Husky's 10-metre miss

DAVID EBNER

Globe and Mail Update

May 21, 2008 at 8:25 PM EDT

CALGARY — Husky Energy Inc. officially opened its $500-million Tucker oil sands project in October, 2006, on time and slightly under budget – a rarity in northeastern Alberta.

The goal was to produce 30,000 barrels a day of bitumen by late this year.

It's not even close.

At the end of December, output was at less than a 10th of the goal, just 2,700 barrels a day. Peak production is now predicted for 2010, 11/2 years late, as Husky pours in $200-million more for drilling and redrilling to rescue Tucker, a project the firm insists is excellent, with a strong reservoir.

Despite the energy boom, $100-plus oil and the promise of huge growth, the oil sands are far more challenging for developers than conventional reserves. And technical challenges and related delays are shaping how the oil sands develop. Enbridge Inc., for example, said this month that these issues have significantly slowed its plan to connect Alberta with Texas by pipeline.

The quickly emerging production method in the oil sands called steam-assisted gravity drainage – SAGD, pronounced sag-D – can be especially tricky, as Husky has discovered at Tucker. Rather than mining bitumen, Husky and others drill wells and inject steam to recover the resource.

“Tucker is a challenge,” Husky chief executive officer John Lau told investors in April during a quarterly earnings conference call.

The company has been working for more than a year to fix the problem, rethinking where it drilled its existing wells and drilling new ones.

“We have relooked at our drilling position,” Mr. Lau said.

SAGD is a technology four decades in the making. The general idea was conceived by Roger Butler, an Imperial Oil Ltd. engineer in the late 1960s.

In 1978, Imperial drilled one of the world's first horizontal wells to test Mr. Butler's vision. The modest first step was a success. Mr. Butler then took early retirement, working with an Alberta government agency and the University of Calgary to refine the process through the 1980s and 1990s.

It was just seven years ago, in 2001, when EnCana Corp. opened the first commercial SAGD project at Foster Creek, south of Fort McMurray.

Now, SAGD has been embraced by the industry as the future of the oil sands, with hometown and global players all putting down big bets, from Calgary-based EnCana Corp. to Britain's BP PLC, Norway's Statoil ASA and Japan Canada Oil Sands Ltd.

In January, the oldest oil sands miner, Suncor Energy Inc., marked a turning point when it said all new production in its planned $21-billion expansion would come from SAGD.

The oil sands are best known for the sprawling mines north of Fort McMurray, where the resource is shallow enough to be stripped away by shovel and truck.

However, most of the bitumen in the oil sands lies deeper and cannot be mined. For SAGD, operators drill what are called “well pairs,” two wells that dive several hundred metres into the reservoir and then traverse it horizontally, one well about five metres above the other.

Steam is injected into the top well, warming the glue-like bitumen, which then drips downward – the gravity drainage – where it is collected and carried to the surface by the lower well.

At Tucker, which is near Cold Lake, Alta., several hundred kilometres south of the oil sands mines, Husky originally drilled 32 well pairs to a depth of about 450 metres, with each horizontal well stretching about 700 metres below the surface. The bitumen reservoir is about 40 metres thick and SAGD developers aim their well pairs to ride along the bottom of the reservoir, to get as much oil out as possible.

Husky missed.

And even though it was just a near miss, five or 10 metres too deep, it is a costly mistake. The wells were drilled too close to what is called “bottom water.” The injected steam won't properly circulate through the bitumen reservoir because it is being soaked up by an aquifer.

“This is energy exploration,” said Graham White, a Husky spokesman. “The recovery of bitumen, especially with SAGD, is still something that's fairly new. … [And] it can be a matter of metres where you're going to get better production and where you're not.”

In a regulatory filing, Husky said its choice to inject steam at a particularly high pressure looks like a mistake too, with steam being pushed downward and to the side – rather than billowing up into the reservoir.

“Steam likes to move where it can move,” said Richard Gusella, CEO of Connacher Oil and Gas Ltd., a junior oil sands producer that started injecting steam at its 10,000-barrel-a-day Great Divide project last September and is currently reaching predicted production rates.

Heating a reservoir is not easy, Mr. Gusella said, noting that evenly distributing heat along the length of a horizontal well is among the big challenges, trying to hit a narrow mark between 250 and 255 degrees.

“Nothing is ever simple; there are a hundred things you run into, but we're pleased,” Mr. Gusella said. “It's not a perfect world. It's still early days. We're appropriately cautious and careful.”

Husky is redrilling an undisclosed number of the 32 well pairs, has drilled eight new pairs and wants to drill another eight pairs this year.

But while still a young technology, SAGD and future variations will eventually surpass mining in the oil sands. EnCana Corp., in a 50-50 partnership with ConocoPhillips Co. of Houston, aims for 400,000 barrels of bitumen a day, bigger than an existing mine, though those are expanding as well.

Nexen Inc. and partner OPTI Canada Inc. will open a 72,000-barrel-a-day operation this summer and are also aiming for about 400,000 eventually. And while Husky is struggling with Tucker, it is working on a project called Sunrise with BP PLC that could produce 300,000 barrels a day.

Suncor wants to add 272,000 barrels of SAGD to its current SAGD output of 40,000 barrels a day by 2012, transforming the company that opened the first oil sands mine in 1967.

Given that the method is relatively unknown beyond the engineers in Alberta, investors who are wildly bidding up the stock prices of oil sands companies as the price of oil climbs ever higher should be wary, analysts say.

And Husky isn't the only miss. Total SA's SAGD project was supposed to be at 10,000 barrels a day this year. It has not managed to generate commercial production and Total won't reveal the current rate.

“This is still an art form, not a science,” said Justin Bouchard, an analyst at Raymond James in Calgary. “There's lots of things to learn. The technology is in its infancy.”