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Likely Future Beneficiaries in the Heavy Oil Extraction Technology Industry: Schlumberger & Imperial Oil

 December 11, 2007 10:34 AM

Heavy oil accounts for more than double the resources of conventional oil, according to Schlumberger. Most of the current and historical oil production has come from conventional reservoirs, which contain oil that is sufficiently viscous to be pumped utilizing well pressure and non-specialized pumps. Heavy oil is more viscous (thicker, like molasses) than conventional oil so is much more difficult to extract from the ground. Currently, the volume of heavy oil production is currently only a fraction of the production from conventional oil. However, going forward, it is almost certain that the world's dependence on heavy oil production will increase due to the massive resource base of heavy oil and projected increased demand from Asian and developing countries.

Source: Schlumberger

There are several methods of heavy oil extraction currently, but, as the heavy oil industry is still in its beginning stages, there is not a de facto "standard" of heavy oil extraction for the industry -- one that is low cost and efficient, that can be applied across most heavy oil deposits. The question that is most relevant for investors is: will there be a dominant, patented technology for the development of heavy oil reserves? And secondly, if so, which firm will capture and patent this technology? These questions will be explored in this article.

Relevance of Proposed Heavy Oil Production Technologies to the Historical Success of Howard Hughes, Sr:
There is (in the author's mind) a relevant comparison of the new technologies for the development of heavy oil to the historical example of Howard Hughes, Sr, who made his fortune mainly by inventing and patenting a drill bit that could drill through hard rock, which was, in turn, utilized by the majority of the oil industry to develop conventional oil reserves. Hughes Sr's drill bit became the foundation for Hughes Tool company which later merged to become the oil services firm Baker Hughes. Hughes Sr. patented drill bit design was so profitable and necessary for the development of conventional oil reserves that Daniel Yergin, writing in his epic book "The Prize" described Hughes' pricing leverage as "highway robbery." This article will explore if there is a similar technology, such as Howard Hughes Sr's patented drill bit, that is applicable to heavy oil extraction.

Background on the Heavy Oil Industry:

The interested reader is encouraged to read the heavy oil sections of Rigzone and wikipedia, as well as Schlumberger's excellent heavy oil website for a background to this very important topic of heavy oil. A brief discussion and summary of heavy oil is presented as follows. The majority of heavy oil deposits are found in two countries, Canada -- in its Albertan oil sands, and Venezuela -- in its Orinoco belt -- both of which contain reserves of recoverable oil comparable to those of Saudi Arabia. Approximately 90% of heavy oil is found in the Western Hemisphere -- mainly in Canada and Venezuela, although significant deposits exist in California, Alaska, Mexico and Brazil, as well as in Russia -- while 90% of conventional oil is found in the Eastern Hemisphere -- mainly in the Middle East. Most of both heavy oil deposits in Canada and Venezuela are underground, below where they can be mined by mining methods -- although approximately 10% of the surface area of the Albertan oil sands can be mined (and this area is already nearly 100% leased by firms, as I discussed in my earlier Canadian oil sands article). The Venezuelan heavy oil deposits are a bit more viscous -- able to flow more easily -- than the majority of the Canadian oil sands -- and therefore, so far, different and methods have been used to extract Venezuelan heavy oil deposits than the Canadian oil sands deposits.

Oil Sands Carbonates:

Note that approximately 50% of the Albertan Oil sands by area are in the form of carbonates, which means the oil sands are trapped in rocks, in a similar way to oil shale. The carbonate formation forms a "triangle" in geographic terms across the Canadian heavy oil deposits. The carbonates require different technologies for extraction than traditional heavy oil, as will be discussed below.

Source: Carbonate picture at: Geological Survey of Canada

Heavy Oil Extraction Technologies in Usage Currently:

There are 5 main technologies currently in operation in the heavy oil industry for the development of traditional heavy oil (not heavy oil carbonates), with varying cost efficiencies and recoverability factors: Cold Heavy Oil Production with Sand, Steam Assisted Gravity Drainage, Mining, Cyclic Steam Stimulation, and Vapor Extraction. Note that most of the techniques were pioneered in Canada due to Canada's relatively early development of its Albertan Oil Sands. These technologies are described briefly as follows.

1. Cold Heavy Oil Production with Sand (CHOPs) -- this technique utilizes a submersible pump that can pump thick fluids, down to the heavy oil and pumps from there, allowing sand and other rocks up the wellbore -- as it is difficult to separate out the sand from the heavy oil. CHOPs is usually utilized without additional heating or chemical treatment. As such, it can be considered the most simple extraction method for heavy oil that is deep below the surface. It is believed the majority of Venezuela's heavy oil is produced using CHOPs. (Venezuela produced an estimated 625,000 barrels per day of heavy oil in 2006 through its national oil company, PDVSA.)

- CHOPs Advantages: Straightforward, relatively simple production method, continuous production, cost effective if heavy oil is viscous enough (as in Venezuela)

- CHOPs Disadvantages: Inefficient if the heavy oil is too thick (as in many areas of Canada), expensive to maintain and/or replace specialized submersible pumps, estimated only 5-10% of total heavy in place can be recovered with CHOPs, "technology stretched to the limits" according to Schlumberger so low future productivity improvements likely possible

2. Steam Assisted Gravity Drainage (SAGD) -- this method of heavy oil extraction involves melting the heavy oil with steam, then collecting the melted heavy oil by vents. A video demonstration of SAGD can be found at Rigzone. Imperial Oil of Canada (majority owned by Exxon Mobile) has done much of the pioneering work on SAGD in its Canadian Oil Sands properties, and is the largest producer of heavy oil by SAGD methods currently.

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