Athabasca sees potential for major oil find

Sveinung Svarte holds up a piece of rock, dull grey and pocked with small holes.

The rock is a sample of limestone carbonate that looks nothing like Alberta's oil sands. But for the chief executive officer of Athabasca Oil Sands it represents the promise of a major new oil find that could add billions of barrels to the already-huge pool of oil in the Fort McMurray area.

Canada's traditional oil sands are made up of vast layers of crumbly, bitumen-rich sand that lie within a few hundred metres of the surface. Athabasca's carbonate rock lies beneath the sand, in a hard layer that's both thicker and trickier to produce.

But if Athabasca can master a new extraction technique, it could yield between 2.7 billion and 11 billion barrels of bitumen, a big boost for a company that has struggled to impress investors start since going public earlier this year.

"There's a lot of barrels here," Mr. Svarte said. "For us, this is a massive upside that we would look to unlock over the next couple of years."

Athabasca made its discovery in the Leduc formation in 2007, when an experienced geologist, acting on a hunch, suggested drilling into it to see if it contained bitumen. Brought to surface, the rock emerged stained and smeared with black goo, unmistakable proof that it contained a new trove of bitumen.

If Athabasca can figure out how to tap the carbonate, its discovery will rank amongst the top new global oil finds of the past decade. It's a tantalizing taste of the enormous volumes of Canadian crude that have yet to be tapped in northeastern Alberta, on top of the currently estimated 173 billion barrels of recoverable oil across the oil sands.

A breakthrough would come as a boon to Athabasca, which has yet to produce commercial volumes of bitumen and is trying to beat back a share price decline that has seen its stock remain 35 per cent off its initial public offering price.

After discovering bitumen in the Leduc formation, Athabasca quickly bought up surrounding land that contained the rock. The company figures it now owns 95 per cent of the play, and has drilled 25 wells - at a cost of $1.5-million each - into the Leduc, and has recently begun talking up its discovery to investors.

An independent estimate suggests the play contains 15 billion to 18 billion barrels, and that Athabasca can recover 2.7 billion barrels. Athabasca's own geologists believe they can achieve a recovery rate of 45 to 60 per cent, which would results in a substantially higher take.

The company will soon find out if it's right. It is waiting for provincial approval to run two tests in the Leduc this winter, one using the standard steam-assisted gravity drainage technology that is broadly used in industry today; another using a new technique that would install long, horizontal stove-style elements through the rock to heat it. The company is confident it will work.

Outside observers warn the idea may be flawed, adding that technology development is often a long, difficult process.

Investors, however, believe the Leduc has potential, even if their main hope is that Athabasca speeds its way to producing bitumen - no matter where it comes from.

The new oil find "is good value" for investors, since markets have yet to ascribe much worth to it, said Greg Bay, president of Vancouver-based Cypress Capital Management, a long-time Athabasca investor. But he says the company should nonetheless develop its less risky properties before aiming for its "blue-sky" carbonate plays.

"When you look at the story, what it really needs is just a little more definition around when they're going to come into production," he said.

The Leduc formation has a storied history in Alberta, as the source of Western Canada's first major oil discovery. It was a part of this rock, located far to the southwest of Fort McMurray, that gushed oil in the well remembered as Leduc Number 1. Subsequent wells produced billions of barrels of light crude from a source that was extraordinarily productive.

One of the Leduc fields, called Wizard Lake, had what "is probably the highest recovery of any field in the world, a 97-per-cent recovery," said Dan Claypool, a long-time driller and oil patch manager who spent decades working in the area. "The average is 30 to 40 per cent."

In part, that's because a Swiss cheese effect in the limestone creates a network of cracks and holes that the oil can drain through. It's easy with light oil because it is thin enough to flow - think of pouring maple syrup. It's much harder with bitumen, which is thicker than peanut butter and flows with much greater difficulty.

The challenge of extracting the bitumen from carbonate is not unique to Athabasca. Other carbonate formations in Alberta contain an estimated 400 billion barrels of crude, and several companies have developed techniques they are now beginning to apply in the field in hopes of tapping that great bitumen wealth.

Laricina Energy Ltd., for example, plans to begin producing oil from its Saleski pilot project in the Grosmont carbonate by year's end.

"Based on that work, we'll do a commercial expansion. The application for that will be filed before the end of this year," Laricina CEO Glenn Schmidt said.

But, he added, the Leduc has several potential disadvantages over other carbonate formations, including lower porosity. In other words, there are fewer Swiss-cheese-style holes in the Leduc compared to other formations.

For Athabasca, however, the advantage of the Leduc is that it's proven. Not only does it have a solid history in Alberta, but similar reservoirs have achieved remarkable success elsewhere. One of the biggest finds in the past decade, Kazakhstan's Kashagan field, contains oil in comparable rock.

"These are probably some of the best reservoirs in the world. And that's what kind of got us interested," Mr. Svarte said.