appeared to work, but Nexen could barely get any oil out of the ground. Bitumen reservoirs are complex and Nexen misjudged what was there. Long Lake was supposed to be producing 72,000 barrels a day of bitumen two years ago - and about 60,000 barrels a day of synthetic oil, which could be sold today for $100 a barrel.
Instead, Long Lake sputters along, producing less than 30,000 barrels a day of bitumen, as of a May report. (That's a major improvement from the 10,000 or so barrels Long Lake produced two summers ago.) All the problems eventually crushed OPTI and pushed it into the bankruptcy filing.
Yet potential remains. It's not clear how much bitumen Nexen can get out of its existing wells but its regional holdings, with OPTI, are vast. And the upgrader, while never operated at full scale, has worked fairly well.
"Upgraders tend to run better when they're full," said Michael Dunn, analyst at FirstEnergy in Calgary. "It appears the technology works. It's never been given a fair test yet. It looks like it's at least partially working."
Nexen has employed numerous SAGD fixes but it is unclear, Mr. Dunn said, whether existing wells will get enough bitumen out of the ground.
Nexen isn't the only company to struggle with SAGD. Husky Energy Inc.'s Tucker project is at one-fifth design capacity and has been stuck there for several years.
For Nexen, and OPTI, it is crushing comedown from the confidence of early 2008, as Long Lake was set to open.
"When we bring Long Lake on, will it be optimal?" Charlie Fischer, then CEO of Nexen, told The Globe at the time. "Probably not. Are we going to have to play with the operating conditions to optimize it? Probably. But that's an easy thing to do. So, is it going to work? Yeah, it's going to work. I've never worried about that."